IRS Seizure of Assets Using Anti-Structuring Laws

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Today we welcome guest blogger Robert Everett Johnson who is an attorney at the Institute for Justice. He joined the Institute in August 2014, and litigates cases protecting private property, economic liberty, and freedom of speech.  You may remember the Institute for Justice for its recent victory in the Loving v. United States case where it took on the return preparer regulations.  See our post from Dan Alban who litigated that case and who also works at the Institute.  It currently represents clients who have had property seized based on the anti-structuring laws.  I have been following the cases with interest.  Today’s post points out the chilling results that can occur when the government invokes these powers.  Keith

The New York Times recently reported about a series of cases in which the IRS has seized money from innocent Americans based on purported violations of so-called “anti-structuring” laws, which make it a crime to deposit less than $10,000 cash in the bank in order to evade bank reporting requirements. Carole Hinders, the proprietor of a Mexican restaurant in small-town Iowa, had almost $33,000 seized after her mother advised her that keeping cash deposits under $10,000 would make life easier for the bank. And three brothers in Long Island—Jeffrey, Richard, and Mitchell Hirsch—had over $400,000 seized after their accountant likewise advised them to keep cash deposits under $10,000.

I am an attorney at the Institute for Justice, a non-profit public-interest law firm that represents Carole Hinders and the Hirsch brothers. The regular bloggers here at Procedurally Taxing have generously invited me to guest blog about these cases. The question they have asked me to address is this: Putting aside the moral outrage at what the IRS has done, has the IRS transgressed the bounds of the law?

The answer to that question is “yes.” And that answer has both substantive and procedural components. Substantively, the IRS has pursued these cases despite the fact that Carole Hinders and the Hirsch brothers do not have the intent required by the anti-structuring laws. And, procedurally, the IRS has pursued these cases in a manner that violates both constitutional principles of due process and the governing provisions of the Civil Asset Forfeiture Reform Act of 2000.

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  • The IRS’s Conduct Is Substantively Unjustified

 

The IRS in these cases appears to have proceeded on the assumption that there is probable cause to believe that individuals have engaged in structuring wherever a bank statement shows a pattern of deposits under $10,000. In the case of the Hirsch brothers, for instance, the affidavit filed to justify the seizure of the bank account stated that there was a pattern of “approximately one hundred sixty-five (165) structured cash deposits . . . in amounts of less than $10,000.01,” and that this pattern was “consistent with structuring.” The structuring laws, however, do not authorize the IRS to seize money based on a mere pattern of sub-$10,000 deposits.

There is no federal law that prohibits depositing cash in an amount under $10,000; the governing federal statutes are more nuanced. Banks are required to report all currency transactions over $10,000. 31 U.S.C. § 5313(a). And the anti-structuring law makes it a crime for an individual to deposit less than $10,000 with the “purpose of evading the reporting requirements” imposed on the bank. Id. at § 5324(a). Under the anti-structuring laws, liability cannot be premised on the mere observation that someone has consistently deposited less than $10,000 cash. The “purpose” behind that pattern of deposits must be to evade bank reporting requirements.

There are many reasons why individuals might choose to keep their deposits under $10,000, quite apart from a desire to evade bank reporting laws. For instance, many banks charge a fee for cash deposits over $10,000—presumably to cover the cost of preparing the reports required by federal law. Individuals may keep their deposits under $10,000 to avoid paying a fee, even if they are indifferent to whether the federal government receives a report. Other people are simply advised by bank tellers or other bank employees that it would be easier for the bank if they were to keep their deposits under $10,000, and agree to break up their deposits to make life easier for bank employees. Or, in another common scenario, businesses may have insurance policies that protect cash from theft or other loss only in amounts up to $10,000. These businesses may consistently deposit cash in amounts under $10,000 because they wish to avoid exposure under their insurance policies. None of these reasons for “structuring” cash deposits would give rise to liability under the federal anti-structuring law.

