IRS Continuing To Pursue An Asset Forfeiture Case That Contradicts Its Own Policy On 'Structuring' Prosecutions

from the the-pettiest-of-discounts dept

Late last year, the IRS began dropping some of its more questionable asset forfeiture cases, most likely in response to reams of bad press about its sketchy enforcement of structuring laws. Many of these cases were built on nothing more than a series of deposits that came close to — but never exceeded — the $10,000 needed to trigger federal reporting. While the IRS may say it’s looking for tax cheats, fraudsters and money launderers, its targets were often small, cash-based businesses like restaurants and vending suppliers.

The IRS also announced that, going forward, it would only pursue asset forfeiture cases that showed the money came from an illegal source. The DOJ followed this up with its own policy shift that roughly matched the IRS’s.

Despite this change of heart, the IRS and DOJ are still pursuing a case against Lyndon McLellan — a convenience store owner who had $107,000 taken from him by the feds late last year. McLellan — on the advice of his banker — began inadvertently “structuring” his deposits, again to “save” his bank from the burden of extra paperwork. There was seemingly no doubt his business generated the cash he deposited, but the IRS went after him anyway.

McLellan’s legal representatives (from the Institute of Justice) forwarded details of his case to legislators ahead of IRS testimony in front of the House Ways and Means Committee. One legislator took this time to confront IRS Commissioner John Koskinen about his agency’s contradictory prosecution of McLellan.

Without naming McLellan, Rep. George Holding (R-N.C.), a former U.S. attorney, asked Koskinen about the seizure:

Holding: Are you saying that under the new policy, you have to aver that we have probable cause to believe an illegal act is taking place other than the act of structuring?

Koskinen: Yes.

Holding: You sure about that?

Koskinen: That’s what I’m advised by the people who run the Criminal Investigation Division.

Holding: The staff pulled for me a case from North Carolina, from my former prosecutorial district, after your policy change. And I’ve read through the affidavit and the associated documents. There’s no allegation of illegal activity, other than the act of structuring…

Koskiken: If that case exists, it’s not following the policy.

This should have resulted in the IRS dropping the case, or at least providing something in terms of evidence justifying its continued pursuit of McLellan. If nothing else, the agency could have played this off as an unfortunate oversight by its prosecutorial arm. Instead of any logical outcome, this questioning resulted in the federal prosecutor handling McLellan’s case claiming the real problem wasn’t the pursuit of a bogus prosecution. No, the real problem here was people disrespecting the power of a gag order.

Prosecutor Steve West emailed this to the Institute of Justice.

I’m a bit concerned. At your request, I provided you a copy of the application for seizure warrant, which remains under seal with the Court, and now it appears it has been made available to a congressional committee? I do not know who did that, and I am accusing no one, but it was not from our office and could only have come from your clients. That was certainly not my intent in making this available. Whoever made [the document] public may serve their own interest but will not help this particular case.

Oh, and that the public exploration of this contradictory prosecution hurt the feelings of West’s office, if not the IRS itself.

Your client needs to resolve this or litigate it. But publicity about it doesn’t help. It just ratchets up feelings in the agency.

And, finally, a half-off sale on sour grapes.

My offer is to return 50% of the money. The offer is good until March 30th COB.

As Reason’s Jacob Sullum points out, there are valid reasons for filing these affidavits under seal. Notifying a structuring suspect of the IRS’s intent to seize funds would probably result in a swift draining of targeted accounts. Whether the seizure is justified or not, there’s at least a solid reason for the gag order. But in this case, the IRS had already seized the funds and moved forward with its prosecution. There was no “fear of flight,” at least not in terms of the money in McLellan’s accounts. West’s nod to the power of sealed affidavits isn’t due to fear of a compromised investigation, but rather due to his irritation at having one of his prosecutions publicly outed as running contrary to both the IRS’s and DOJ’s policies on structuring seizures.

As for the 50% offer, that’s similarly disingenuous. At this point, the IRS commissioner has publicly acknowledged that such a case would be in violation of IRS policy. It’s already likely on its way to being dropped, despite the prosecutor’s suggestion that publicly embarrassing his office and the IRS’s forfeiture team might result in the case being pursued out of spite, rather than based on any evidence of criminal activity.

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Comments on “IRS Continuing To Pursue An Asset Forfeiture Case That Contradicts Its Own Policy On 'Structuring' Prosecutions”

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Anonymous Coward says:

Re: Re:

Absolutely – it happens all the time.

When they catch up with you for non-payment of back taxes and you owe them $100k, hire a good attorney and negotiate a deal to pay a small percentage of the owed taxes and you can probably even setup a payment plan.

Reading books on paying the least amount of taxes possible – most suggestions are to aggressively write off stuff even if it’s gray area, or questionable – because being audited and having to pay “penalties” can often be cheaper than paying the higher taxes on stuff up front.

Basically, “tax evasion” can be a cheap way to pay less taxes, even if you’re caught – as long as you’re not doing it on a massive scale (millions of dollars).

