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IRS clarifies its position on civil forfeitures in uncharged structuring cases

Following a slew of recent negative press involving IRS’s use of civil forfeiture laws, IRS’s Chief of Criminal Investigation (CI) has issued a statement stating that the agency would no longer pursue the seizure and forfeiture of funds associated solely with legal source “structuring” cases unless there are exceptional circumstances that warrant such seizures or forfeitures. This article provides background on the banking laws implicated in these cases and on the Justice Department’s asset forfeiture program, the facts of a recent high-profile case that brought this issue into the public eye, and proposed legislation to combat perceived civil forfeiture abuses.

Background. Under the Bank Secrecy Act (BSA), financial institutions generally must report each deposit, withdrawal, exchange of currency or other payment or transfer which involves a transaction in currency of more than $10,000. Multiple currency transactions must be treated as a single transaction if the financial institution has knowledge that the transactions are by or on behalf of any one person and result in either cash in or cash out totalling more than $10,000 during any one business day. (31 CFR §103.22)

A taxpayer may not “structure,” or assist in structuring, his deposits (e.g., by keeping a series of deposits under the $10,000 threshold) in order to avoid BSA requirements. (31 USC 5324(a)(3)) A fine of not more than $250,000, or imprisonment for not more than five years, or both, may be imposed on a person who willfully violates this anti-structuring provision. (31 USC 5322(a))

According to the U.S. Department of Justice (DOJ) website, the DOJ’s Asset Forfeiture Program “encompasses the seizure and forfeiture of assets that represent the proceeds of, or were used to facilitate federal crimes. The primary mission of the Program is to employ asset forfeiture powers in a manner that enhances public safety and security. This is accomplished by removing the proceeds of crime and other assets relied upon by criminals and their associates to perpetuate their criminal activity against our society. Asset forfeiture has the power to disrupt or dismantle criminal organizations that would continue to function if we only convicted and incarcerated specific individuals.”

Recent scandal. A recent New York Times article (“Law Lets I.R.S. Seize Accounts on Suspicion, No Crime Required” (Oct. 25, 2014), by Shaila Dewan) profiled Carole Hinder, a restaurant owner who, for 38 years, deposited the earnings from her cash-only establishment at a local bank. According to the article, last year, without charging Hinder with any crime, IRS seized her checking account because of the less-than-$10,000 pattern in deposits—which, by itself, was apparently a sufficient basis to obtain a seizure warrant despite the facts that valid business reasons may exist for keeping deposit levels under $10,000 and that doing so isn’t illegal absent an intent to evade the BSA reporting requirements. (The article indicates that IRS is one of several agencies that investigates cases then refers them to the DOJ.)

According to a press release by the Institute for Justice (IJ), Hinder and the IJ are bringing a lawsuit challenging the forfeiture. ( ) Larry Salzman, an IJ attorney, called civil forfeiture “one of the most serious assaults on property rights in America today.” The IJ says that unlike criminal forfeiture (which generally follows a criminal conviction), with civil forfeiture, a property owner can have his or her property permanently taken without ever being convicted of or even charged with a crime. The IJ also alleges that IRS made 639 seizures in 2012, up from 114 in 2005—a more-than-550% increase.

RIA observation:Weekly Alert readers might remember the Institute for Justice from their representation of the plaintiffs in the Loving case (Loving, et al, v. IRS, et al, 113 AFTR 2d 2014-867113 AFTR 2d 2014-867), which successfully challenged IRS’s authority to regulate tax return preparers who prepare and file tax returns for compensation.

IRS’s response. Richard Weber, chief of IRS-CI, provided the following statement to the New York Times: “After a thorough review of our structuring cases over the last year and in order to provide consistency… I.R.S.-C.I. will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level. While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring.”

Political response. Sen. Chuck Grassley (R-IA), Ranking Member of the Judiciary Committee and senior member of the Finance Committee, commented in response that “[t]he IRS plays a role in fighting money laundering and other criminal activity, but it has to treat business owners fairly. If the pendulum has swung too far in favor of the government and against fairness for innocent people, then it’s time to reform civil asset forfeiture laws and procedures.”

Legislative proposals. There have been a number of recent bills introduced regarding civil asset forfeiture (which has become an increasingly prevalent issue over the past few years, with alleged abuses occurring at the state and local levels in addition to misuse by federal agencies) prior to this latest scandal. S.2644, the “Fifth Amendment Integrity Restoration (FAIR) Act of 2014,” was introduced by Sen. Rand Paul (R-KY) back in July. The bill would make the federal government’s standard of proof in civil forfeiture proceedings be “clear and convincing evidence” and would require the government, in addition to showing a substantial connection between the seized property and the offense in a forfeiture proceeding, to establish by clear and convincing evidence that the owner of any interest in the seized property intentionally used the property (or knowingly consented or was willfully blind to the use of the property by another) in connection with the offense.

H.R. 5212, the “Civil Asset Forfeiture Reform Act of 2014,” was also introduced in July by Rep. Tim Walberg (R-MI). The bill would similarly make the government’s standard of proof be “clear and convincing evidence,” require the government to notify all owners of forfeited property of the possibility of using a public defender to argue their case, and expand the criteria to consider when weighing the proportionality of the amount of the forfeiture against the connected crime.

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