The IRS Criminal Investigation Division (IRS-CI) regularly violated taxpayers’ rights and skirted or ignored due process requirements when investigating taxpayers for allegedly violating the $10,000 currency transaction reporting requirements, according to a 2017 report by the Treasury Inspector General for Tax Administration (TIGTA). In addition, less than one in ten investigations uncovered violations of tax law.
These findings should be alarming to taxpayers given that President Biden has proposed creating a new comprehensive financial account information reporting regime which would force the disclosure of any business or personal account that exceeds $600. Not only would this include the bank, loan, and investment accounts of virtually every individual and business, but it would also include third-party providers like Venmo, CashApp, and PayPal.
Under the Bank Secrecy Act, financial institutions are currently required to report transactions exceeding $10,000 or multiple transactions in aggregate of $10,000 in a single day. TIGTA examined 306 investigations undertaken by IRS-CI between 2012 and 2014 for violating this law, where a total of $55.3 million assets were seized. During the audit, the sample size was narrowed to 278 investigations, as several did not meet the criterion for inclusion.
TIGTA found that only 8 percent of investigations uncovered violations of tax law. In many cases, IRS-CI had not considered reasonable explanations from those investigated, property owners were not adequately informed of their rights nor informed of seizure of their property, and outcomes in cases lacked consistency, violating the Eighth Amendment to the Constitution.
Given these findings, a new reporting regime that includes the financial accounts of virtually every business and individual could see countless new cases of taxpayer abuse.
Very few taxpayers investigated by IRS-CI were found to have violated tax law.
Taxpayers investigated by IRS-CI were found to have violated tax law in just 21 of the 252 cases, or 8 percent. Similarly, out of the 278 cases, only 26, or 9 percent, of investigations established that funds came from an illegal source or was involved in another illegal activity.
Instead of establishing tax crimes, it appears that many of these investigations were merely IRS-CI fishing expeditions.
Businesses that dealt with a high number of currency transactions, such as retail, wholesale, service, automobile, restaurant, and gas stations were the primary targets for seizures. This involved the seizing of deposits into a bank account and blocking withdrawals from a bank account, which would likely have disrupted owners’ ability to run their business.
Many of these owners explained that funds withdrawn were simply used for business purchases. Over 90 percent of them were telling the truth.
Interviews with property owners were primarily conducted after seizures.
TIGTA found that in 92 percent of cases, interviews were conducted after the seizure of the interviewee’s property, oftentimes on the same day. This is important, as judges did not receive any information from interviews before making their probable cause determination.
In many cases, with explanations given by property owners, judges’ decisions would have been affected.
This history of seizing property with little to no information outside of simple banking patterns should be alarming to taxpayers, given that the IRS is proposing to force the collection of new banking patterns.
IRS-CI did not consider reasonable explanations given by property owners.
In many cases, there was little or no evidence that property owners’ reasonable explanations were considered by the IRS-CI. In fact, in 54 of the 229 investigations, owners provided reasonable explanations, such as “depositing business funds, withdrawing funds for inventory purchases, or conducting transactions under $10,000 due to insurance policy restrictions.”
In most instances, TIGTA found no evidence that CI attempted to verify the property owners’ explanations.
In other cases, the property owners provided other types of reasonable explanations, such as “friends or unidentified bank representatives told them to conduct transactions under $10,000, they did not want to handle more than $10,000 cash due to the time and “hassle” of filling out forms, a desire to avoid bank fees, or for personal safety reasons.”
Again, TIGTA found no evidence that CI considered the defense offered or tried to verify them.
CI procedures require that all “realistic” defenses are considered before a seized asset is forfeited. Against the rights of these owners, CI agents failed to even verify realistic defenses. Given the failure to follow procedure here, there is a compelling case that these owners’ Fourth Amendment right against unreasonable searches and seizures was violated.
Taxpayers under investigation were not adequately informed of pertinent information, such as the purpose of the interview, proper agent identification, and that a seizure of their property took place.
In 171 of 229 cases, special agents did not properly identify themselves as assistants to the United States Attorneys’ Office (USAO) when they were assisting on an investigation or TIGTA did not find evidence they did. This violates the Internal Revenue Manuals (IRM), which states, “that IRS employees... should advise those contacted that they are acting as assistants to the attorney for the government in conjunction with an investigation.”
In 106 of 229 cases, the agents did not state the purpose of the interview or TIGTA did not find evidence they did. IRM procedures in Title 26 cases require special agents to advise the property owner regarding the purpose of the contact.
For 181 of 229 cases, TIGTA identified a problem with the information provided to the property owner about the seizure. In 110 cases, the property owners were not informed until the end of the interview that a seizure took place. In 60 cases, the property owners were not informed that a seizure took place. As the TIGTA report explains, “For Title 26 cases, the IRM procedures requires special agents to advise the property owner regarding the purposes of the contact, and we believe this also relates to the requirement in Title 26 cases for special agents to advise the property owner that a seizure took place.”
Outcomes in cases lacked consistency, violating the Eighth Amendment to the Constitution.
The Eighth Amendment to the Constitution of the United States, precludes excessive fines and requires that penalties be proportionate to the offense. Additionally, under 18 U.S.C. § 983(g)(1), “a court is required to consider whether a forfeiture is proportional to the gravity of the offense giving rise to it.”
TIGTA explains that many of the individual outcomes in seizure cases were disproportionate to the conduct of the taxpayers and were disproportionate to the outcomes in cases of similarly situated taxpayers.
Worse, outcomes did not appear to be consistently determined by the facts of the cases but rather by how willing a taxpayer was to engage in costly litigation against the government and the potential of a criminal prosecution if no settlement was reached.
The few cases where structuring cash transaction was proven, often through owners’ own admission, is where the most disproportionate outcomes were identified:
“The most disproportionate outcomes identified for our sample results included cases for which the property owners were criminally charged and entered into plea agreements solely for legal source structuring. In nine cases from our sample, legal businesses and their owners were indicted for structuring cash transactions for which there was no evidence of any unlawful conduct other than structuring. The businesses included water amusement parks, pharmacies, used car sales, and coin and stamp dealers.”
Disproportionate outcomes are a tell-tale sign of a violation of Eighth Amendment rights, as these rights demand proportionate penalties for the offense itself. The IRS-CI’s practice of determining outcomes by taxpayers “risk tolerance” is a dreadful, egregious violation of their rights.
TIGTA found numerous cases where IRS-CI failed to uncover tax crime, violated taxpayers’ due process rights, failed to notify taxpayers of pertinent information, and improperly determined outcomes in violation of the Constitution.
Given that these investigations were conducted due to possible violations of the $10,000 currency transaction threshold, the Biden proposal to create an entirely new reporting regime for financial accounts that exceed $600 should be alarming to taxpayers. If this proposal is implemented, it is inevitable that we will see new cases of the IRS targeting and harassing taxpayers.