IRS and DOJ Crack Down on Cash Reporting Violations

Federal law requires that anyone engaged in a trade or business who receives more than $10,000 in U.S. currency is required to file a Form 8300 (available here) with the Internal Revenue Service.  Failure to do so can subject the individual or business receiving the cash to civil and/or criminal penalties.

A recent criminal prosecution in Texas illustrates the severe consequences for failing to properly report cash transactions using Form 8300.  An electronics business known as D-Tronics was prosecuted for failing to report its receipt of cash in excess of $1.3 million in multiple transactions.  The company pleaded guilty to willfully failing to file Forms 8300 and agreed to forfeit the amount of $1.3 million to the government.  On October 29, 2014, the company was sentenced to one year of probation, and ordered to forfeit the amount of $1.3 million.  The court further ordered that the company and its employees were required to complete training on Form 8300 requirements.  In a press release announcing the sentence (available here), the Justice Department stated that the forfeiture amount in this case “is among the highest against a trade or business for violating the Form 8300 filing requirement.”

On October 25, 2014, the New York Times published an article describing the Internal Revenue Service’s controversial, yet legal, practice of seizing bank accounts when the account holder is suspected of engaging in “structuring.”  “Structuring” refers to the practice of depositing (or withdrawing) funds from a bank account in amounts of less than $10,000, in order to avoid triggering the cash reporting requirement.  The article provided several examples of small business owners who had been subjected to this practice by the IRS yet were not accused, or convicted, of any criminal activity:

 For almost 40 years, Carole Hinders has dished out Mexican specialties at her modest cash-only restaurant. For just as long, she deposited the earnings at a small bank branch a block away — until last year, when two tax agents knocked on her door and informed her that they had seized her checking account, almost $33,000.

The Internal Revenue Service agents did not accuse Ms. Hinders of money laundering or cheating on her taxes — in fact, she has not been charged with any crime. Instead, the money was seized solely because she had deposited less than $10,000 at a time, which they viewed as an attempt to avoid triggering a required government report.

As the article points out, under federal law, the IRS is permitted to seize bank accounts utilizing the civil forfeiture laws even if the account holder is never charged with a crime:

The I.R.S. is one of several federal agencies that pursue such cases and then refer them to the Justice Department. The Justice Department does not track the total number of cases pursued, the amount of money seized or how many of the cases were related to other crimes, said Peter Carr, a spokesman.

But the Institute for Justice, a Washington-based public interest law firm that is seeking to reform civil forfeiture practices, analyzed structuring data from the I.R.S., which made 639 seizures in 2012, up from 114 in 2005. Only one in five was prosecuted as a criminal structuring case.

The practice has swept up dairy farmers in Maryland, an Army sergeant in Virginia saving for his children’s college education and Ms. Hinders, 67, who has borrowed money, strained her credit cards and taken out a second mortgage to keep her restaurant going.

Their money was seized under an increasingly controversial area of law known as civil asset forfeiture, which allows law enforcement agents to take property they suspect of being tied to crime even if no criminal charges are filed. Law enforcement agencies get to keep a share of whatever is forfeited.

Critics say this incentive has led to the creation of a law enforcement dragnet, with more than 100 multiagency task forces combing through bank reports, looking for accounts to seize. Under the Bank Secrecy Act, banks and other financial institutions must report cash deposits greater than $10,000. But since many criminals are aware of that requirement, banks also are supposed to report any suspicious transactions, including deposit patterns below $10,000. Last year, banks filed more than 700,000 suspicious activity reports. Owners who are caught up in structuring cases often cannot afford to fight. The median amount seized by the I.R.S. was $34,000, according to the Institute for Justice analysis, while legal costs can easily mount to $20,000 or more.

There is nothing illegal about depositing less than $10,000cash unless it is done specifically to evade the reporting requirement. But often a mere bank statement is enough for investigators to obtain a seizure warrant. In one Long Island case, the police submitted almost a year’s worth of daily deposits by a business, ranging from $5,550 to $9,910. The officer wrote in his warrant affidavit that based on his training and experience, the pattern “is consistent with structuring.” The government seized $447,000 from the business, a cash-intensive candy and cigarette distributor that has been run by one family for 27 years.

The article further points out that small businesses often have perfectly legitimate reasons for making deposits in amounts less than $10,000:

There are often legitimate business reasons for keeping deposits below $10,000, said Larry Salzman, a lawyer with the Institute for Justice who is representing Ms. Hinders and the Long Island family pro bono. For example, he said, a grocery store owner in Fraser, Mich., had an insurance policy that covered only up to $10,000 cash. When he neared the limit, he would make a deposit.

Ms. Hinders said that she did not know about the reporting requirement and that for decades, she thought she had been doing everyone a favor.  “My mom had told me if you keep your deposits under $10,000, the bank avoids paperwork,” she said. “I didn’t actually think it had anything to do with the I.R.S.”

In response to questions from the New York Times, the IRS announced a major policy change to ensure that the government’s civil forfeiture powers are not abused.  In particular, the IRS said it would no longer seek seizure and forfeiture of accounts unless the funds in question were generated by illegal activity or there were exceptional circumstances justifying the exercise of forfeiture: 

After a thorough review of our structuring cases over the last year and in order to provide consistency throughout the country (between our field offices and the U.S. attorney offices) regarding our policies, I.R.S.-C.I. will no longer pursue the seizure and forfeiture of funds associated solely with “legal source” structuring cases unless there are exceptional circumstances justifying the seizure and forfeiture and the case has been approved at the director of field operations (D.F.O.) level.  While the act of structuring — whether the funds are from a legal or illegal source — is against the law, I.R.S.-C.I. special agents will use this act as an indicator that further illegal activity may be occurring.  This policy update will ensure that C.I. continues to focus our limited investigative resources on identifying and investigating violations within our jurisdiction that closely align with C.I.’s mission and key priorities.  The policy involving seizure and forfeiture in “illegal source” structuring cases will remain the same.