Carole Hinders and the Hirsch brothers had perfectly innocent reasons for depositing cash in amounts less than $10,000. As detailed by the New York Times, Carole was told by her own mother that it was simply easier for the bank to handle deposits in amounts under $10,000. Before the IRS decided to intervene, Carole had kept her deposits under $10,000 for decades on the basis of that advice. The Hirsch brothers, meanwhile, had a series of banks shut down their bank account, and finally were advised by their own accountant that banks would be less likely to close their account if they kept their deposits under $10,000. In both cases, the “purpose” of keeping deposits under $10,000 was to avoid hassle and disruption—not to keep information secret from the federal government.

In these and other cases, the IRS is seizing money based solely on a pattern of deposits, without warning and without any serious investigation to determine the reason for that pattern. But the IRS should not simply assume that every case that looks like it might involve structuring actually does involve structuring. The IRS should conduct a serious investigation to determine the reason behind a pattern of deposits, and should do so before it swoops in and takes a business’s entire bank account. Too often, the IRS has not taken that basic step.

  • The IRS’s Conduct Is Procedurally Improper

 

In addition to being substantively unjustified, the IRS’s conduct also runs afoul of procedural protections afforded by federal statute and the Constitution. The IRS routinely draws out structuring cases for years: In the case of the Hirsch brothers, the IRS has held the seized currency for over two years, but has not yet commenced any forfeiture proceedings. And in the case of Carole Hinders, although over one year has elapsed since the account was seized, Carole has not yet had an opportunity to present her defense to a judge. This kind of delay causes extraordinary difficulties for businesses that are deprived of their operating capital while awaiting their day in court. And it also makes it easier for the IRS to pressure many property owners into extortionate settlement agreements. In addition to being unfair to property owners, this habitual delay is flatly unlawful.

In the Civil Asset Forfeiture Reform Act of 2000 (“CAFRA”), Congress enacted deadlines to govern these kinds of forfeiture proceedings. See 18 U.S.C. § 983(a)(1). Under CAFRA, the government has a 60-day window to do one of three things: it may send “written notice to interested parties” of a “non-judicial civil forfeiture proceeding”; it may “obtain a criminal indictment containing an allegation that the property is subject to forfeiture”; or it may “file[ ] a civil judicial forfeiture action against the property.” Id. § 983(a)(1)(A).In other words, the government may choose to proceed via administrative forfeiture, criminal forfeiture, or civil judicial forfeiture. If the government does none of these things, however, CAFRA provides that “the Government shall return the property” to “the person from whom the property was seized.” Id. § 983(a)(1)(F). The IRS blew far past these deadlines in dealing with the Hirsch brothers. Instead of commencing forfeiture proceedings in a matter of days after the seizure, the IRS has waited years.

The IRS’s conduct not only violates CAFRA, but also violates the Constitution’s guarantee of due process. Although the IRS filed a judicial forfeiture action against Carole Hinders’ property within the CAFRA deadlines, Carole has nevertheless waited over a year for any opportunity to present her defense to a judge. If the local sheriff had come to Carol’s restaurant to seize an oven or a refrigerator, Carol would plainly have been entitled to a pre-seizure hearing or, if there were exigent circumstances, to a prompt post-seizure hearing. See Fuentes v. Shevin, 407 U.S. 67, 90, 96-97 (1972) (striking down state provisions that allowed vendors to have goods seized without prior hearing); Krimstock v. Kelly, 306 F.40, 53 (2d Cir. 2002) (Sotomayor, J.) (holding that New York City was required to provide an interim hearing pending criminal proceedings after seizing cars from suspected drunk drivers). There is no reason why the IRS should be held to a lesser standard when it seizes bank accounts. Yet both Carole and the Hirsch brothers have been denied any prompt post-seizure hearing. That delay violates due process.

