irs - MyTicor

100 money orders totaling $50,000? How we handle cash payments in excess of $10,000…

On June 26, 2013 / Blog, Escrow

The Financial Crimes Enforcement Network (FinCEN) recently published their findings of a study they conducted assessing Suspicious Activity Reports (SARS) and Suspicious Form 8300 Filings Related to Real Estate Title and Escrow Businesses 2003–2011. The study confirmed the importance of Title and Escrow Companies filing of IRS Form 8300 – Report of Cash Payments Over $10,000 Received in a Trade or Business. Read on for the details of a transaction in which cash was received and reported.

A $50,000 earnest money deposit

An escrow officer for one of our sister branches contacted our National Escrow Administrators for assistance. She had just opened a new sale transaction. It was the purchase of a REO property with a sales price of $1.3 million. According to the Purchase and Sale Agreement the buyer agreed to deposit $50,000 in earnest money with the escrow company and the sale was scheduled to close in less than a week. So far so good, right?

Along with a copy of the Purchase and Sale Agreement, the real estate agent delivered an envelope to the escrow officer. Inside the envelope was the earnest money deposit of 100 money orders, in increments of $500. After she picked her jaw up from her desk, she informed the agent she would have to file some additional forms and needed some information from the buyer. She explained she would look into exactly what information she needed and get back with him. This is when she contacted her Escrow Administrators.

She was correct to do so. The receipt of the money orders triggered an obligation to file IRS Form 8300. Pursuant to the IRS Regulations, businesses who receive “cash” payments in excess of $10,000 need to report the funds received.

“Cash” as defined by the IRS is:

Coin and currency
Cashier’s checks, official checks, bank drafts, traveler checks and money orders if they have a face value of $10,000 or LESS.

Settlement agents must file Form 8300 upon receipt of multiple “cash” items received in one transaction. The multiple payments may have been made at one time or over the course of the transaction. A settlement agent must report upon receipt of the final “cash” item which puts the total of all “cash” received more than $10,000. Obviously this was the case in this deal.

Potential delays to be aware of

The National Escrow Administration sent the escrow officer a copy of Tech Memo 153–2012 Reporting Cash Payments over $10,000 using IRS Form 8300 and called her, as there was more than one issue to discuss. First, the escrow officer needed to obtain a signed W–9 – Request for Taxpayer Identification Number and Certification, as well as a copy of the buyer’s driver’s license. Next, she was reminded the form had to be filed within 15 days. Lastly, they discussed the timeframes for clearance of the funds.

The money orders were issued by Western Union® and MoneyGram®. Money orders may clear as soon as seven to ten business days but they could take longer depending on which Federal Reserves they were drawn on. Additionally, money orders are often counterfeited. If a money order is counterfeit, it could take weeks before it is discovered and the Company is notified. When this occurs, the funds previously credited to the trust account are immediately debited from the account. This poses a risk to the Company if the file closes and is disbursed without allowing sufficient time to pass to ensure they are not fraudulent.

Communication and cooperation are key

The escrow officer contacted the selling agent to let him know what she needed from the buyer and informed him the closing date would have to be delayed. The agent made arrangements for the buyer to come see the escrow officer by the end of the week. Fortunately, both the buyer and seller understood the need for an extension to the closing and the buyer assured the escrow officer he would wire the balance of the closing funds.

The buyer was cooperative, so she asked why the earnest money came to her in this manner. Turned out he is a real estate investor. He regularly attends auctions. At an auction the successful bidder has to pay right then and there with either cash or certified funds which is why he had money orders in that denomination. Since, at an auction he does not know what the sales price will be he regularly purchases money orders in small amounts so he can pay for his purchases. This explained why he seemed unfazed by the request for his Social Security Number and driver’s license – he was familiar with this process.

MORAL OF THE STORY

Real estate transactions are often a target for illegal activity including a means to launder funds. Money laundering involves disguising financial assets so they can be used without detection of the illegal activity that produced them. This is true, unless the funds are reported. Settlement agents have a duty to monitor and report “cash” payments to the IRS. Failure to do so can result in hefty fines.

Although the escrow officer did not believe this buyer was up to anything illegal, she still identified she had a responsibility to report the “cash” received, eliminating the Company’s risk of being fined. In order to ensure she did this properly she did not hesitate to contact National Escrow Administration for assistance.

Questions or comments? Please share below!

Refi drama and the importance of document execution guidelines

On November 27, 2012 / Blog, Escrow

It is amazing how a divorce can affect a closing. Many people believe their domestic problems become the settlement agent’s problem and often look to the settlement agent to be the tie–breaker for them. It is important for a settlement agent to take a step back, stay out of the drama and never lose sight of the proper escrow procedures and underwriting requirements.

This story illustrates how a simple refinance turned into a whole lot of drama — other people’s drama — and our Company was continually asked to take on unnecessary risks. Read on to find out why it is crucial settlement agents do not abandon policy and procedures.

