Sidebar: With Civil Forfeiture, IRS Cleans Out Bank Accounts

Lyndon McLellan runs a convenience store in Fairmont, N.C., and has done so without incident for more than a decade. All that changed in 2014, when the Internal Revenue Service used civil forfeiture to seize McLellan’s entire $107,000 bank account. He did not stand accused of selling drugs or even of cheating on his taxes; in fact, he was not charged with any crime at all. Rather, the IRS claimed that he had been “structuring” his deposits—that is, breaking them into amounts of less than $10,000 to evade federal reporting requirements for large transactions. McLellan, like most people, did not even know what “structuring” was, let alone that it was illegal. His niece, who handles the deposits, had been advised by a bank teller that smaller deposits meant less paperwork for the bank, so she kept deposits small. ¹

Unfortunately, McLellan ’s case is not unusual. From 2005 to 2012, the IRS seized more than $242 million in over 2,500 structuring cases. In theory, the IRS keeps an eye out for structuring to catch criminals laundering money or committing financial crimes. Yet more than a third of those structuring cases were civil actions where only structuring, and no other crime, was suspected. ²

In Iowa, Carole Hinders had $33,000 seized after making frequent small cash deposits, even though all of the money had been legitimately earned at her cash-only Mexican restaurant. ³  In Michigan, Terry Dehko and Sandy Thomas lost more than $35,000 from their family grocery store’s bank account just a few months after a routine IRS audit had found the business clean as a whistle. ⁴

In each case, civil forfeiture made it possible for the IRS to raid bank accounts without any evidence of criminal wrongdoing. Had the IRS been forced to prove crimes had occurred—or even just to perform any kind of investigation—it would have discovered that each of these small-business owners had legitimate reasons for making small deposits. Instead, McLellan, Hinders, and Dehko and Thomas had to go to court and fight to get their money back.

After these cases gained publicity, in the fall of 2014, the IRS announced that it would no longer pursue bank accounts unless it believed the money came from illegal activity. ⁵  Yet a federal prosecutor continued pursuing forfeiture of McLellan’s money, even accusing him of “ratchet[ing] up feelings in the agency” by going public with his plight. ⁶  Only in the face of public criticism did the government back down and return the funds—though it has refused to pay legal fees, costs and interest to which McLellan is entitled. ⁷

Additionally, victims of the old policy have yet to be made whole. The IRS forfeited money belonging to Randy Sowers and Ken Quran, small-business owners in Maryland and North Carolina, without any evidence that they had done anything wrong. Now that the IRS has admitted its old practices were flawed, Sowers and Quran are petitioning for their money back. ⁸

Meanwhile, legislation has been proposed in Congress that would make the IRS’ policy change permanent. ⁹

Continue Reading: Federal Equitable Sharing