Indeed, when the IRS waits years after seizure to commence forfeiture proceedings, as it has with the Hirsch brothers, that delay is so extreme that it should bar the IRS from forfeiting the money evenimagining thatstructuring has occurred. In United States v. Eight Thousand Eight Hundred and Fifty Dollars ($8,850) in U.S. Currency, 461 U.S. 555 (1983), the Supreme Court set out a multi-factor test to determine when delay is so extreme that it acts as a total bar to further forfeiture proceedings. A court will look “to four factors: length of delay, the reason for the delay, the defendant’s assertion of his right, and prejudice to the defendant.” Id. Under the first of these factors, there is no question that a delay of years is substantial; courts have found violations of due process based on comparable or shorter periods of delay. See, e.g.,United States v. One Motor Yacht Named Mercury, 527 F.2d 1112, 1113 (1st Cir. 1975) (twelve months); United States v. One (1) Nissan 300 ZX, 711 F. Supp. 1570, 1572-73 (N.D. Ga. 1989) (eighteen months). Prejudice to the property owners also is self-evident; in addition to the harm of being deprived of access to their bank account, crucial evidence may be lost or forgotten with the passage of time. Courts must demand some extraordinary justification from the IRS to explain this kind of delay. In the mine run of cases, no such extraordinary justification will be available.

* *  *

This post is not intended to provide a complete catalogue of the IRS’s errors, or to exhaust the universe of arguments that may be advanced as these cases make their way through the courts. Rather, the intent is to demonstrate that the outrage over the IRS’s conduct is not merely justified as a matter of moral principle—but also as a matter of law.

The IRS has seized money from innocent people without warning or serious investigation, and then has held the money for years without providing any opportunity for a hearing before a judge. The IRS has done so despite the fact that the property owners have good reasons for keeping their deposits under $10,000, and thus are not guilty of structuring. And the IRS also has done so despite a federal law that provides hard deadlines to commence forfeiture proceedings—deadlines that the IRS has passed many times over. Indeed, the procedural willfulness of the IRS is so extreme that the agency has violated the foundational protections afforded by due process. Anyone who values the rule of law should be outraged by such conduct.

Comments

  1. Some questions:

    1. What if a totally — but very private — depositor went in to deposit $100,000 cash and were told by the teller that the bank would have to file a report on $10,000+ cash deposits. The depositor then broke the amounts down and on 11 separate days contribute less than $10,000. The depositor’s desire to remain private is real and legitimate. But the depositor clearly intended by breakdown the deposits to avoid the bank’s reporting requirements. Is that illegal or subject to forfeiture?

    2. Same example, but the bank said that it would charge a fee for a deposit over $10,000 because of the required CTR paperwork. The depositor’s intent is to avoid the fee, but the taxpayer is indifferent to the CTR. The depositor thus knows that the deposits of less than $10,000 will (i) avoid the CTR and (ii) avoid the fee. The taxpayer intends to avoid the CTR and thereby avoid the fee. They are flip sides of the same coin. Is that illegal or subject to forfeiture?

    My point is that simply having or conjuring another reason for breaking down the deposits would not necessarily negate an intent to avoid the CTR requirement. What if there are dual intents?

    • Dual intents mean one intent is to purposefully evade the currency transaction reporting requirements. ‘Nuff said.

    • Jack, how do you want to prove intent or even dual intent ? How do you prove commencing an act with the “purpose of willfully evading the reporting requirements” imposed on the bank. Id. at § 5324(a) with the mere observation is not enough according to the anti-structuring laws. There is no federal law that prohibits depositing cash in an amount under $10,000.
      I think the answer lies in “what” and “how” the IRS uses this information (31 U.S.C. § 5313(a) ) but only after a serious investigation to determine the reason behind a pattern of deposits has been done everything else is overreach especially with regards to 18 U.S.C. § 983(a)(1) under CAFRA or process 18 U.S.C. 983(a)(2)(A)..
      If I may introduce common sense here again ….if it is really impossible for the government to stay within the 60-day window maybe just flag all these cases that look like they might involve structuring for an audit.
      I agree the problem is what Congress through the “Bank Secrecy Act” which btw. until recently was NOT well known in the business community and its sinister sister acts especially Title 31 permits the IRS to do.

