We require our business customers to deposit all checks payable to the business into their business checking account. We do not require sole proprietors to do the same - they have been allowed to cash checks that are made out in their name. We've discovered a sole proprietor who is using business proceeds to make loan payments and also take back cash. I don't believe the law specifically prohibits this practice, but what, exactly, would be an examiner's criticism from a BSA standpoint? Tax evasion?

they have been allowed to cash checks that are made out in their name.

How can you tell what they are for??

Unless the customer has been risked as "high", we've never questioned whether the check is for personal or business reasons. If I sold my car for, say $5,000, and cashed the check at the bank, there wouldn't be any questions asked. If I'm doing business on the side as "whatever", (whether I'm using a DBA name or not) but someone makes a check out to me personally, how would the bank know the difference and is it our business to ask? (I know we're supposed to know everything.....but I don't want to make trouble where I've never had any before.)

I should probably clarify that these sole proprietors do not use DBA names. Many are farmers.

I guess it comes down to how much cash are you talking about and what are the source of those funds and where do you think the cash is going. If they are receiving payments from most sources, that source will most likely to have to report the payments on a 1099MISC, so tax evasion might be a stretch. Again, this will be based on the specific activity of the individual. They only way around this is to force everyone to first deposit checks before getting cash. You don't cash checks payable to actual businesses as your corporate resolutions or similar supporting documents most likely do not provide an authorization for a signer on the account to perform such an action.

If a customer deposits all or part of a check that represents taxable income, it appears he's willing to pay taxes on the money because he is leaving a clear paper trail tied to his name that the IRS could unearth. If he cashes that same check over the counter you have to consider the possibility that he is evading income taxes because he somewhat illogically denied himself a record of the receipt while fracturing the paper trail tied to his name. (In order to find the income the IRS would have to know who the drawer of the check was and go there for documentation.)

Acknowledging that he is somewhat illogically denying himself a record of the payment, I'm still much less willing to consider income tax evasion when he uses that same check to make a loan payment. The loan payment generates a credit ticket tied to the customer's name just like depositing the check generates a credit ticket (deposit slip). That credit ticket has the same probative value as a deposit slip i.e. the paper trail is still evident and the IRS would find it with a simple summons in the name of the taxpayer. (If he's using this as a method to evade income taxes, he's dumber than the average bear.)

Curiosity only: Does anyone have a policy of refusing to accept third party checks as loan payments? For it to make sense, you would have to be consistent; e.g. Yogi cannot use his payroll check to make his car payment and take the difference in cash.

Note: This entire conversation is about checks payable to individuals that might not be reportable to the IRS by the drawer. No payroll checks, no entities, no DBA names are being discussed here. There is just the name of a human being on the payee line.

[quote=Ken_Pegasus]If a customer deposits all or part of a check that represents taxable income, it appears he's willing to pay taxes on the money because he is leaving a clear paper trail tied to his name that the IRS could unearth. [quote]

Ken, what if the customer is the principal of a corporation and the check he/she is depositing in part/full represents taxable income for the entity? Does that muddy the otherwise clear paper trail? We have no knowledge that the customer is filing as a subchapter S corporation (To Randy's question, the pattern generally includes multiple, often numerous checks payable to the individual that include notations indicating the payment is for services provided by the corporation.)

Not Ken, but most banks will simply not cash checks payable to an entity. As I previously mentioned, the standard forms used by most banks do not provide authority for individuals to negotiate such checks for cash for the entity. Without a standard policy of not cashing these checks, if the person is embezzling from the entity and they lacked such authority, the bank will be on the hook for each and every check. The other issue is if this is tax evasion and the IRS gets involved, they will subpoena the bank to produce all records of any checks that were ever cashed for the entity. Think about going through years of transactions looking for those needles in the haystack.

good luck trying to unravel this when the subpoena show up. (hence one good reason to not do this)

Randy beat me to it

The note at the end of my post was intended to keep this on track. If a check is payable to an entity, I assume you will not cash it.

If a payment is due a corporation, but it is made to the individual 1) the drawer is a fool and 2) it's a fraud on the corporation, a far more substantive accusation than suspected income tax evasion. Your bank may or may not be aware of the fraud. If you are, then you become an accomplice to the fraud when you cash the check.

However, if the bank (more accurately, its staff) notices that a principal or other individual involved in a corporation is negotiating checks payable to him/herself with any indication that the checks are for services provided by the corporation, it's fodder for a possible SAR filing (think dollar reporting thresholds) and for contacting the corporation (assuming it's not a small one-individual corporation and that one individual is the subject of your concern) with what you know or suspect.

I used "negotiating" to encompass cashing the checks, applying them to his/her loan account and depositing them to other than the corporation's accounts.

Thanks, John. And apologies to everyone for apparently not being clear on my question to Ken. The checks being deposited are payable to the individual.

I could see some tellers missing the "clues" if the individual is Samuel T. Jones and the corporation is Samuel T. Jones, Inc. or Samuel T. Jones Construction, Inc. It's also more likely that a customer of the business would issue a check to "Samuel T Jones" -- especially out here on Cape Cod where lines between a small business and its owner are often blurred -- without the corporate indicator, just as he would write a check to Walmart rather than to Walmart Stores, Inc.