IRS Will Pay Legal Fees of Business Owner Whose Money Was Wrongfully Seized

A federal judge has ordered the Internal Revenue Service to pay the legal fees of Lyndon McLellan, a convenience store owner based in Fairmont, North Carolina, whose bank account was wrongfully seized by the powerful tax agency in July 2014. The IRS had previously agreed to drop the attempted forfeiture of the $107,702.66 it stole from McLellan.

The IRS seized the money because it believed McLellan was "structuring" frequent cash transactions under $10,000 to avoid a report required by the Bank Secrecy Act. The government views frequent deposits below $10,000 as an attempt to conceal illicit activity, such as money laundering of drug money. In reality, the convenience store owner was following the advice of a bank teller, who told him he could save the bank the trouble of submitting paperwork.

"It took me 13 years to save that much money," McLellan said, "and it took fewer than 13 seconds for the government to take it away."

McLellan hired an attorney to help him get the money back and an account to review his books. His case also received some attention during a February 2015 House Ways and Means subcommittee hearing on the IRS’s abuse of federal structuring and civil asset forfeiture laws. The assistant federal prosecutor handling the case against the seized money (in forfeiture cases, the money or seized property is on trial, not the owner; in this instance, the case was United States v. $107,702.66 in United States Currency Seized from Lumbee Guaranty Bank Account Number 82002495) fired off a letter to McLellan and his attorney warning them that the attention would not help him get his money back.

"Your client needs to resolve this or litigate it. But publicity about it doesn’t help. It just ratchets up feelings in the agency," Assistant US Attorney Steve West wrote. "My offer is to return 50% of the money. The offer is good until March 30th COB." It is worth noting that the IRS and the prosecutor continued to pursue McLellan’s money even after administrative policy changes by the agency and the Department of Justice that prohibit the seizure of money in instances where structuring is the only alleged illegal activity.

Still, McLellan pushed forward in the effort to get what was rightfully his back from the federal government. The Institute for Justice got involved on his behalf. In May, the Department of Justice dropped the case against McLellan’s money and returned it to him. But he was not awarded compensation for the approximately $20,000 in legal and accounting expenses — money that would not have been spent if the IRS had not wrongfully seized the money.

On Tuesday, US District Court Judge James Fox came down on McLellan’s side in his effort to win the expenses he incurred while fighting the federal government, which sought to shirk its responsibility. "Certainly, the damage inflicted upon an innocent person or business is immense when, although it has done nothing wrong, its money and property are seized. Congress, acknowledging the harsh realities of civil forfeiture practice, sought to lessen the blow to innocent citizens who have had their property stripped from them by the Government," Fox wrote. "This court will not discard lightly the right of a citizen to seek the relief Congress has afforded."

The Institute for Justice is involved in a similar case. Carole Hinders, an Iowa restaurant owner, is seeking attorneys fees after getting back the $33,000 the IRS wrongfully seized from her account. The Eighth Circuit Court of Appeals will hear oral arguments in this case on Tuesday, February 9.