Tuesday, October 28, 2014

IRS CI Modifies Its Policy Regarding Forfeitures for Structuring on Bank Deposits for Legal Source Deposits (10/28/14)

An important facet of the criminal tax practice is the money laundering laws, including the reporting requirements for currency transactions.  Among those requirements are the the currency transaction report by financial institutions for deposits of $10,000 or more.  Piece mealing deposits -- often called structuring -- to make each individual deposit less than $10,000 to avoid the reporting requirements can be a crime and can result in forfeitures.  This law and its punitive penalties (meant to be redundant) is designed to support the criminal laws by identifying criminal conduct.  But, persons not involved in criminal conduct can be caught in and violate this provision.  In a recent article, the New York Times raised questions about the IRS's expansive use of the forfeiture power against persons not otherwise involved in criminal activity -- against small business owners and others who, perhaps from ignorance, engage in a pattern that can be viewed as structuring.  See Shaila Dewan, Law Lets I.R.S. Seize Accounts on Suspicion, No Crime Required (NYT 10/25/14), here.

In response to the article (or just in advance of it), the IRS announced in a statement, here, to the New York Times as follows:
After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. attorney offices) regarding our policies, I.R.S.-C.I. will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level. While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring. This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.'s mission and key priorities. The policy involving seizure and forfeiture in “illegal source” structuring cases will remain the same.
Kudos to the investigative reporter for the New York Times for shining light on this aggressive use of the law by the IRS.  And Kudos to the Institute for Justice, here, mentioned prominently in the article for representing citizens caught in this trap.  Robert Johnson of the Institute for Justice has contributed a blog entry, here, to the Procedurally Taxing Blog,

One question readers my have is how the IRS would learn about structuring -- the pattern of depositing less than $10,000 from which an inference might be made that the activity was to avoid the CTR reporting requirements?  I suspect -- you know where this is going -- that the banks may report most of such activity on Suspicious Activity Reports ("SARs").  See Wikipedia discussion of SARs, here.  In my Federal Tax Crimes book, I describe SARs as follows (footnotes omitted):
Although there is no general duty under American law to report crimes, certain financial institutions (including money services businesses and high cash businesses such as casinos) are required to file with FinCen a report, called a Suspicious Activity Report (“SAR,” but not to be confused with the Special Agent’s Report with the same acronym which we encountered earlier).  This SAR combines features of earlier reports and is in addition to the CTR if required.  The SAR is required if the financial institution “knows, suspects, or has reason to suspect the money was derived from illegal activities” or the transaction was “part of a plan to violate federal laws and financial reporting requirements (structuring).”  The financial institution is not required to investigate or confirm that a crime has been committed. The financial institution is prohibited from telling its customer of the filing of the report, even in response to a subpoena.  The financial institution is protected from liability to the customer.  The IRS may share this SAR with the IRS examination function having civil tax responsibility, but components of the IRS receiving the information are required to keep the information secure to the same extent as if received from a confidential informant.
Financial institutions have computer algorithms that can detect certain types of activity, including patterns of deposits below the $10,000 CTR reporting threshold and report the activity to FinCEN on the SARs.  So patterns by the unsuspecting or uncurious can be reported.

And readers should keep in mind that structuring to avoid the reporting requirements is a crime.  The statute does not require that structuring be related in any way to other criminal conduct or to hiding such other criminal conduct.  If the intent in the structuring is to avoid the reporting requirements, it is a crime.  Given that the reporting requirement is primarily designed to flush out crimes with important national priorities, it becomes an act of discretion not to proceed against persons committing no other crime than structuring.  Note that the CI statement quoted above does hold out the possibility that, in some cases. legal source structuring may be pursued.

