Mimesis Law
27 February 2020

Unconscionable IRS Takes Money From Mexican Restaurant

October 7, 2016 (Fault Lines) – Carole Hinders isn’t the type of person you think of when you think about criminals. She’s a 67-year-old woman, who has been running a Mexican restaurant for 38 years. Perhaps because of credit card processing fees, she only accepts cash and checks. Instead of stuffing her mattress with cash or burying the bills in pickle jars, she deposits her proceeds into a bank account, like most business owners would do.

When two IRS agents showed up at her home almost three years ago, she had no idea what problems were headed her way. You see, Carole Hinders had regularly avoided making deposits amounting to $10,000 or more. And it was that fact that had attracted the IRS’ attention.

You might wonder, why does the IRS care about how big or small I make my bank deposits? This is because of federal anti-structuring laws. Structuring is also known by the much better name smurfing. Under federal law, banks are required to report certain transactions to the Department of Treasury. And to ensure that banks are able to file these reports, it is a crime for a person to structure transactions in such a way to avoid triggering the reporting requirements. In other words, if you don’t handle your bank transactions as the federal government demands, you go to jail.

At this point, libertarian-minded readers might have destroyed their monitors or are resigned to simply grinding their teeth. But there is at least some explanation that can be offered for this law. Successful criminals often need places to put their money, including banks. So, the thinking goes, by keeping track of large transactions, it will be easier for the federal government to uncover organized crime and money laundering. Similarly, if banks report whenever they think someone is attempting to evade the reporting requirements, then even more subtle criminal enterprises can be uncovered.

As with many statutes aimed at white collar crime, Congress wrote the statute quite broadly. For a time, smurfing was treated as something akin to a strict liability offense, until the Supreme Court interpreted the word “willfully” to have some meaning:

Undoubtedly there are bad men who attempt to elude official reporting requirements in order to hide from Government inspectors such criminal activity as laundering drug money or tax evasion. But currency structuring is not inevitably nefarious.

Consider, for example, the small business operator who knows that reports filed under 31 U.S.C. § 5313(a) are available to the Internal Revenue Service. To reduce the risk of an IRS audit, she brings $9,500 in cash to the bank twice each week, in lieu of transporting over $10,000 once each week. That person, if the United States is right, has committed a criminal offense, because she structured cash transactions “for the specific purpose of depriving the Government of the information that Section 5313(a) is designed to obtain.” Brief for United States 28-29.

Nor is a person who structures a currency transaction invariably motivated by a desire to keep the Government in the dark. But under the Government’s construction an individual would commit a felony against the United States by making cash deposits in small doses, fearful that the bank’s reports would increase the likelihood of burglary, or in an endeavor to keep a former spouse unaware of his wealth. * * * To convict Ratzlaf of the crime with which he was charged, violation of 31 U.S.C. §§ 5322(a) and 5324(3), the jury had to find he knew the structuring in which he engaged was unlawful.

And then like honest services fraud, Congress re-drafted the statute to return to the old way of doing business prosecutions. Regardless of the source of the money, if you know about the reporting requirements and take any steps to avoid it, you’ve become a felon. And, according to the Eighth Circuit, that’s more or less what happened to Carole Hinders:

Hinders almost always deposited less than $10,000 at a time but occasionally deposited more than that amount. According to Hinders, she did this on the advice of her mother, who previously managed the bookkeeping for Mrs. Lady’s and told Hinders that she could “avoid paperwork at the bank” if she kept deposits under $10,000.

Oh yeah, there’s more than just the charge at work here:

In May 2013, the IRS seized $32,820.56 from the restaurant’s business checking account. * * * On the day of the seizure, Agent Adkins interviewed Hinders. According to Adkins, Hinders confirmed that she was aware of the reporting requirement and claimed that she did not break up cash for deposit.

Adkins contends that Hinders then changed her story after being shown a record of her deposits and admitted that she broke up deposits so that the bank would not have to fill out paperwork. When asked why she did this, Hinders asserted that she thought avoiding paperwork was a good thing and that her mother had advised her to keep deposits below $10,000.

Hinders disputes Adkins’s account of the interview.

Why the IRS agent didn’t record the interview is beyond me. In any event, the IRS seized the cash before filing any charges. There may have been good reasons why the IRS thought it was necessary, but it’s not clear from the appellate record what they may have been. Maybe the 67-year-old was going to flee to Mexico. She operated a Mexican restaurant—plausible enough perhaps.

