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April 01, 2015

Civil Forfeiture in Structuring Cases: How Far Can the IRS Reach?

The tax attorneys at Nardone Law Group in Columbus, Ohio, are committed to keeping taxpayers updated regarding the Internal Revenue Service’s efforts to eliminate tax fraud, through civil and criminal investigations. In our prior article on Criminal Tax Convictions, we discussed the IRS’ ability to prosecute taxpayers for tax evasion, such as failing to remit withheld employment taxes. Taxpayers who commit tax crimes, such as filing false returns, failing to remit withheld taxes, or assisting others in similar acts, can face severe punishments if convicted. These punishments usually involve considerable fines, penalties, and, in some instances, incarceration.

In certain cases, the IRS has the ability to seize a taxpayer’s assets (i.e., property or cash) that it suspects have been somehow used in criminal activity. This seizure and forfeiture of taxpayer assets often arises in the context of structuring cases, which involve manipulating cash transactions to avoid reporting requirements. Recently, IRS Commissioner John Koskinen testified before the House Subcommittee on Oversight on Financial Transaction Structuring to discuss the IRS’ new policy regarding civil forfeiture in structuring cases (the full testimony can be viewed here). This article is intended to provide a brief overview of structuring cases and the IRS’ new position on civil forfeiture actions.

What is “Structuring”?

Under the Bank Secrecy Act (BSA), financial institutions are required to report any deposit, withdrawal, exchange of currency, or other payment or transfer exceeding $10,000. Multiple transactions are to be treated as a single transaction if the transactions are made by, or on behalf of, any one person and total more than $10,000 during one business day. Structuring involves the willful manipulation of cash transactions to fall below the $10,000 reporting threshold. While legitimate business reasons may exist for keeping deposit levels under $10,000, more often than not, the intention for doing so is to defraud and evade the BSA reporting requirements. Taxpayers that willfully violate the anti-structuring provision may be subject to a fine of no more than $250,000, imprisonment for a maximum of five years, or both. This is why the IRS vigorously pursues structuring cases.

The Difference between Civil and Criminal Forfeiture

A “seizure” is the process by which the government initially comes into possession of property. “Forfeiture” proceedings are how the government is able to acquire legal title and full rights over the property. Generally, civil forfeiture is a process by which the government can seize property that is suspects has been involved or used in criminal activity. Criminal forfeiture typically follows a criminal conviction. The key difference is that with a civil forfeiture, the property owner need not be convicted or even charged with a crime. In his testimony, Commissioner Koskinen stressed that there are significant due process protections in place to protect the rights of innocent parties. Furthermore, there are numerous safeguards that ensure the reasonableness of any seizure and allow interested parties to have a full and fair opportunity to be heard.

“Legal Source” vs. “Illegal Source” Structuring Cases

Following some negative press, the IRS stated that it would no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases, absent exceptional circumstances. Legal source structuring cases involve funds that come from legal activities and are not derived from, or associated with, any other illegal activity. One example of why legal source structuring cases were receiving criticism involved a restaurant owner who, for 38 years, had deposited all of the earnings from her cash-only business at a local bank. The IRS seized the owner’s checking account, even though she had not been charged with any crime, because of a pattern of less-than-$10,000 deposits. Apparently the pattern was a sufficient basis to obtain a seizure warrant, despite the fact that it isn’t illegal to deposit less than $10,000, so long as you are not intending to evade the BSA reporting requirements. These types of instances are what prompted Commissioner Koskinen’s testimony and the IRS’ updated policy regarding civil forfeiture actions in legal source cases.

Recognizing that businesses and individuals may make deposits under $10,000 without any intent to evade reporting requirements, the IRS concluded that it should begin focusing its resources on cases where evidence indicates that the funds used in the structuring scheme are from illegal sources. Commissioner Koskinen emphasized, however, that structuring deposits or withdrawals to evade reporting requirements is a felony, regardless of whether the funds come from a legal or illegal source. The new policy simply means that the IRS will not be seizing assets in structuring cases unless there is evidence that the funds are somehow connected to illegal activity.

The IRS’ new policy on civil forfeiture in structuring cases should help eliminate instances of law-abiding taxpayers having their assets seized because of a transaction “pattern.” This will also allow the IRS to focus its attention on “illegal source” structuring cases, ensuring consistency in how structuring investigations and seizures are conducted. Seizures and forfeitures are powerful tools, so it is important for taxpayers to be aware of the BSA reporting requirements and the IRS’ broad investigative power.

Contact Nardone Law Group

Nardone Law Group routinely represents businesses and individuals who are undergoing an IRS audit or examination, including criminal investigations. If you have been contacted by an IRS revenue officer, or if you are currently facing a civil or criminal tax investigation, contact one of our experienced tax attorneys today. Nardone Law Group’s tax lawyers and professional staff have vast experience representing taxpayers before the IRS. We will thoroughly review your case and determine what options and alternatives are available.

Contact us today for a consultation to discuss your case.

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April 01, 2015

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