It all started as a refinance

The transaction was opened as a refinance. The new loan amount was approximately $5,500,000. Per the title report there were two existing deed of trusts recorded against the property. The first lien was for the benefit of Chase and the original loan amount of $5,230,000. The second lien was for the benefit of a private beneficiary.

Per the deed of trust the beneficiary was two individuals, Jim Smith and John Smith, with an original loan amount of $2,000,000. The loan officer told the settlement agent she would receive a zero demand for payment from the second lien holder and fully executed release.

The settlement agent requested the contact information for the Smiths and sent them a request for a payoff demand, the original note and a Substitution of Trustee and Full Reconveyance (Recon). Shortly after the request, she received a payoff demand and the original Promissory Note.

Who should the funds go to?

Unlike the deed of trust, the promissory note indicated Jim Smith or John Smith or XYZ Books were the payees. The payoff demand instructed the settlement agent to pay all funds to XYZ Books and was signed only by Jim Smith.

A few days later, the Company received a Notice of Motion and Court Order stating our Company must hold all funds due John “Jim” Smith and/or ABC Novels, Inc. DBA XYZ Books pending further order of the court. It was then the settlement agent realized Jim and John were one in the same. The Order was issued because Mr. Smith was in the process of getting divorced.

Mrs. Smith claimed the funds due to payoff the Note were community funds. Mr. Smith claimed the funds belonged to XYZ Books. Since the funds were in dispute, the court ordered the Company to hold the funds until it was determined who the funds belonged to. The Order did not prohibit the borrower from closing on her refinance, but the payoff funds for the second lien would have to be escrowed post–closing.

A change was requested

The Company was still in need of an executed Recon. Originally, the settlement agent completed the document listing only the beneficiaries named on the Deed of Trust; Jim Smith and John Smith. Mr. Smith did not want to sign anything which could be construed as his admittance the funds were due him individually. His attorney called asking if the Company would be willing to modify the Recon. They requested the following change:

The undersigned, Jim Smith or John Smith, present Beneficiary as owner and holder of the Note secured by Deed of Trust dated June 15, 2009 made by Roberta Jones.

Rather than modify the language (and in light of the new information she had received) it was agreed the settlement agent would add XYZ Books, since she had a demand instructing her to pay the full amount to XYZ Books and was informed the note had been assigned to XYZ Books. The settlement agent agreed to add the other beneficiary, pending the corporate documents to ensure she was accepting the Recon from the authorized person. The Recon was changed to:

The undersigned, Jim Smith AKA John Smith or XYZ Books, present Beneficiary as owner and holder of the Note secured by Deed of Trust dated June 15, 2009 made by Roberta Jones.

Mr. Smith’s attorney agreed this modification would work. The settlement agent sent the revised Recon along with an AKA statement to be signed by Mr. Smith and requested the corporate documents and a Corporate Resolution from XYZ Books as she was told it was a corporation.

The attorneys representing Mr. and Mrs. Smith in their divorce went back into court to ask the judge to issue an Order allowing the Clerk of the Court to sign the Recon, since Mr. Smith did not want to sign it and imply in any way the funds were his personally. The settlement agent received a fax of an Order allowing the Clerk to sign the Recon and copy of the executed Recon.

Reconstructed recon

Unfortunately, the Recon signed was not the proper Recon as it did not include a signature line for XYZ Books, which the settlement agent later found out is actually ABC Novels, Inc. DBA XYZ Books. Since the Company had been put on notice the note was assigned to XYZ Books, they explained the Recon would have to be executed by an authorized officer of ABC Novels, Inc. DBA XYZ Books.

A few days later an executed Recon, along with an amended demand for payment, was delivered via messenger to the settlement agent. The revised demand was conditional. It stated the Recon could only be recorded if the funds were paid in accordance with the original demand stating all funds were to be paid to XYZ Books. Clearly the settlement agent would not be able to comply because the previously issued Court Order required the Company to hold all funds.

Mr. Smith had been notified of these requirements and that the Recon was not executed in a manner which complied with the Company’s Document Execution Guidelines. Escrow notified Mr. Smith’s attorney the document would have to be re–executed to meet the Company’s underwriting requirements — and they were still in need of the AKA statement and corporate resolution.

Then the IRS showed up

What happened next? Only one week later the IRS issued a Notice of Levy to the Company and one to the borrower, Ms. Jones. The levy covered any funds due Mr. Smith and had a copy of the Promissory Note attached indicating the IRS was aware Mr. Smith may have been due a payment of $2,000,000. The full amount of the Levy exceeded this amount.

Then, Ms. Jones’ attorney contacted the settlement agent to find out what could be done to enable the transaction to close. The attorney was informed the deal could not close until they received the outstanding Recon, the AKA statement and corporate resolution from Mr. Smith. Upon receipt of those items the funds would have to remain in escrow until it was determined who the funds belonged to and how they would be disbursed. The attorney contacted Mr. Smith’s attorney and the IRS.