    • Jack I have not gotten into the merits of 31 U.S.C. § 5313(a);§ 5324(a) and 18 U.S.C. § 983(a)(1) aka. Civil Asset Forfeiture Reform Act of 2000 (“CAFRA”), but the question arises why the big fuss of possible intent and possibly avoiding reporting requirements !?
      As you correctly state it does not require an evil act or illegal money so my question now becomes : Is the government bored ?….. it seems that if the prosecutors can’t find the intended targets of legislation, they see no ethical problem with going after everyone else….. in CH they call this “Arbeitsbeschaffungsprogramm“ and believe me we do have a lot of those.
      Jack common sense instead of overreach again would go a long way !! The IRS should not simply assume that every case that looks like it might involve structuring actually does involve structuring or also known as smurfing in banking industry jargon . I just do not understand what the big deal is. If there is a smidgen of suspicion just audit the person immediately to see if anything illegal transpired.
      This simple solution is as good or as bad as the current one where the government seems to be incapable of following 18 U.S.C. § 983(a)(1) under CAFRA…60 day window or process 18 U.S.C. 983(a)(2)(A) – the right to file a claim for the return of their property where the IRS would have 90 days to either file a forfeiture action against the property—or return it.
      I do not call in question the original purpose for the “Anti-Structuring Laws” against money laundering etc. but I do have to criticize the application of those laws to real people in 2014. It makes totally sense to uphold and enforce that the banks file one or more “Suspicious Activity Reports” that detail “suspicious deposit practices” but what makes no sense for the IRS is to shoot first and ask questions later – that is or was the Wild West.

    • How odd it is that financial “structuring” can be considered a serious crime by the IRS when practiced by ordinary little people who gain no benefit from it, yet perfectly OK when practiced by a corporation’s tax department that employs a myriad of structuring strategies to avoid paying millions or billions of dollars in taxes.
      But it makes perfect sense, that rather than trying to rein-in loophole exploiting corporations who are sure to put up a massive, expensive and lengthy court fight, the IRS knows that picking the pockets of people who can’t afford to fight them in court — or know it would be more expensive to fight than to simply walk away and swallow the loss — makes much better business sense.
      And it’s only natural that IRS agents would rather take the easy route and add a few more small notches on their belt, than spend all their time and energy “fighting the good fight” and probably losing in the end.

  2. As a CPA firm who concentrates their work on IRS Controversy matters, I represented a client who operated a vending machine business a good three and a half years ago who faced this same issue. After having more than $80K seized from their bank account over night, they had to hire an attorney. This case was well before the issue ever hit the press, but your factual descriptions within your blog regarding the IRS’ handling of the issue is spot on. Back then, CID was quite blatant with their comments, which basically amounted to “prove otherwise”.

    Which brings me to my comment. It was quite disappointing that the prosecutor’s office would so blindly acquiesce to the IRS arguments. Of course we learned later that they too shared in the seized proceeds. Thank you to your Institute of Justice and other low income legal clinics for taking up this cause; it has moved the fight to where it is now three and a half years later. In my case we ultimately settled, unfavorably so, since the taxpayer in this case, and I am sure the taxpayers in the cases you noted, are unable to fund a proper defense.

    • A disgruntled teen-aged grocery store employee (among many others) can file a bogus “Suspicious Activity Report” against us without consequence, indeed, with complete immunity. So long as we tolerate that fact, the victim count will continue to rise.

    • Some tid-bits : approx. 80% of the bank accounts emptied by the IRS in 2012 involved completely innocent people and businesses…..IRS made 639 seizures in 2012, up from 114 in 2005. Only 1 in 5 was prosecuted as a criminal structuring case !!
      2013 banks filed 700,000 SARs. The median amount seized by the IRS. was $34,000….while legal costs can easily mount to $20,000+ meaning most account owners can’t afford to fight the government for their money. I think it is fair to say that the practice “amounts to nothing short of grand larceny on the part of the Internal Revenue Service” . Many parties often voluntarily negotiate or plea “bargain” to avoid going to court which brings me to Jacks blog post :
      http://www.federaltaxcrimes.blogspot.ch/2014/11/the-honorable-jed-rakoff-on-why.html
      According to the Institute for Justice, the Department of Justice’s Asset Forfeiture Fund held $93.7 million of seized assets in 1986. In 2008, that fund was greater than $1 billion…for 2014 this number is estimated to be close to $2billion !
      To put a different spin on it : why set a $10K limit at all if you are going to arbitrarily go after anyone who follows the rules? It’s like pulling over someone for going 55 MPH in a 60 MPH zone.
      “Oh you got really close to the speed limit but didn’t go over, so we are going to assume you stayed below the limit to avoid suspicion, which is suspicious.”

