IRS Misusing 'Structuring Law' to Seize Assets of Individuals and Small Businesses That Have Committed No Crimes

IRS under a spotlight for freezing assets

The IRS between 2005 and 2012 seized more than $242 million for suspected structuring violations in more than 2,500 as February 11, 2015

Politico - On April 12, 2013, the IRS seized every penny of a nearly $1 million business account held by Georgia gun shop owner Andrew Clyde.

His misdeed — if you can call it that: depositing business checks into his bank account in increments under $10,000.


A bipartisan group of lawmakers on House Republicans are on Wednesday preparing to shine a spotlight on the government’s practice of seizing small business civil assets without charging them with a crime, signaling a new oversight focus on an issue gaining more attention and hinting at new legislation backed by both parties.

In one instance, a U.S. attorney suggested to one witness’s attorney that he may be getting a harsher punishment because the witness spoke to the press, according to an email reviewed by POLITICO.

“There is a strong indication that the IRS has been involved in civil forfeiture that has hurt innocent people,” said House Ways and Means oversight subcommittee chairman Rep. Peter Roskam (R-Ill.) in a brief interview, calling it an “abuse by the federal government against citizens.”

The hearing was the first for Roskam, who takes over the subcommittee that in the past year focused nearly exclusively on the IRS tea party targeting controversy.

But Wednesday’s hearing struck a rare bipartisan accord as Democrats joined their counterparts in lecturing the IRS.

“Whether or not it is within the law, it is wrong to, without any criminal evidence, seize somebody’s property,” New York Democrat Charles Rangel fumed. “Common sense and decency says that when the Congress screws up, we expect you people to come back and say this is not working.”

IRS Commissioner John Koskinen in the hearing apologized to “anyone who got caught up in this,” calling lawmaker’s concerns “legitimate and appropriate.” But he also said his agents were merely following the law.

Under the law, banks must report cash bank deposits of $10,000 or more to the federal government — a provision aimed at catching illicit traffickers. Criminals have tried to sidestep the reporting requirement by keeping their deposits under the $10,000 threshold that triggers the reports, a practice called “structuring” that is also illegal.

The IRS — like other agencies that engage in the practice, such as the DEA or FBI — has sweeping authority to take assets, having to prove only “preponderance of evidence.”

They don’t have to charge anyone with a crime or present any evidence that shows guilt beyond a reasonable doubt, but can get a seizure warrant solely by presenting bank statements showing that a business has deposited amounts under $10,000.

Critics say that shows nothing.

Although the seizure issue crosses several agencies, Roskam’s panel homed in on the IRS, bringing in small business-owner witnesses who had their money taken without a warning while the House Judiciary Committee held a separate hearing at the same time from a Justice Department perspective.

Koskinen said the agency is addressing the problem, having announced last October that it will seize assets only after finding “probable cause” that depositors are engaging in criminal activity, not just “structuring” — and only after it’s approved by an IRS senior executive.

Lawmakers from both sides of the aisle expressed interest in doing more. Rep. John Lewis (D-Ga.), for example, who apologized to the witnesses “for what IRS did to you,” told POLITICO after the hearing that he is interested in legislation that would allow the victims to regain money lost from their predicaments. That’s something the majority also has brainstormed.

There has been bipartisan backing to increasing the threshold for seizing assets before, including bills by Sen. Rand Paul (R-Ky.), Rep. Tim Walberg (R-Mich.), former Ways and Means Chairman Dave Camp (R-Mich.) and ranking member Sander Levin (D-Mich.).

The broad power in question was aimed at making it easier to catch the bad guys. But the IRS in recent years has used the authority to net small-business owners they believe could be intentionally keeping deposits under $10,000 to avoid reporting requirements.

The IRS between 2005 and 2012 seized more than $242 million for suspected structuring violations in more than 2,500 cases, according to data obtained in a Freedom of Information Act request by the Institute for Justice, a conservative nonprofit representing a number of individuals affected by the practice. It made 639 such seizures in 2012, up from 114 in 2005.