Addendum 11/10/14 2:00 pm:

In light of this development, I revised my Federal Tax Crimes book and offer here the link for the pdf of the revised section on Forfeiture (with revisions marked in red).  The discussion on civil forfeiture begins on p. 2 of the pdf and p. 436 of the book.  The pdf has the footnotes.  Here is a cut and paste of the text of  the civil forfeiture section without the footnotes:
2. Civil forfeiture. 
Contraband, being property illegal to own per se, is forfeitable even without the statute.  The statutes deal principally with property used in the commission of crime or proceeds from the commission of crime and are in rem forfeitures.  In part pertinent to this class, civil forfeiture is available for property involved in a money laundering transaction under §§ 1956 or 1957.  And, in pertinent part, proceeds from the commission of certain crimes, including specifically crimes defined as “specified unlawful activity in § 1956(c)(7)” are forfeitable.  Civil forfeiture is not prescribed in these general provisions for tax offenses.  (Note that the Internal Revenue Code provides certain forfeitures, which I cover below.)  The statute confers title in the United States from the time of commission of the underlying offense. 
Seizures generally require a court seizure warrant obtained in a manner similar to a search warrant, but there are some key exceptions.  Upon satisfaction of this initial requirement, the Attorney General generally makes the seizure, but in part pertinent to this class, the Secretary of the Treasury makes the seizure for crimes investigated by Treasury (including, of course, the IRS).  As usual in such a large bureaucracy, the Secretary of the Treasury has delegated the authority and through redelegations the authority resides in local IRS management.  The property, once seized, is not repleviable. 
The Government may bring a judicial proceeding for forfeiture but in most cases may also forfeit administratively, subject to the property owner’s right to invoke judicial remedies by following certain requirements. Administrative forfeiture is available for personal property (including bank accounts) not in excess of $500,000 and for monetary instruments (not including bank accounts) “within the meaning of 31 USC §5312(a)(3), regardless of their value .”  Within 60 days of the seizure, the seizing agency (here the IRS) must send notice to all known claimants to the property of the seizure will advise those persons that they have either a judicial remedy or an administrative remedy.  In addition, the IRS must publish notice of the seizure “once a week for three consecutive weeks in a newspaper of general circulation in the judicial district where the property was seized.”  The judicial remedy is obtained by filing an administrative claim of ownership.  The administrative claim of ownership is a timely claim made no later than 35 days after the notice letter or, if no such letter received, within 30 days after final publication “to refer the matter to a US district court for a judicial judgment” made to the SAC of the IRS field office responsible for the forfeiture. There is no requirement to post bond.  If the administrative claim is filed, the IRS must file a civil judicial forfeiture proceeding within 90 days or return the property seized.  The process to insure prompt judicial review is a requirement of due process.  
Other key facets of this system for forfeiture are: 
1. Indigent property owners may obtain representation if they have indigent representation in a related federal criminal case.  Further, indigent property owners may obtain representation if the Government seeks to forfeit a primary residence. 
2. The Government must prove by a preponderance of the evidence that it is entitled to make the forfeiture.  If the Government’s grounds for forfeiture is that the property facilitated the commission of the offense, the Government must prove that there is a substantial connection between the property and the offense.  
3. A claimant may petition to determine whether the forfeiture was constitutionally excessive. 
4. Innocent owners of property, including bona fide purchasers, who did not participate in the criminal offense or know of the conduct may avoid forfeiture. 
5. Administrative forfeitures that have not been properly noticed may be set aside. 
6. Expedited release from forfeitures may be granted in cases of hardship.  
7. These forfeiture protections apply generally to forfeitures under any applicable federal law except in specifically enumerated circumstances, one of which is forfeitures under the Internal Revenue Code forfeitures (which I discuss below).  As I note below, since forfeitures under the Internal Revenue Code are not material for general crimes that we consider in this course, this exception is also not material for this course. 
Judicial proceedings related to civil forfeiture are handled under the Federal Rules of Civil Procedure. 
An additional constitutional issue is whether civil in rem forfeiture after conviction of the crime constitutes punishment for purposes of the double jeopardy guarantee.  The Supreme Court has held that it does not.

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