      How much do you want to bet that there is a (formal or informal) quota system, that IRS agents expected to make a certain number or amount of seizures every quarter?
      But what is good for the goose is certainly good for the gander …the IRS civil forfeiture system is every bit as crooked as the one being abused by law enforcement agencies : The Justice Department’s Equitable Sharing Program was an initiative that allows local and state police to keep up to 80 percent of the assets they seize. Police have seized $2.5 billion since 2001 from people who were not charged with a crime and without a warrant being issued. Police reasoned that the money was crime-related. About $1.7 billion was sent back to law enforcement agencies for their use.

  3. In a genuine constitutional republic, I would be outraged by what the IRS has done to Ms. Hinders and the Hirsch brothers. But in a nation that tolerates a “Bank Secrecy Act” and other like enactments, I have little sympathy for its victims. Besides, Robert Everett Johnson’s story does not pass the smell test:

    1. No sane business person could believe that a financial services business would somehow benefit if he kept his cash deposits below $10,000. The “Bank Secrecy Act” has been with us since 1970. Its provisions are well known in the banking, if not in the general business, community. No BSA trained employee would advise someone to deliberately keep his deposits below the reporting threshold because such advice would implicate them as a co-conspirator in that crime. In fact, a law exists that allows a U.S. financial institution NOT to file a Currency Transaction Report if it regularly deals with a “qualified business customer,” which is how the Institute for Justice describes Ms. Hinders and the Hirsch brothers. See 31 U.S.C. 5313(e).

    2. The purported beneficiaries of the sub-$10,000 deposits in the Hinders and Hirsch cases, the banks, had to have blown the whistle on their respective customers. Q: How would the IRS have known that either Ms. Hinders or the Hirsch brothers had made cash deposits lower than $10,000? A: The banks filed one or more “Suspicious Activity Reports” that detailed their “suspicious deposit practices.” Unless Ms. Hinders and the Hirsch brothers were already under IRS examination, the IRS would have no other way to discover the nature of their respective bank deposits.

    3. I cannot buy the argument that Ms. Hinders and the Hirsch brothers’ deposit practices reflect “innocence.” Each DID attempt to avoid the currency reporting requirements. For what other reason could Ms. Hinders have relied on her mother’s “advice?” For what other reason could the Hirsch Bros. have relied on their accountant’s so-called advice? For instance, if the Hirschs made 165 random cash deposits, then those deposits should fall into widely varied amounts from, say, $3,000 to $10,000 (the reporting threshold is more than 10,000). But I’ll bet that 95% of the their deposits were between $9,000 and $9,999. Under 31 U.S.C. 5324(a), that behavior is purposefully evasive.

    4. Indeed, Ms. Hinders and the Hirsch brothers may be innocent. But they are as innocent as are those individuals who habitually distrust banks, and who thus use cash and postal money orders to transact their business or personal affairs. Yet many of those individuals have been prosecuted for tax assessment or tax payment evasion. Their overt act of evasion: using cash and money orders, neither of which are crimes.

    5. I’m not sure why the Hirsch brothers have a problem. They need not wait for the IRS to commence a forfeiture proceeding. They have a right to file a claim for the return of their property. See 18 U.S.C. 983(a)(2)(A). If they did so, the IRS would have 90 days to either file a forfeiture action against the property—or return it.

    The problem in Hinders-Hirsch cases is not what the IRS has done. Rather, the problem is what Congress through the “Bank Secrecy Act” and its sinister sister acts permits the IRS to do. Perhaps our soon-to-be Members of Congress would be receptive to temporarily refocusing their attention from the Affordable Care Act to the “Bank Secrecy Act.”

