IRS seized funds from lawful activity when pursuing anti-structuring cases

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Internal Revenue Service criminal investigators mainly pursued law-abiding citizens and businesses when seizing assets in civil forfeiture cases because they were easier to go after, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found the Internal Revenue Service’s Criminal Investigation division enforced the Bank Secrecy Act’s anti-structuring provisions mostly against individuals and businesses who earned their income legally, rather than against the drug traffickers and money launderers the law was intended to stop. The report also found the rights of some individuals and businesses were compromised during the investigations.

The IRS has come under criticism in recent years for mishandling a number of civil asset forfeiture cases in which it seized money and property from innocent business owners who had deposited funds in bank accounts in amounts just under $10,000 to avoid bank reporting requirements. Under the Bank Secrecy Act, a pattern of such deposits can be viewed as “structuring” and bring the attention of law enforcement as a sign of possible money laundering.

After a number of innocent business owners got caught up in the enforcement efforts and the IRS failed to return the funds seized from them, advocacy groups such as the Institute for Justice took up their cause, winning court cases and prompting hearings in Congress (see Lawmakers prod IRS to return funds seized from taxpayers). The IRS was forced to change its policies in 2014 and then, after further problems were uncovered, again last year (see IRS changes civil asset forfeiture policies).

The new Inspector General report looked further into the matter and found the IRS’s Criminal Investigation unit pursued structuring cases, mainly using the civil forfeiture process, as part of task force teams that included federal, state and local officials. TIGTA found the vast majority of cases it looked into, 91 percent of the 278 investigations in its sample where the source of funds could be determined, were of businesses and individuals whose funds were obtained legally.

The Bank Secrecy Act does not differentiate between legal and illegal sources of funds, TIGTA acknowledged, but IRS procedures dictate that the overall purpose of the civil forfeiture program is to disrupt and dismantle criminal enterprises.

Most people who were affected by the program did not seem to be criminal enterprises participating in illegal activity, TIGTA found. Instead, they were legal businesses such as jewelry stores, restaurants, gas stations, scrap metal dealers and similar enterprises.

One reasons why such cases were pursued was the Justice Department encouraged the task forces to engage in “quick hits,” so the property could be seized faster and the problems could be resolved more promptly through negotiation, rather than pursuing more time-consuming cases involving actual criminal activity, such as drug trafficking and money laundering.

TIGTA found that, in most cases, IRS Criminal Investigation typically relied on the pattern of currency transactions to support the seizure instead of initially looking for information from the property owners. When the property owners were finally interviewed after the seizure, the IRS agents did not always identify themselves properly and they didn’t always explain the purpose of the interviews, nor did they always inform the property owners about any rights they might have or told the property owners they had committed a crime at the end of the interviews. Under IRS procedures, individuals are supposed to be informed of their rights, including the right to remain silent in tax cases, even when they are not in custody. However, these rights are not provided in Title 31 cases, such as Bank Secrecy Act violations.

TIGTA also found that, in 54 cases, the property owners provided the IRS with reasonable explanations as to why the transactions did not exceed $10,000. In most cases, TIGTA found no evidence that these explanations were investigated.

TIGTA also found that, in some cases, the government seemed to use non-prosecution as a bargaining chip to resolve the civil forfeiture case, though it wasn’t clear whether the potential criminal matters were leveraged only to resolve the civil matter, which would have been improper. The outcomes in cases with substantially similar fact patterns were inconsistent. TIGTA’s report was significantly delayed because IRS Criminal Investigation frequently designated many of the case materials as “grand jury information,” which is generally not subject to disclosure.

The Criminal Investigation unit changed its policy in October 2014 so in the future it would only pursue illegal source income in structuring cases, unless there were “exceptional circumstances.” It also made other process changes to improve the program. But in examining a sample of cases in the period after the policy change was made, TIGTA still found some inconsistencies with the new policy. In 2016, after two congressional hearings on the problems, IRS Criminal Investigation notified approximately 1,800 property owners who had their funds seized under the program, inviting them to send petitions for the money to be returned.

“Criminal Investigation has now made important improvements to this program,” said TIGTA Inspector General J. Russell George in a statement.

“However, the IRS should ensure that protections are in place so that people have rights and that innocent people do not feel compelled to settle a civil forfeiture matter under the pressure of possible criminal prosecution.” TIGTA made several recommendations for improving the program. IRS Criminal Investigation agreed with five of the suggestions, but disagreed with three of the recommendations and partially agreed with one recommendation.

In responding to the recommendations, CI officials said they have established controls to monitor the selection of cases and are in the process of evaluating the petitions from property owners seeking the return of their funds. They partially agreed to allow taxpayers to be advised of their rights in noncustodial situations for administrative cases, but not for cases deemed to be “grand jury investigations.”

“During the past two years, IRS Criminal Investigation (IRS-CI) has implemented policies that effectively addressed the recommendations in your draft report,” wrote IRS Criminal Investigation chief Richard Weber in response to the report. “IRS-CI’s Title 31 enforcement program never violated the structuring laws and related forfeiture provisions. The Bank Secrecy Act does not differentiate between legal or illegal sources in terms of violating the structuring laws. Despite this lack of differentiation, IRS-CI instituted changes over the past two years to its Title 31 structuring program. A policy change was enacted in October 2014 and subsequent procedures and guidance followed in support of the policy change. As a result, IRS-CI no longer pursues forfeiture based solely on legal source structuring. As such, the recommendations offered by TIGTA in the report have been addressed or obviated.”

IRS Criminal Investigation agreed that all reasonable explanations provided by subjects should be explored and it has eliminated the use of consents to forfeiture. However, IRS CI officials refused to provide additional guidance or training relating to the bargaining of nonprosecution to resolve civil cases. They said they are committed to making appropriate referrals to the IRS examination function, but would not agree to improve their grand jury information designation process, pointing to the Inspector General Empowerment Act of 2016, which grants inspectors general access to grand jury information, unless certain denial criteria are met, such as active investigations or if disclosure would be harmful to the interests of the United States. They said this obviates the need for Criminal Investigation to correct the problem of over-designating information as grand jury information.

For its part, TIGTA contended that requiring the Attorney General to review voluminous information for the law’s grand jury denial criteria when the information has been incorrectly designated as grand jury information by IRS Criminal Investigation is a needless waste of scarce resources of both the Attorney General and TIGTA.

A group of Republican lawmakers on the House Ways and Means Committee pointed to the findings in the report, noting that the IRS violated internal Criminal Investigation requirements when conducting interviews with property owners, withholding important information. The IRS failed to notify property owners of their rights, both under the Taxpayer Bill of Rights and the Constitution, before or during these interviews. Most seizures for structuring violations involved legal source funds that had minimal ties to tax crimes from businesses, despite IRS internal policy indicating the Criminal Investigation unit would make a priority of disrupting criminal enterprises. The government appeared to improperly use non-prosecution as a bargaining chip to resolve civil cases, with the settlement practices varying widely from jurisdiction to jurisdiction.

“This report reaffirms our committee’s findings that the IRS has repeatedly and knowingly abused its authority to wrongly target and seize money from hardworking Americans,” said House Ways and Means Committee chairman Kevin Brady, R-Texas, Tax Policy Subcommittee chairman Peter Roskam, R-Ill., and Oversight Subcommittee chairman Vern Buchanan, R-Fla., in a joint statement. “We commend TIGTA for issuing this report and building off of our work to bring IRS’s abusive practices to light. These investigations are a critical part of holding the IRS accountable to the American people, as well as delivering justice to the innocent victims of the IRS. We will continue working to ensure taxpayers are advised of their rights and treated with respect."

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