Sidebar: Beyond Taxes: The IRS and Civil Forfeiture

The Internal Revenue Service maintains a database of its non-tax forfeiture activity, which is typically focused on white-collar financial crimes such as money laundering and reporting violations. This database—called the Asset Forfeiture Tracking and Retrieval System—is similar to the Department of Justice’s Consolidated Asset Tracking System. Unlike CATS, however, AFTRAK is not publicly available. In 2015, the Institute for Justice requested a copy under the Freedom of Information Act. For seven years, the IRS fought disclosure of the database, providing it in 2022 only after IJ sued and won before the U.S. Court of Appeals for the District of Columbia Circuit. ¹  

We used AFTRAK to conduct the first comprehensive analysis of IRS forfeitures, focusing on property forfeited from 2010 through 2019. ²  Our analysis shows that IRS forfeitures have much in common with those of other agencies, both federal and state, while also exhibiting a few key differences. It also provides new insights into the IRS’ questionable forfeiture practices related to structuring, a financial reporting violation.

The first commonality is that the IRS has not been shy about using forfeiture. From 2010 through 2019, the IRS forfeited more than 18,000 properties worth over $8 billion. Typically, the IRS forfeited several hundred million dollars per year. The lone exception was 2015, with more than $4.3 billion, largely due to a single forfeiture of $3.8 billion.

Second, like many other agencies, the IRS has done a lot of equitable sharing, a federal program that allows state and local agencies to partner with federal agencies on forfeitures and get a share of the proceeds. Roughly 49% of the IRS’ forfeited assets had at least one sharing request from another agency. The overwhelming majority of these requests (88%) came from state and local agencies, with the remainder coming from federal agencies.

Third, attorney representation was uncommon, and most seizures resulted in forfeitures. The data are not entirely clear, but even under the most generous reading, only 15% of assets were in any way associated with an attorney. ³  Accordingly, it should not be surprising that the IRS forfeited far more property than it returned. Of all properties disposed of from 2010 through 2019, 73% were forfeited in full, while only 13% were returned in full. ⁴

Fourth, using forfeited assets to compensate crime victims appears rare. Such restitution was requested for just 13% of forfeited assets. Although the data do not reliably indicate how often such requests were granted, we can say IRS forfeitures did not commonly result in restitution.

Despite these similarities, the IRS’ forfeiture practices differ from those of other agencies in a few meaningful ways. First, the alleged crimes underlying seizures were far more likely to be white collar than related to drugs. Over 70% of forfeited properties were associated with alleged money laundering, and another 16% were related to structuring.

Second, while almost two-thirds of forfeited properties were currency, this “currency” was generally bank accounts and securities, not loose cash. Over 70% of forfeited currency assets were a financial account, financial instrument, or marketable security. The IRS also forfeited far more homes and other real estate than most other agencies. For other agencies, such “real property” is typically only a tiny sliver of forfeited property, if any. However, roughly 6% of all IRS forfeitures were real property.

Third, the IRS employed more criminal forfeiture than is typical. Even still, criminal proceedings did not constitute a majority. About 42% of assets were forfeited criminally versus 48% that were forfeited civilly. (The remaining 10% involved both civil and criminal processes.) Among civil forfeitures, judicial proceedings were slightly more common than administrative ones.

The AFTRAK data also shine new light onto the IRS’ questionable forfeiture practices related to structuring, which IJ documented in a 2015 report. ⁵  Structuring is when bank deposits and withdrawals are purposefully kept under $10,000 to avoid reporting requirements intended to identify possible money laundering.

In the early to mid-2010s, the IRS aggressively pursued forfeitures based on alleged structuring. Caught in the crosshairs were individuals and particularly small-business owners with legitimate reasons for regularly making smaller deposits. Two such small-business owners were IJ clients Carole Hinders and Jeff Hirsch. Carole frequently deposited smaller sums because she ran a cash-only Mexican restaurant in Arnolds Park, Iowa. ⁶  Similarly, Jeff Hirsch and his brothers routinely made smaller deposits because customers of their Long Island, New York, business supplying candy, snacks, and other sundries to convenience stores often paid in cash. ⁷

Without charging Carole or the Hirsches with any crimes, the IRS seized their bank accounts for alleged structuring, leaving them struggling to pay their bills and keep their businesses afloat.

Cases like these led to widespread criticism of the IRS, culminating in a prominent New York Times article exposing the IRS’ practices related to structuring. ⁸  In 2014, the IRS yielded to the public outcry and announced it was changing its internal policies to focus (with rare exceptions) on structuring cases where the money is believed to have been obtained illegally.

As the dust settled, it became clear that small-business owners like Carole and Jeff—both of whom eventually got their money back—were far from exceptions. IJ spearheaded an effort to have property owners who had money seized for alleged structuring file petitions for remission. That effort resulted in the IRS voluntarily returning over $9.9 million to 174 property owners. ⁹  And a 2017 IRS internal audit found that among a random sample of investigations where assets were seized primarily for structuring, 91% involved legally sourced funds. ¹⁰  In other words, the vast majority of property owners who had their lives upended had done nothing wrong other than potentially run afoul of a reporting requirement.

Fortunately, Congress passed a law in 2019 codifying the IRS’ policy change, ensuring it cannot be reversed on a whim. ¹¹  And in other good news, our data show that since the policy change, seizures for structuring have plummeted from a peak of over 25% of seizures in 2012 to half a percent in 2019 (see Figure). Nevertheless, that the IRS was ever able to destroy businesses and lives—and reap millions of dollars in revenue—on the mere suspicion of a reporting violation speaks to the deeply flawed nature of civil forfeiture.

Figure: Following the 2014 policy change, IRS seizures for structuring plummeted