    • with regards you bringing up 18 U.S.C. 983(a)(2)(A)……You are correct anyone nailed by an IRS seizure can fight for the return of their money/property, but there’s nothing resembling due process here. Those choosing to do so would have to file a lawsuit intervening in the IRS’s forfeiture case. In other words, the situation must be forced. Simply showing up and defending money from accusations of wrongdoing isn’t enough. In fact, it isn’t even a possibility, at least not in the Dehko case. Take this IRS seizure from last year : Prosecutors for the Dehko case offered to them a “deal:” an implicit admission of guilt via a plea bargain (presumably on behalf of the guilty money) and the return of 20% of the seized funds.
      Fortunately for the Dehkos, they won their battle against the government and had the seized funds returned. The IRS was ordered to produce proof of wrongdoing or release the funds. It chose the latter and was additionally held responsible for $71,500 in attorneys’ fees !!
      Dropping the case also allowed the IRS to walk away from the debacle without further legal examination of its civil asset seizure policies. So, while the Dehkos obtained a win, the IRS ultimately learned nothing from the experience. The fact that the average forfeiture battle racks up over $20,000 in legal fees means that more often than not, the IRS will get to keep nearly everything it seizes.

  4. Bob Kamman says

    These are simply more episodes in the continuing series of Misguided Law School Graduates Hired By Government. If the prosecutors can’t find the intended targets of legislation, they see no ethical problem with going after everyone else. What are they teaching these guys in law school? (Sorry if that sounds sexist. You mean there are women involved also?) See also Wednesday’s Supreme Court arguments in the case involving the guy who threw small fish back into the ocean:

    [NYT] “What kind of a mad prosecutor would try to send this guy up for 20 years?” Justice Scalia asked. (Mr. Yates was sentenced to 30 days’ imprisonment.)

    The Supreme Court has been wary of stretching federal laws to fit minor crimes, ruling in June in Bond v. United States, for instance, that a chemical weapons treaty could not be used as the basis for a prosecution of a domestic dispute.

    “Who do you have out there that exercises prosecutorial discretion?” Justice Scalia asked the government’s lawyer, Roman Martinez. “Is this the same guy that brought the prosecution in Bond last term?”

    Mr. Martinez said Mr. Yates’s crime was a serious one, involving lying and a cover-up.

    Chief Justice Roberts was skeptical. “You make him sound like a mob boss,” he said.

  5. What is the purpose for the “Anti-Structuring Laws”?
    How does that purpose compare w/the APPLICATION of those laws?

  6. The blog’s author says in the blog:

    The IRS blew far past these deadlines in dealing with the Hirsch brothers. Instead of commencing forfeiture proceedings in a matter of days after the seizure, the IRS has waited years.

    As I read the law, the IRS is not required to file a judicial proceeding within days after the seizure. Indeed, it is not required to file such a proceeding at all unless the putative owner files a timely administrative claim with IRS CI SAC. The timely administrative claim require the IRS to either file the judicial proceeding within 90 days or return the property. I am confident that a court would enforce that requirement. Did the Hirsch brothers filed the timely claim? If so, did they ask a court to force return of the money because no judicial proceeding was timely filed by the IRS?

    Finally, just fyi, here is a brief summary of the forfeiture rules that I have just revised for my Federal Tax Crimes book (footnotes omitted).

    Administrative forfeiture is available for personal property (including bank accounts) not in excess of $500,000 and for monetary instruments (not including bank accounts) “within the meaning of 31 USC §5312(a)(3), regardless of their value .” Within 60 days of the seizure, the seizing agency (here the IRS) must send notice to all known claimants to the property of the seizure will advise those persons that they have either a judicial remedy or an administrative remedy. In addition, the IRS must publish notice of the seizure “once a week for three consecutive weeks in a newspaper of general circulation in the judicial district where the property was seized.” The judicial remedy is obtained by filing a claim of ownership. The administrative claim of ownership is a timely claim made no later than 35 days after the notice letter or, if no such letter received, within 30 days after final publication “to refer the matter to a US district court for a judicial judgment” made to the SAC of the IRS field office responsible for the forfeiture. There is no requirement to post bond. If the administrative claim is filed, the IRS must file a civil judicial forfeiture proceeding within 90 days or return the property seized. The process to insure prompt judicial review is a requirement of due process.

  7. You ever wonder why is the IRS, an internal revenue agency, overseeing a banking law ? Maybe the IRS could worry a little bit less about cash deposits and foreign bank account reporting and worry more about quickly and accurately processing tax returns !
    The Bank Secrecy Act of 1970 needs to go.

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