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Congress Reins in IRS Abuse of Federal Forfeiture Laws

06/17/2019

Last week, the Senate very quietly passed the Taxpayer First Act, H.R. 3151. The bill, which now heads to President Donald Trump’s desk for his signature, seeks to improve customer service and better assist taxpayer appeals. The bill included other provisions, however, that seek to rein in the Internal Revenue Services abuse of civil asset forfeiture laws.

Several years ago, the media began reporting on small business owners whose bank accounts were seized by the Internal Revenue Service (IRS) because the depositor had made frequent deposits or withdrawals below $10,000. This dollar threshold requires the bank to submit a report under the Bank Secrecy Act.

Intended or not, this is called “structuring,” and it’s illegal, although one would imagine that the vast majority of Americans aren’t aware of this. The reports keep track of these deposits and withdrawals to monitor for suspicious activity related to money laundering or fraud. If suspicious activity is suspected, the IRS will seize the account of the owner, as well as the money in the account. The IRS can take permanent possession of the money through federal civil asset forfeiture laws.

A 2017 audit by the Treasury Inspector General for Tax Administration (TIGTA) found that roughly 91 percent of the 278 sampled structuring cases involved funds that were legally obtained. Although the IRS’ Criminal Investigations Division did find tax violations in 21 of these cases, the TIGTA noted, “In the remaining 231 legal source cases, there was no evidence that the property owner structured funds to hide income from illegal activity (other than structuring) or to underreport income on their tax return. Current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than the alleged structuring). In these 231 cases, $17.1 million was seized and forfeited to the Government.”

Basically, the IRS stole $17.1 million from people who did nothing wrong.

Take the case of Andrew Clyde. A veteran, Clyde runs a legitimate business -- a gun store -- in Athens, Georgia. Back in late 2012 and early 2013 his shop, Clyde Armory, had seen good business because of the fear that then-President Barack Obama would try to push Congress to pass additional gun control measures. Clyde made frequent transactions under $10,000 because of his insurance policy wouldn’t cover more than that threshold for off-premise losses.

In April 2013, the IRS seized Clyde Armoney’s bank account because of the deposits under $10,000, and the $940,313 in it. Eventually, Clyde settled, surrendering $50,000. He called this “a tactical retreat” during his February 2015 testimony before the House Ways and Means Subcommittee on Oversight. “I did not serve three combat tours in Iraq only to come home and be extorted,” Clyde said.

Clyde wasn’t alone. During that same hearing, he testified alongside Randy Sowers, a dairy farmer from whom the IRS wrongly seized $60,000, and Jeffrey Hirsch, part owner of Bi-County Distributor, from whom the IRS wrongly seized $446,000. The federal prosecutor who oversaw that case was Loretta Lynch. The case against the money went away in 2015 while Lynch was being considered to serve as attorney general.

The IRS made a policy change in October 2014 in which the agency said that it would no longer pursue seizure and forfeiture of bank accounts in structuring cases “unless there are exceptional circumstances justifying the seizure and forfeiture.” In March 2015, Attorney General Eric Holder placed limits on the use of civil asset forfeiture in banking. The Department of Justice wouldn’t pursue civil or criminal forfeiture until formal charges were brought against an individual suspected of illicit activity.

Essentially, structuring deposits or withdrawals couldn’t be the primary offense, and the suspected structuring had to be tied to another offense, such as money laundering.

This policy change, however, was only administrative. It could be easily changed by a future administration. Congress had to codify it, as well as reform the underlying issue. Although the House passed the Restraining Excessive Seizure of Property through the Exploitation of Civil Asset Forfeiture Tools (RESPECT) Act in 2016 and again in 2018, the Senate didn’t act on the legislation, and thus the RESPECT Act’s prospects in the past two congresses died.

In February 2019, at the outset of this new Congress, Reps. Doug Collins (R-Ga.) and John Lewis (D-Ga.) reintroduced the RESPECT Act. The RESPECT Act is a modest bill. The bill simply requires a federal prosecutor to demonstrate by probable cause that the funds are connected to illicit activity and codifies the IRS’s policy change from October 2014. It also allows the individual from whom the money has been seized to immediately challenge the seizure.

Although the RESPECT Act hadn’t moved as a standalone bill in this Congress, the text of the bill was included in the Taxpayer First Act in sections 1201 and 1202. The House passed the Taxpayer First Act by a voice vote on June 10. On Thursday, Majority Leader Mitch McConnell (R-Ky.) brought the bill to the Senate floor and passed it by a voice vote.

Although the Taxpayer First Act is now headed to President Trump’s desk for his signature where he is expected to sign it, there is still much more left to do to reform federal civil asset forfeiture laws. Although several states have passed civil asset forfeiture reforms in the past five years that increase evidentiary standards and strengthen reporting requirements, Congress has failed to move forward on the issue.

Thankfully, two amendments have been introduced to the Commerce, Justice, and Science division of H.R. 3055, the second appropriations “minibus” bill for FY 2020, to address civil asset forfeiture. Rep. Warren Davidson (R-Ohio) has filed an amendment to prohibit the transfer of assets from the Justice Assets Forfeiture Fund to a state or local law enforcement agency. Reps. Tim Walberg (R-Mich.) and Jamie Raskin (D-Md.) have filed an amendment to prohibit adoptive seizures. The House Rules Committee will meet on June 18 at 5:00 pm to begin determining which amendments will be considered on the floor of the House.

Still, the best way to address civil asset forfeiture to reform the underlying statutes in federal law. Reps. Walberg and Raskin have introduced the Fifth Amendment Integrity Restoration (FAIR) Act, H.R. 1895. This bill would reform federal civil asset forfeiture laws to increase the evidentiary standard needed to subject property to permanent seizure and restore the presumption of innocence in federal civil forfeiture proceedings.

Although the Taxpayer First Act addresses one important aspect of civil asset forfeiture, Congress must pass comprehensive civil asset forfeiture reform to truly fix federal forfeiture laws, by increasing the evidentiary standard, putting the burden of proof on the government, and making it easier to challenge a forfeiture in federal court.