A $34,000 Mistake: the IRS and Civil Asset Forfeiture

by Michael Tasselmyer / /

Imagine this scenario: you own a small, cash-only Mexican restaurant in Iowa. Your profits are small, but you love what you do and have a loyal customer base. For nearly four decades you've been working day in and day out to serve them, all the while depositing your modest earnings in a checking account at a small bank not far from your business.

Then one day, without warning or even charging you with a crime, two IRS agents inform you that they’ve seized all $33,000 in that account – and you are powerless to retrieve it.

Sadly, not only is that the reality for Iowa restaurateur Carole Hinders, it's just one of many cases in which the IRS has taken property from innocent individuals without charging them with any crime, a process known as civil asset forfeiture.

Under federal law, banks are required to report cash deposits of $10,000 or more. However, they are also required to report more frequent deposits of $10,000 or less, on the basis that criminals might do so in an attempt to avoid being reported. Unfortunately, there are plenty of legitimate instances in which an individual or business might also make regular deposits in those amounts. A front-page story in the New York Times recently explored several high-profile cases from around the country:

  • A former Army sergeant in Virginia had been depositing money for his daughter’s college education. The IRS noticed, and seized $66,000 from his account.
  • A family-owned candy and cigarette distribution business in Long Island, NY lost $447,000 to the IRS after a years' worth of daily deposits were reported.
  • The IRS seized $77,000 from the owners of South Mountain Creamery in Maryland, a direct-to-consumer seller that makes most transactions in cash at local farmers’ markets.

The Institute for Justice, a public interest law firm representing Hinders and the Long Island business, has long been researching and writing about the issue. According to their analysis, about 80 percent of people who have their assets seized by the IRS are never even charged with a crime. In 2012 the IRS made 639 seizures (over 500 more than they made in 2005), and took a median of $34,000 in each case.

Resolutions in these instances are often so prohibitively costly that the victims, accused or not, are unable to fight back by taking the case to court. And many times, even when settlements are reached, the IRS ends up keeping a sizeable chunk of the money in question – the Virginia Army sergeant mentioned above lost $21,000 in his settlement, forcing his daughter to delay college classes for a year and a half.

Earlier this year, NTUF released a policy paper that explained why tax reform is not only advisable on economic grounds, but necessary to protect taxpayers’ privacy and security. The fact that civil asset forfeiture is becoming so frequent (and virtually institutionalized, as the Times reports over 100 interagency task forces are devoted to finding suspect accounts) shows the dangers associated with placing one centralized agency in charge of enforcing a complex Tax Code. If a full overhaul of tax laws is not yet politically possible, taxpayers at least deserve less arbitrary and reckless enforcement.