Then a year after the forfeiture filing, things changed, or common sense prevailed, if you’d prefer:

In October 2014, the IRS issued a policy memorandum that altered its approach to civil forfeiture. The new policy provided as a general rule that the agency no longer would pursue the seizure and forfeiture of funds in structuring cases where the funds were believed to have come from legal sources. A forfeiture in these circumstances would be pursued only in exceptional circumstances and with approval by the Director of Field Operations.

In December 2014, the government moved to dismiss the forfeiture complaint without prejudice. The motion stated that the government wished to exercise its prosecutorial discretion to decline to pursue the case and to allocate its resources elsewhere.

IRS, thy name is magnanimity. Hinders wanted a dismissal with prejudice, plus attorney fees and costs. The district court concluded that a dismissal without prejudice did not implicate the fee-shifting mechanism the federal government has in place for some cases. And it went along with the dismissal without prejudice. We see what you did there IRS.

On appeal, Hinders made a strong argument:

On her view, CAFRA allows an award of fees where a claimant has “largely” prevailed, “even if that is not ‘wholly’ true as a formal procedural matter.” Because the government moved to dismiss the case and returned the seized money to Hinders, she argues that she achieved her desired ends and “substantially prevailed” in the litigation.

But the Eighth Circuit was unmoved. Because the dismissal without prejudice did not materially alter the legal relationships between the parties, she was not awarded attorney’s fees. And regarding the dismissal without prejudice, prosecutorial discretion saved the day:

While the government declined to pursue the case further as a matter of prosecutorial discretion, the IRS and the Department of Justice are free to change their discretionary policies and to pursue another civil forfeiture action in the future. The statutory requirement of 18 U.S.C.§ 984(b) that the government must trace property directly to an underlying offense after one year would present an evidentiary challenge, but it does not establish a legal barrier to a renewed action.

Two things are of note. The charging discretion was exercised after a case had been filed. And the discretion here was done at the policy-level and not due to the facts of the case at hand. You’d think those facts might count for something. They did, but only for a consolation prize:

I concur specially not because I have any great reluctance to join the majority opinion. There is nothing in the Court’s opinion that is inconsistent with the facts of the case, the positive law or this court’s precedent. Instead I concur to comment on the exercise of discretion by the Department of Justice in this matter.

It is beyond question that the Attorney General and the United States Attorneys “retain ‘broad discretion’ to enforce the Nation’s criminal laws.” United States v. Armstrong, 517 U.S. 456, 464 (1996). They have no less discretion in deciding when to enforce the nation’s civil forfeiture laws.

Sure. Sounds good so far.

In exercising this discretion prosecutors should act in a manner that comports with justice. This includes an obligation to quickly and diligently investigate the facts underlying the case. The tortuous history of this case reflects an unwise exercise of discretion early on in the proceedings.

Yeah, it looks like it was a bad call to seek forfeiture of an old lady’s burrito profits.

It should have been apparent to the government and its agents that if Hinders had simply made daily cash deposits, no forfeiture question would have been raised. While Hinders made comments about the structuring of her deposits to stay under “the $10,000 rule,” it should have been equally apparent to the government that the violation was at most a technical violation–and one that arose out of Hinders’s lack of understanding the problems created by failing to make daily deposits.

By technical violation, you mean the law that Congress re-wrote to be in essence strict liability, right? Maybe the conclusion will be that the unjust exercise of discretion at the front end deprives the state of the ability to avoid the cost of an unwise decision.

The failure of the government to exercise its discretion early in the proceedings in a manner that minimized expense and litigation was, in my opinion, improvident to such a degree that failure to note it is unconscionable. In the future the government would be wise to exercise greater common sense in exercising its discretion.

Nope. Not quite cursing the wind but in the ballpark. Discretion typically implies some sort of fact-based and individualized decision. That does not appear to be the case here. Moreover, Chief Justice Roberts defined it this way: “Prosecutorial discretion involves carefully weighing the benefits of a prosecution against the evidence needed to convict, the resources of the public fisc, and the public policy of the State.”

Here, on the contrary, a broad statute was applied in a cookie cutter way, filed against a business owner who was misinformed. Understandably, courts do not want to assume the general responsibility of policing prosecutorial discretion. And outside of a Bivens action, there is not much legal recourse for abuses of discretion. But it’s difficult to accept that an unconscionable action leaves the citizen without recourse. Yet it seems we must.

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  • Windypundit
    7 October 2016 at 11:05 pm - Reply

    As an aside, there would probably be fewer of these incidents with innocent depositors if the law had kept up with inflation. Businesses that need to deposit $60,000 cash are probably large enough to get advice from a CPA or lawyer instead of the owner’s mother.