This scenario is a grey area for me...

Joe Doe applies for a loan. He provides copy of his tax return but states his income is something other than what is on tax return. The income on his tax return does not support his repayment ability. He has other loans and always makes timely payments.

Is this SAR worthy? If so, based on what?

I don't see what would be SAR worthy here...yet....are there any mitigating circumstances that made his responses more than just unusual? Again, the activity must be suspicious, not just unusual.

There is a fine line when it comes to tax evasion as a predicate for SAR filing, the following case is a great example of that:

http://www.fincen.gov/law_enforcement/ss/html/003.html

On the other hand, what this person is saying could be relatively common for a small business owner, for example; he might just be limiting what he takes as payment from that business to reduce the personal taxes he is paying. I think in this case before filing a SAR you need to at least have some justification to say your customer is EVADING taxes, and not just AVOIDING taxes.

Well, you could have another scenerio here also, depending on when you received the tax return. If he has told you before on an application that he makes $X and you just requested a tax return with this request and discovered he makes less than $X, then you have loan fraud as he lied on an application for a loan from a Federally insured financial instituion: 18 U.S.C. Section 1344 - Bank Fraud

Other than that you have more of a safety and soundess issue as you appear to be making loans based on unverified income of the applicants.

I think part of the point is that there are probably a whole lot of scenarios that could explain situations where a SAR should or should not be filed. I think the most prudent approach is just to tell the customer/member/whatever:

"We need to verify income. If it's not on your tax return, I need to understand the big picture, so I need documentation"

Once he/she responds to that, then you'll know more. But, based on the facts presented at this point, I don't see that this has met the suspicious litmus test.

There are some many factors that could play a part in a scenario like this...Your input helps

At the moment, I wouldn't file the SAR. I think that you need to sit down with the customer and attempt to verify the income. However, I agree with Randy in that if customer lied on his loan application, you are looking at loan fraud and should file the SAR.

Why not file? He made a material misrepresentation of his income. If that's not consumer loan fraud, then what is?

If he said "I don't report all of my income", file as he has made you complicit.

If it is a matter of understanding the classification of income (draw vs guaranteed payments/salary, non-cash deductions that reduce net, etc.) then you need to get a better understanding of the situation.

It's not necessarily a misrepresentation. The post said that "states his income is something other than what is on tax return". That could mean, for example, that his income has increased substantially over what he made in 2009. If it is different, though, it's up to him to show why it is different.

I agree with Ted. There are a lot of reasons that people could say they make (or have access to) more funds than represented on their 1040. The small business example I gave before is a good one that's perfectly legitimate (e.g. increasing retained earnings on their business return and not showing guaranteed payments to increase income on the 1040). There is nothing to illustrate a suspicious determination yet.

I was under the impression bsanewbie had ruled out the common explanations like s-corp trickery. If not, I agree that more documents are needed. But, if the customer can't produce them or is not willing to produce them, then I would strongly suggest filing.

"The small business example I gave before is a good one that's perfectly legitimate (e.g. increasing retained earnings on their business return and not showing guaranteed payments to increase income on the 1040)."

If the business earned the income and didn't spin it off to the individual - he didn't earn the money. There is legal "trickery" for personal income. Trust me - I run a small business.

I think that was part of the point I was making, actually - it's perfectly plausible that a person could just be using such "trickery" to reduce the taxes he has to pay as an individual.

"If the business earned the income and didn't spin it off to the individual - he didn't earn the money."

Not true at all- he just didn't show that he earned it on his 1040. If he would be a small business owner you could always ask for his business return - that would be another way to check out his story.

If it is a Corp and not a Sole Prop. He did not earn it the buisness did. The business is a seperate enity.

You can not have it both ways. Ask any IRS agent if you did not declare it you did not earn it.

Ya, I should probably clarify that ;-) In my experience the vast majority of situations where someone says 'My 1040 doesn't represent [insert 'funds I have access to, wealth, etc'] is that the person is in a small partnership and he's just playing with what is shown as income on his 1040. I've seen that response quite frequently with sole proprietorships, and small, small partnerships.

I'm sure IRS would agree that people would do whatever they need to do to legally reduce the taxes they would pay Uncle Sam.