IRS Continuing To Pursue An Asset Forfeiture Case That Contradicts Its Own Policy On 'Structuring' Prosecutions

from the the-pettiest-of-discounts dept

Late last year, the IRS began dropping some of its more questionable asset forfeiture cases, most likely in response to reams of bad press about its sketchy enforcement of structuring laws. Many of these cases were built on nothing more than a series of deposits that came close to -- but never exceeded -- the $10,000 needed to trigger federal reporting. While the IRS may say it's looking for tax cheats, fraudsters and money launderers, its targets were often small, cash-based businesses like restaurants and vending suppliers.

The IRS also announced that, going forward, it would only pursue asset forfeiture cases that showed the money came from an illegal source. The DOJ followed this up with its own policy shift that roughly matched the IRS's.

Despite this change of heart, the IRS and DOJ are still pursuing a case against Lyndon McLellan -- a convenience store owner who had $107,000 taken from him by the feds late last year. McLellan -- on the advice of his banker -- began inadvertently "structuring" his deposits, again to "save" his bank from the burden of extra paperwork. There was seemingly no doubt his business generated the cash he deposited, but the IRS went after him anyway.

McLellan's legal representatives (from the Institute of Justice) forwarded details of his case to legislators ahead of IRS testimony in front of the House Ways and Means Committee. One legislator took this time to confront IRS Commissioner John Koskinen about his agency's contradictory prosecution of McLellan.

Without naming McLellan, Rep. George Holding (R-N.C.), a former U.S. attorney, asked Koskinen about the seizure:

Holding: Are you saying that under the new policy, you have to aver that we have probable cause to believe an illegal act is taking place other than the act of structuring?

Koskinen: Yes.

Holding: You sure about that?

Koskinen: That's what I'm advised by the people who run the Criminal Investigation Division.

Holding: The staff pulled for me a case from North Carolina, from my former prosecutorial district, after your policy change. And I've read through the affidavit and the associated documents. There's no allegation of illegal activity, other than the act of structuring...

Koskiken: If that case exists, it's not following the policy.

This should have resulted in the IRS dropping the case, or at least providing something in terms of evidence justifying its continued pursuit of McLellan. If nothing else, the agency could have played this off as an unfortunate oversight by its prosecutorial arm. Instead of any logical outcome, this questioning resulted in the federal prosecutor handling McLellan's case claiming the real problem wasn't the pursuit of a bogus prosecution. No, the real problem here was people disrespecting the power of a gag order.

Prosecutor Steve West emailed this to the Institute of Justice.

I'm a bit concerned. At your request, I provided you a copy of the application for seizure warrant, which remains under seal with the Court, and now it appears it has been made available to a congressional committee? I do not know who did that, and I am accusing no one, but it was not from our office and could only have come from your clients. That was certainly not my intent in making this available. Whoever made [the document] public may serve their own interest but will not help this particular case.

Oh, and that the public exploration of this contradictory prosecution hurt the feelings of West's office, if not the IRS itself.

Your client needs to resolve this or litigate it. But publicity about it doesn't help. It just ratchets up feelings in the agency.

And, finally, a half-off sale on sour grapes.

My offer is to return 50% of the money. The offer is good until March 30th COB.

As Reason's Jacob Sullum points out, there are valid reasons for filing these affidavits under seal. Notifying a structuring suspect of the IRS's intent to seize funds would probably result in a swift draining of targeted accounts. Whether the seizure is justified or not, there's at least a solid reason for the gag order. But in this case, the IRS had already seized the funds and moved forward with its prosecution. There was no "fear of flight," at least not in terms of the money in McLellan's accounts. West's nod to the power of sealed affidavits isn't due to fear of a compromised investigation, but rather due to his irritation at having one of his prosecutions publicly outed as running contrary to both the IRS's and DOJ's policies on structuring seizures.

As for the 50% offer, that's similarly disingenuous. At this point, the IRS commissioner has publicly acknowledged that such a case would be in violation of IRS policy. It's already likely on its way to being dropped, despite the prosecutor's suggestion that publicly embarrassing his office and the IRS's forfeiture team might result in the case being pursued out of spite, rather than based on any evidence of criminal activity.

Filed Under: asset forfeiture, convenience store, doj, irs, lyndon mclellan