In a widely publicized report TIGTA this week discussed how IRS enforcement of the Bank Secrecy Act’s anti-structuring provisions often violated the fundamental rights of small business owners who obtained money legally but who IRS suspected were structuring transactions to violate the reporting requirements that accompany certain deposits and transfers of cash.
As most readers know, deposits of over $10,000 trigger additional reporting requirements. There are many reasons to avoiding the requirements by depositing amounts less than the trigger; some of the reasons are legitimate and others are done with the intent to shield illicit activities. The BSA is meant to give government the tools to combat money laundering and terror financing, and not to hassle small business owners. Getting the balance right between enforcement to catch bad guys and not catching good guys requires careful calibration by the administrative agency. Recent information suggests the IRS dialed up the enforcement side too high.
TIGTA looked at a sample of cases where IRS Criminal Investigation (CI) used its broad forfeiture powers in response to suspicions of structuring. It essentially found that in many cases the underlying activity was legal; using the broad forfeiture powers in response to legal source activities essentially amounts to use of a power that is extraordinary for what is in essence a reporting violation. Moreover, the report discusses how in many instances CI agents did not when interviewing suspects tell them that they were potentially the subject of a criminal investigation or explain their constitutional rights.
The Washington Post article The IRS took millions from innocent people because of how they managed their bank accounts, inspector general finds is typical of the reaction the mainstream press has had to the report; in one word: outrage.
One voice among the many who has criticized IRS practice is the National Taxpayer Advocate. As she should, the NTA’s criticism focuses on the harm to taxpayers created by CI enforcement practices and the failure of CI to recognize fundamental taxpayer rights – something she has championed. Following the TIGTA report, the NTA released a statement expressing concern over CI’s apparent position that taxpayer rights don’t apply in these anti-structuring investigations:
CI takes the position that taxpayer rights, such as those included in the TBOR, only apply when it is conducting investigations under Title 26 of the U.S. Code (i.e., the Internal Revenue Code). CI says taxpayer rights do not apply in the cases examined in TIGTA’s report, either (1) because CI is acting at the direction of the Justice Department in a grand jury investigation or (2) because the structuring laws are codified in Title 31 of the U.S. Code (rather than Title 26), so the subject of the investigation should be viewed as a “property owner” rather than a “taxpayer.”
As a refresher Section 7803(a)(3) requires the Commissioner to ensure that “employees of the Internal Revenue Service are familiar with and act in accord with taxpayer rights as afforded by [Title 26], including [the ten rights in the TBOR].” She points out that the IRS engages in the administration of laws across the federal code including bankruptcy law found in title 11, the freedom of information act (FOIA) found in title 5, as well as numerous other provisions. The position taken by CI, if applied to all parts of the IRS would create a big gap in the coverage of the taxpayer bill of rights not intended by Congress.
The NTA makes the strong point that Section 7803(a)(3) does not make exceptions or append to the statute that the protections are only meant to apply when the IRS is investigating a Title 26 matter.
The NTA statement connects this issue to fundamental taxpayer rights:
The right to be informed is particularly important because, without adequate information, it is difficult to exercise the right to challenge the IRS and be heard. If people do not know what they are suspected of, they may not provide exculpatory information that they possess. At the same time, the government is more likely to waste resources pursuing cases against innocent people. Pursuing such cases also violates the right to privacy, which includes the right to “expect that enforcement will be no more intrusive than necessary.”
The NTA makes the sensible recommendation that IRS should clarify that its agents should act in accord with taxpayer rights in these investigations. Rights mean different things in different contexts, and there is still the question as to what those rights would mean in these investigations. Yet taking as a starting point that IRS employees should act in accord with respecting these rights is surely a good recommendation for an agency that seems at times to make itself an easy target for critics. This discussion also offers the opportunity to show how the codification of taxpayer rights may (or at least should) make a difference in the way the IRS approaches enforcement. Had it followed the provisions in TBOR, CI would likely have avoided this opportunity for adverse publicity. Maybe it would have caught a few less bad guys, but it could have prevented numerous good guys from getting caught in a net cast too widely.