Under mounting pressure, the Internal Revenue Service and the Justice Department have announced in recent months that they will no longer use a law designed to go after drug dealers and terrorists to seize the bank accounts of small business owners who are not suspected of criminal activity.
But Lyndon McLellan, the owner of a convenience store in the town of Fairmont, south of Lumberton, where catfish sandwiches go for $2.75, is still trying to recover the $107,703 – his entire business bank account – that was seized by the IRS last summer.
Under the increasingly unpopular practice of civil forfeiture, law enforcement agents can seize property suspected of having ties to crime, even if no charges are filed – and then begin forfeiture proceedings, in which the burden of proof is on the owner.
Often the cost of fighting such a seizure is greater than the value of the assets seized, and law enforcement agencies get to keep forfeiture proceeds. Such a windfall, critics say, creates perverse incentives, and the lack of due process runs counter to the central tenets of the American justice system.
McLellan’s money was seized under a subset of civil forfeiture law that governs cash deposits under $10,000, the threshold at which a bank is required to report the transaction to the government.
But limiting deposits to less than $10,000 to evade the reporting requirement, known as structuring, is illegal in its own right. Structuring seizures have ballooned in recent years as law enforcement task forces comb through hundreds of thousands of bank reports, often using warrants based on nothing more than a pattern of deposits. The IRS alone made 639 structuring seizures in 2012, up from 114 in 2005.
The seizure dragnet has ensnared small business owners who operate with cash and may have legitimate reasons to keep their deposits low, or do not know that doing so could get them into trouble. In Michigan, for example, the owners of a drugstore had an insurance policy that only covered the loss of $10,000 or less in cash. In the case of Carole Hinders, whose modest Mexican restaurant in Iowa specialized in Insane Tacos, she was following advice dispensed by her mother decades before: that smaller deposits meant less paperwork for the bank.
After these cases and others received public scrutiny, the IRS announced last October that it would no longer pursue structuring cases unless the money was tied to some other illegal activity. The Justice Department followed suit in March. But neither change in policy was retroactive, and the United States attorney for the Eastern District of North Carolina has continued to pursue the forfeiture of McLellan’s money, though no crime has been charged. The Justice Department declined to comment on an open case.
“It was like I was just slapped in the face with something. I didn’t know what was going on,” said McLellan, 50, who has built a small gas station into a convenience store and restaurant. “You work for something for 13, 14 years, and they take it in 13, 14 minutes.”
During a congressional hearing in February, U.S. Rep. George Holding, a Republican from Raleigh, referred to McLellan’s case, saying no crime other than structuring had been alleged. “If that case exists, then it’s not following the policy,” John Koskinen, the commissioner of the IRS, said.
But the prosecutor on the case, Steve West, was unmoved. Notified of the hearing by McLellan’s lawyer at the time, he responded with concern that the seizure warrant in the case, filed under seal but later given to McLellan, had been handed over to a congressional committee, according to an email exchange provided to The New York Times by the Institute for Justice, a libertarian public interest law firm that has taken over the case.
“Your client needs to resolve this or litigate it,” West wrote. “But publicity about it doesn’t help. It just ratchets up feelings in the agency.” He concluded with a settlement offer in which the government would keep half the money.
McLellan’s new lawyer, Robert Everett Johnson, said the fact that prosecutors refuse to drop the case shows that self-restraint by federal agencies is not enough and that Congress needs to rein in civil forfeiture. Republicans, led by Senators Rand Paul of Kentucky and Mike Lee of Utah, have filed a bill in the House and Senate to change the practice, and the Judiciary Committees of both houses are working on a proposal.