And, according to the group who testified Wednesday, “at least” a third of such seizures resulted simply because the businesses were making multiple bank deposits under $10,000. They say no other criminal activity was ever alleged.

“How can you be guilty on a suspicion?” asked Rep. Mike Kelly (R-Pa.). “This flies in the face of everything we are as a country.”

Koskinen retorted that IRS doesn’t make the decision on its own but with a U.S. attorney and a federal judge, though he later specified that IRS agents initially flag and bring the cases to the Justice Department.

He said the predicament of the small-business owners doesn’t happen often, noting that in 60 percent of the cases when there is a seizure, no one shows up, suggesting that a criminal is behind the pot of cash and has fled.

Still, those caught up in the storm have a tough job of showing they didn’t do anything wrong, but sometimes they don’t get to see a judge for months or years.

“The burden of proof basically shifts — it’s incumbent on small businesses to prove they’re innocent,” said Kevin Brown, former acting IRS Commissioner, who was flabbergasted by the way the policy was being used on small businesses.

That’s what happened with Clyde, the owner of Clyde Armory. He kept his deposits under $10,000 because his insurance limited coverage for losses due to robbery over $10,000, according to his testimony obtained by POLITICO.

After the IRS seized his $940,313 account, he ended up settling to pay $50,000 to avoid a public dispute that could hurt his business and reputation, he will tell the panel. He spent $149,000 on legal bills trying to get his money back.

Small businesses often end up settling for three reasons: It can hurt their public image; it can take years to unfreeze their assets; and it costs money to fight back.

Jeff Hirsch, who will also testify, fought for two and a half years with his brothers against the IRS to get back more than $446,000 worth of assets the IRS seized from his family business in May 2012.

They never got to bring their case before a judge because the government never started the forfeiture proceedings, locking up the assets used to operate their Long Island-based company that distributes snacks to convenience local stores. They relied extensively on credit, paid $25,000 to hire an outside auditing firm to dig through their books and another $25,000 in lawyer bills.

Three weeks ago, the IRS dropped the case. It returned the funds, without any interest and without ever charging the brothers with a crime.

But some can’t afford to wait as Hirsch did.

Randy Sowers, who also appeared Wednesday, decided he and his wife couldn’t operate their Maryland-based dairy farm and creamery without their capital after the IRS took their entire business account balance of more than $62,000. They settled, forfeiting $29,500.

Sowers may have gotten an even harsher settlement than others because he talked to the press about his predicament, according to an email exchange shared with POLITICO.

His lawyer had asked assistant U.S. attorney Stefan D. Cassella why his client, as part of the settlement, had to acknowledge that the government had “reasonable cause” to take his assets even though he disagreed — despite the fact that another person in a similar case did not have to knowledge this.

Cassella retorted in an email that the other person didn’t have have to do that because he “did not give an interview to the press.” Sowers had just talked to a Baltimore-based newspaper, which ran a story on his predicament.

IRS has said from now on it will only focus on seizing the assets of those suspected of illicit activity unless it is an “exceptional circumstance,” but at least two former IRS experts weren’t sure how they could classify which accounts were illegal and which weren’t upon initial inspection and seizure.

Republicans intend to also push the IRS to apply the recent policy change retroactively, giving businesses that settled in recent years the opportunity to re-open their cases and get some sort of reprieve.

They’ll also be seeking more information for the hike in asset seizures in 2012 and 2013. While the number of IRS seizures between 2005 and 2014 often averaged around 1,500, totals reached more than 3,000 during 2012 and 2013. It decreased again in 2014.

Republicans want to know why they doubled, then dropped again. IRS will say the recent drop is because it had to scale back its resources, according to a panel source briefed on the position they’ll take.

The GOP also wants to know what percentage of assets seized were illicit and which were legally earned. The IRS has told the committee it does not have such a breakdown between what’s called “illegal source versus legal source cases.”