How the IRS Seized Millions From Small Businesses: Equitable Sharing or Extortion?

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If you’re a small business owner, following the rules won’t necessarily stop the IRS from seizing your bank account. Under loose allegations of business owners making evasive deposits, the IRS has taken millions from small business owners.

How they did it will shock you

Federal law allows the IRS to levy anyone’s bank accounts and freeze their assets if they suspect you’re committing money fraud. The IRS has used a legal loophole to get their money back as quick as possible.

The law in question was originally designed to track cash involved in criminal activity. It just so happens to also give the government the ability to take money without any criminal complaint on file. So instead of the intended money launderers, racketeers, and drug dealers the law was designed for. The IRS has gone after innocent business owners and wage earners.

We’re talking about regular, middle-class citizens whose only trouble with the law may be a mere speeding ticket.

One of the first cases of the IRS engaging in the wrongful account seizure of small businesses was back in 2014. An Iowa woman that had ran a small cash-only restaurant had nearly $33,000 seized from her checking account.

She had not been charged with a crime and was not accused of money laundering or tax evasion. The IRS justified the seizure by the fact that her bank deposits were for less than $10,000 at a time.

When a business owner or individual deposits more than $10,000 at a time banks must report it to the government. This rule also applies to withdrawals and transfers. To your average person, this is probably news.

How can the IRS take your money without proof that you’ve done anything wrong in the first place?

Civil asset forfeiture is an increasingly controversial area of law. It allows law enforcement agents to seize any property as long as they have suspect that it’s tied to crime. The law does not require criminal charges to be filed for a seizure to occur, and the law enforcement agencies are given shares of each forfeiture.

Law enforcement and the IRS are able to share forfeiture shares because of the Equitable Sharing Program.

Here’s how it works

The IRS has a Criminal Investigations Unit, which works with local police to sift through bank records and identify suspicious transactions. These “suspicious” transactions are brought to a federal magistrate, who has the power to authorize the IRS to seize the accounts. Federal agents can then go the bank, confiscate the money, and show up unannounced at a business owner’s office to inform them they have lost control of their account.

Can you imagine that? You’ve been running a business for years without any issues. Then one day you go to the bank and the teller informs you that your account has been taken over by the government.

That exact scenario is one that the Hirsch brothers dealt with back in 2012. They ran a small New York distributing company.

The brothers did business with various small gas stations and delis and frequently made cash deposits in their bank account. They were innocent of any criminal activity. However, the IRS mistakenly flagged their transactions as drug dealer or terrorist behavior.

They were never accused of wrongdoing or criminally charged, and it took two years fighting the IRS in court and tens of thousands of dollars to get their money back.

According to a watchdog report from the Treasury Inspector General For Tax Administration, the Hirsch brothers’ situation is not uncommon.

Here’s what they found

Most of the seizures for structuring violations involved legal source funds from businesses. Since 2014, $17.1 million was seized and forfeited to the government in 231 legal source cases. IRS Criminal Investigation (CI) relied on patterns of banking transactions to establish the probable cause that warranted the seizure of assets for structuring violations.

In most cases, the CI did conduct interviews with property owners to determine the reasons behind their pattern of banking activity. Additionally, the interviews sought to find out whether the property owners even had knowledge of the banking law and had the intent to structure.

IRS Criminal Investigation had a requirement for agents to provide advice about the property owner’s’ rights. This was true in Title 26 case, but not in Title 31 cases.

Here are the details

According to the report:

“In only five of the 229 interviews conducted, non-custodial statements of rights, such as the right to remain silent, were provided. For 54 investigations, the property owners provided realistic defenses or explanations, and for 43 of those cases, there was no evidence they were considered by CI.”

How was all of this legal?

The IRS Response to the Watchdog Report

The IRS gave a response to the watchdog report, emphasizing that the agency had been acting within the law.

Licensed tax professionals, tax attorneys, and registered agents disagree.

Their argument strongly rests on the fact that structuring violations aren’t required to illegal source funds.

Why has this has been going on so long?

The Inspector General report alleges that going after small businesses seemed to be a part of a strategy to obtain as much money as possible with minimal effort. (Source: https://www.treasury.gov/tigta/auditreports/2017reports/201730025fr.pdf)

The Department of Justice actually encouraged the IRS and task forces to pursue these ‘quick hits’, which made property seizure and negotiation a quicker process. Pursuing cases with actual criminal activity like drug trafficking or money laundering was more time-consuming.

The IRS claims to have stopped practicing ‘quick hits’ in back 2013.

The DOJ also condemned asset forfeitures when no criminal activity could be proven.

In 2014 the IRS announced it would cut down its use of forfeiture in cases where deposit and withdrawal behavior was their only cause for concern. The announcement came after the agency was embarrassed by a series of high-profile cases.

Moving forward

We shall see how the government plans to control the problem. Congress has recently pushed a bill called the “Clyde-Hirsch-Sowers-RESPECT Act”. The bill would prohibit the IRS from carrying out seizures unless there is definitive probable cause that criminal activity is involved.

How you can protect yourself from the IRS seizing your accounts

As a small business owner, it is important that you understand your rights. One of the best things your can do to protect yourself is to keep very detailed accounting to corroborate your transactions. It is in your best interest to be as transparent with the IRS as possible.

If your bank informs you that your account has been seized by the government, you should immediately consult a reliable tax attorney or licensed tax professional. They will have the experience necessary to best handle your case and get your money back.

Boxelder Consulting is always here to help if you have any questions about finding the right attorney or licensed tax professional you need. If the IRS has seized your bank accounts, it’s in your best interest to act as soon as possible.