Imagine a situation where you have been accused of a crime, but because you did not commit the crime, you have not been charged. Now imagine the government seizing property that is even remotely connected with the criminal activity that you have not been charged with committing. Finally, imagine the government selling that property and keeping the profit. This is a technique called civil asset forfeiture at its worst. And it’s not just the police that use civil asset forfeiture. Unfortunately, taxpayers are at risk of the IRS, Department of Justice, and state taxing authorities seizing their assets, too. Luckily, the U.S. Supreme Court recently dealt a blow to states attempting to use civil asset forfeiture in an excessive manner.
Civil asset forfeiture is a method used by federal, state, and local law enforcement officials and government agencies to seize property that they believe is connected with criminal activity. Because the burden of proof in civil matters is much lower than in criminal cases, the government has been successful in seizing the property of citizens for years. In many cases, the value of the property seized appears to be significantly higher than what would seem to be commensurate for the crime the individual was accused of.
A prime example of asset forfeiture in the tax context is Foreign Bank Account Reporting (FBAR) penalties for those who have been accused of failing to report in accordance with the Bank Secrecy Act. If the government finds that a taxpayer willfully failed to comply with FBAR laws, the government asserts that they have the right to half of the value of the high-balance of the account for the year of noncompliance. For taxpayers with accounts with balances in the millions of dollars, the financial penalty seems incredibly disproportionate to the amount of loss that the government has suffered due to the taxpayer’s purported noncompliance.
But it’s not just the IRS that engages in potentially excessive fines and penalties. State taxing authorities are known to target the assets of taxpayers, as well. Last week, the Supreme Court made it a little more difficult for states to engage in civil asset forfeitures or levy fines and/or penalties that are excessive. In Timbs v. Indiana, the Court unanimously agreed that the 8th Amendment to the U.S. Constitution applies to the states (through the 14th Amendment) and prevents excessive fines. The Court sent the case back to the lower courts to determine if the forfeiture represented an amount that was excessive.
The result in Timbs could be a major win for taxpayers on both the federal and state fronts. First, states have now been directly instructed to be careful of violating the 8th Amendment’s prohibition against excessive fines. Second, and most importantly, the disposition in Timbs is likely to reignite litigation about what constitutes excessive fines and penalties. For those who are facing a massive FBAR penalty, this line of litigation should be of particular interest.
If you are facing a federal or state tax examination or are the subject of a criminal inquiry related to tax, it is in your best interest to contact an experienced tax attorney as soon as possible. A tax defense attorney will assist in determining whether the latest developments isn’t he law will prove helpful in your case and help you craft a strategy that places your financial and physical freedom as a top priority.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience representing taxpayers from all walks of life. Whether you are a small business owner facing a sales or employment tax audit or are an individual wage-earner who has been notified that the IRS would like to examine your tax return, our team of zealous advocates are ready to assist. Do not let the threat of a small tax issue snowball into a criminal case keep you up at night. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.
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