Anonymous Coward says:

Re: Re: Re:

Disclaimer – I wouldn’t condone tax evasion – I just find it interesting that it can be used as an investment strategy to hold onto your money longer when you’re likely to get a slap on the wrist during an audit. Also, paying it back years later after inflation has devalued the amount is kind of amusing.

Anonymous Coward says:

Re: Re: Re:2 Re:

Even if the amount is inflation-adjusted, you could still come out ahead if the money spent the intervening time increasing in value faster than inflation. For example, suppose you spent the disputed money paying off a credit card account with its typical double-digit interest. Even if tax interest + penalties + inflation adjustment came to 9% (which is probably high), that’s still a cheaper adjustment than what the credit card balance would have been.

Pyros (profile) says:

Saving Money

The idea for Gray area items is that as long as they are Gray you can simply say “the Tax Code is HARD” show your receipts and the IRS can only get you for an honest mistake. You may still pay the tax you owe, and even some fees, but as far as you care you had the tax money earning something while it was not in the feds hands.

Also, Some gray items will be cleared as good, others may not. So your better off claiming everything you can.

Coyne Tibbets (profile) says:

New policy probably not as stated

I’m betting the new policy actually goes something like this:

Under the new policy there must either be probable cause to believe an illegal act is taking place other than the act of structuring; or the case must be prosecuted as a national secret.

Basically, national security trumps all. Which would explain why they’re irritated about this case: they declared it a nation secret so the press and Congress wouldn’t be a nuisance…and here they are, being a nuisance.

And, if so, that would mean the policy really didn’t change at all, and the fact that they said it did is merely propaganda…hiding a national secret interpretation of the rules.

John says:


You’ve made an error in your analysis. There is a difference between the actual seizure warrant and the application/affidavit for the warrant. A seizure warrant is generally not filed under seal, and if it is, it is unsealed immediately and automatically upon service. The seizing officer is required to leave a copy of the warrant with the bank or the party from whom the property is taken, so it’s open at that point. Also, the officer has to make a return on the warrant to the issuing magistrate within days and file that with the clerk, so those are public also. The return is made under oath and describes everything taken pursuant to the warrant. The seizure warrant doesn’t have much information in it, just the item(s) to be seized and the statutory basis.
The application is an affidavit made under oath to obtain the warrant and these are routinely sealed upon motion by the US Attorney (which may also be sealed). The reason they’re sealed is to protect confidential informants or other sources. The application contains all of the probable cause to justify the seizure warrant.
In this case, it sounds like the US Attorney provided a copy of the sealed application to the defendant’s attorney and the defendant’s attorney gave it to someone else (Congress). On the one hand, that’s probably not cool, and the judge who sealed the application might have something to say about it. On the other hand, if I was the agent in the case I’d have been extremely pissed at the US Attorney for giving the affidavit to the defense attorney in the first place. It’s under seal so he CAN’T see it. I don’t really care if Congress sees it, I care a lot if the defendant and his lawyer know who my informant was. Why did we bother sealing it in the first place?
That would be the thinking from the law enforcement side.

James Burkhardt (profile) says:

Re: Application/Order

The application is an affidavit made under oath to obtain the warrant and these are routinely sealed upon motion by the US Attorney (which may also be sealed). The reason they’re sealed is to protect confidential informants or other sources. The application contains all of the probable cause to justify the seizure warrant.

I can see why they wouldn’t want that to get out then, given they have stated they have no probable cause, other than possible structuring, which itself isn’t even technically a crime unless you prove the intent of the structuring (which is why the idea that the property is tried itself is rediculous). Moreover, the sources and or informants on this case should be readily known, as the bank would be the entity reporting this. Nothing that needs to be filed under seal. Hense the commentary from the Institute of Justice, who is accused of leaking this to congress, informing us that the seal serves no purpose other then to protect against public scrutiny.

Ninja (profile) says:

You see, the new policy is just a bunch of words written somewhere if you don’t have real punishments, accountability for violations. Ill intended people will avoid doing anything illegal if there is punishment (and societal support for such law and punishment obviously). If there’s no punishment it will keep happening. My own country is a good example of it: the police keep arresting criminals but the law and the judicial system won’t keep them behind bars (there’s the issue of overcrowded prisons too) for whatever reason so crime never decreases because most criminals are so sure of the impunity that they even challenge the cops when arrested.

Jasmine Charter says:

Fair is foul and foul is fair...

More accountability should exist in government. For instance, the agent signing off on the seizure affidavit should be PERSONALLY responsible for any issues arising. If a mistake is made, they are instantly fired AND must pay personal restitution and any legal fees the injured party incurred as a result of their reckless action.

Perhaps slander/perjury and other charge could be levied against them too.

It would make them seriously think about their actions and their impact. And also prevent a little blind obedience…

Hmm… do I listen to my boss and do something I know is wrong and risk firing, plus charges plus financial ruin… or do I do the right thing?

Uriel-238 (profile) says:

That is the point of having things like a working justice system and oversight

Because when a system of authority operates without these things, then it gets aggressive because someone offends them rather than because there was some kind of transgression.

And people get offended by the darnedest things: Color of skin, seizable assets, the wrong religion, a poorly cut jib, an attractive partner, and so on.

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