The Moral of the Story

In 2005 our Company implemented Document Execution Guidelines as a result of a dramatic rise in fraud and forgery claims. Since then fraud and forgery claims have dropped from the number one reason down to number three. The policy works — which only reinforces why settlement agents should not veer from, or make exception to, the policy.

Our Company has the right to implement policy, procedure and sound underwriting requirements even though statutory requirements are stronger. We owe this to our shareholders. We are never afraid to stand by Company policies. Abandoning these only opens the Company to additional liability.

Ms. Jones’ attorney called the settlement agent almost daily with a new scenario inquiring as to whether the Company would be willing to insure based on the different scenarios. He asked the Company if they would close and insure without receiving any of the documents due from Mr. Smith and send the funds to the court to decide. He then asked the Company to close and file an action to interplead the funds without receiving the pending documents. He even asked if the Company would close and insure if the IRS issued a Notice of Seizure, taking possession of the Note and requiring all funds be paid to the IRS.

And in the end…

The answer was always the same. The Company could close and hold the funds, send the funds to the court, file an action to interplead the funds — but not until it received the required documents from Mr. Smith.

In the end the Company received word the new lender decided to withdraw their loan and not proceed with the refinance. It was at this point the settlement agent resigned from the transaction and returned the original documents to Mr. Smith.

Real Estate Investor Tries to Defraud the IRS

On February 21, 2012 / Blog, Escrow

IRS Liens & Over-Encumbered Property

Foreclosures are just one of many challenges facing our country in this economic crisis. People are not only failing to pay their mortgages, but they have also fallen short on many other obligations. Paying taxes is one of them. It has become common for an IRS lien to appear on a title report.

The IRS, however, is not in the business of owning real estate so they regularly work with taxpayers to release the property from the lien. They do not discharge the lien altogether, but examine the transaction and often release the property when they can determine there will be no proceeds because the property is over–encumbered. Read on to find out how one settlement agent was duped into assisting a real estate investor trying to defraud the IRS.

One deed and one lien

One of our sister offices in Las Vegas opened a sale transaction. The seller was a real estate investor who purchased the property only a few months earlier. Title was held as John Doe, an unmarried man. When the title report came in it showed the property was encumbered by only one deed of trust along with a tax lien. The tax lien was against a limited liability company (LLC) and its members, one of whom was our seller Doe. The settlement agent, Betty, contacted Doe to inform him she needed to order a demand from the IRS.

He explained the lien was against the LLC, was not his personal obligation and should therefore not affect his sale. Betty explained she could not close without a release of lien for this property from the IRS. She asked Doe if she should proceed with ordering a demand from the IRS or if he would be contacting them to negotiate a release of the property only. Doe told her he would take care of it.

A second deed appears

A couple of weeks later Doe asked Betty to update the title report, as there should be a second deed of trust of record. He also requested a HUD–1 Settlement Statement showing a payoff of both loans resulting in no proceeds to him. He planned on submitting the HUD–1 to the IRS to induce them to release the property from the tax lien. Betty thought this was odd and contacted management.

Unbeknownst to Betty – Jane, another settlement agent within the Company, handled the initial purchase of this property for Doe. Jane contacted management about the IRS lien, as she had heard the property was under contract and now in escrow with another settlement agent within the Company. Jane was curious about the IRS lien since it was against the LLC and not Doe individually, and did not appear on her title report when Doe acquired the property.

Since both calls came at the same time, management reviewed the updated title report and documents. The second deed of trust had been prepared by someone in the Company and notarized by Jane. Management noticed the document was dated two months earlier, when Doe purchased the property, yet it was recorded only a few days ago. When management inquired about the document, Jane explained Doe had come into her office and said he forgot to have her prepare and record a deed of trust in favor of his investor on the purchase. He asked her to help him out, and she allowed Doe to back–date the deed of trust and she back–dated the notarial certificate. Jane gave the original to Doe who promptly recorded it.

No-go for Doe

Doe was contacted by management who told him they would not be providing him with an updated title report reflecting this fraudulent deed of trust. They made it clear to Doe Our Company would not assist in defrauding the IRS. Fortunately they were able to convince Doe he was headed down the wrong course and he did not proceed.

Settlement agents are considered the last honest people in a real estate transaction. The IRS certainly counts on it. When the IRS agrees to provide a release in order to allow a taxpayer to sell their over–encumbered property, their approval is conditional. It is conditioned upon receipt of a HUD–1 Settlement Statement confirming the seller received no proceeds. The IRS knows, per Title 18 U.S. Code Section 1001 and 1010, “It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment.” Upon confirmation from the settlement agent the IRS prepares and records their release.

Moral Of The Story

Jane’s behavior is inexcusable. Settlement agents should never allow a document to be back–dated in their presence. Settlement agents who are also commissioned notaries should never participate in back–dating a notarial certificate. Lastly, settlement agents should never prepare courtesy documents.

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