Imagine yourself being stopped by a police officer while driving home from work. You have committed no crimes or traffic violations, but unfortunately, this is no routine stop. Much to your shock, the officer seizes cash or other valuables from your vehicle – even though you have not been arrested. You may be able to reclaim your property by petitioning the courts, but this process can be convoluted, and there is no guarantee of success. Believe it or not, this practice, which is known as “civil asset forfeiture,” is perfectly legal provided specific criteria are satisfied – and law enforcement officers aren’t the only government employees who use it. Civil asset forfeiture has also been utilized by the Internal Revenue Service (IRS), which can withdraw funds directly from an individual’s bank account. While the IRS relaxed its civil asset forfeiture policies in 2014, certain taxpayers remain at risk, notably small business owners. To minimize this risk, in addition to being represented in any tax collection action, is to understand the little-known “structuring” regulations that allow the IRS to seize lawfully held assets – and, for added security, to consult with an experienced tax attorney for personalized financial guidance.
The history of civil asset forfeiture stretches back as far as the seventeenth century, when it was applied to British sailing vessels. Though hardly new, the practice has attracted heightened scrutiny during the past several years, thanks in part to a series of controversial cases in which IRS agents drained hundreds of bank accounts maintained by business owners accused of violating obscure “structuring” laws. (Specifically, a study released by the Institute for Justice (IJ) – a 501(c)(3) organization which, in its own words, “litigates to limit the size and scope of government power and to ensure that all Americans have the right to control their own destinies as free and responsible members of society” – reports that the IRS seized approximately $43 million in 618 cases spanning the period from 2007 to 2013.)
The good news is that, on October 17, 2014, the IRS’ Criminal Investigation Division (CID or CI) amended its policies to affect a smaller sliver of taxpayers. The bad news is that some level of risk, albeit lessened, persists under certain conditions. To quote a Department of Justice (DOJ) memorandum issued March 31, 2015 by the Office of the Attorney General, under the revised policy, “IRS-CI will not pursue seizure and forfeiture of funds associated only with ‘legal source’ structuring unless: (1) there are exceptional circumstances justifying the seizure and forfeiture and (2) the case is approved by the Director of Field Operations.”
So what does that actually mean for taxpayers, and who should be concerned? To understand the answers to those critical questions, taxpayers must have some background knowledge about “structuring” laws, what they seek to prevent, and how they impact income reporting requirements.
When a business receives a payment, or a bank receives a deposit, exceeding a threshold of $10,000, the transaction must be reported to the IRS using Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business), a legal requirement which is established by the Bank Secrecy Act (BSA). Though some exceptions have been noted by the IRS, such as exceptions for “financial institutions and casinos who must file FinCEN Report 112,” Form 8300 requirements otherwise apply to most businesses and financial institutions.
Businesses which sell high-cost products, such as diamond jewelry or small private aircraft, are most likely to be affected, as transactions of this nature can easily surpass the $10,000 threshold. However, even transactions below the $10,000 threshold can attract IRS notice – a fact many business owners are unaware of.
In an effort to curb money laundering, tax evasion, and terrorism, federal law prohibits the practice of breaking up large deposits into multiple, smaller deposits in order to circumvent reporting requirements, an offense which is called “structuring” or “smurfing.” Unfortunately, there have been multiple cases in which well-meaning business owners and other taxpayers, unaware of these structuring laws, made one or more large deposits slightly below the $10,000 threshold, inadvertently triggering an IRS investigation and subsequent seizure of assets. In 2013, for example, the IRS removed approximately $33,000 from Iowa restaurateur Carole Hinders’ bank account after detecting multiple large deposits beneath the threshold.
Fortunately, the government’s lawsuit against Hinders was later dismissed, resulting in a return, albeit delayed, of the seized funds. (As the IJ, which represented Hinders, noted in a statement, “For more than 30 years, [Hinders] has kept her bank deposits to less than $10,000 because she was told that larger deposits cause an inconvenience to the bank. She had never heard of the term ‘structuring’ until federal agents knocked on her door… to tell her they had emptied out her bank account. But it’s not illegal to run an honest cash business, and Carole Hinders is not a criminal.”)
Unfortunately, the positive outcome of Hinders’ case is uncommon. Though the IRS “established a special procedure for people whose assets were involved in structuring to request a return of their forfeited property or funds” in June 2016 following a Congressional inquiry, the same IRS publication also notes that, as of February 8, 2017, the Service “is no longer accepting applications,” leaving taxpayers with limited recourse.
While the IRS has relaxed its civil asset forfeiture policies in an effort to reduce unjustified seizures of legal income, business owners and other taxpayers may still be at risk of losing valuable assets in cases where the IRS determines that “exceptional circumstances” exist. Business owners and other individuals who have recently made one or more large deposits under the $10,000 threshold, or who have failed to report large transactions using Form 8300, are advised to discuss compliance with an experienced business tax attorney serving S corporations, C corporations, limited liability companies (LLCs), partnerships, and sole proprietorships.
At the Tax Law Office of David W. Klasing, our trusted team of zealous accounting and tax professionals brings decades of combined experience to each matter we handle, and, in addition to offering general tax planning guidance, is prepared to provide aggressive representation in the event of an audit or criminal charge. To arrange a reduced-rate consultation concerning Form 8300, income reporting requirements, or other matters pertaining to civil asset forfeiture, contact us online, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
Here is a link to our YouTube channel: click here!
Here is a link to our practice video on warning signs than an audit has gone criminal.
What is an eggshell tax audit?
What is an effective tax defense in an IRS eggshell tax audit?
So, you cheated on your taxes and you are under a tax audit…
Why should I hire a tax attorney to represent me in a tax audit?
Foreign income and information non-compliance