IRS Stole Money and Hid the Details for Years

As law enforcement agencies patrol for profit, the secrecy surrounding cash seizures must stop.

The Internal Revenue Service demands transparency when its agents conduct audits. They open ledgers, snoop through bank accounts, and review receipts. But its appetite for disclosure disappears when the roles reverse.

The IRS stonewalled for more than six years when our public interest law firm, the Institute for Justice, sought access to the agency's forfeiture database. Initially, the IRS wanted $750,000 in fees before it would accommodate the request—an unreasonable demand that would render the Freedom of Information Act useless for all but the wealthiest citizens.

Once in court, the IRS attempted a bait and switch. Rather than provide the actual data, it released a summary report that was 99 percent redacted. It then declared that it had gone above and beyond the legal requirements. The ruse worked at the district court level, but the U.S. Court of Appeals for the D.C. Circuit ruled against the agency in 2019. After a second trip to the district court, the IRS finally coughed up the full database in April 2022.

For anyone without a law degree or the resources to endure a long legal battle, the message from the IRS is clear: Do not try this at home. Accountability is good for the taxpayer, but not for the tax collector.

Institute for Justice client Lyndon McLellan saw the double standard firsthand when IRS agents reached into his bank account and took his life savings without warning or cause in 2014. McLellan had purchased a small convenience store on the side of the road in Fairmont, North Carolina, in 2001 and had worked for 13 years to build the business. Over time, he expanded it to include a restaurant and lunch counter.

McLellan worked long hours and rarely took vacations. More importantly, he ran an honest enterprise. Yet federal agents accused him of violating so-called structuring laws because his business frequently made bank deposits in amounts under $10,000.

Structuring, a type of money laundering, occurs when a person divides cash for the specific purpose of evading bank reporting requirements. There is no reason to believe that McLellan ever did that, but the IRS seized more than $107,000 anyway.

"It took me 13 years to save that much money," he says. "And it took fewer than 13 seconds for the government to take it away."

McLellan was never charged with a crime, but the government tried to keep his money permanently using a law enforcement maneuver called civil forfeiture. This scheme does not require a conviction or arrest; vague allegations are good enough. And once the process ends, Congress allows federal agencies to keep 100 percent of the proceeds for themselves.

The perverse incentive invites abuse, and the IRS got greedy. Between 2013 and 2015, the Institute for Justice represented small-business owners in Iowa, Maryland, Michigan, New York, and North Carolina. All of the targets shared the same experience—one day they had money in their bank accounts, and the next day they didn't.

Lawmakers eventually clamped down on the abuse of structuring laws, and all of the Institute for Justice clients got their money back. But questions remained. How many innocent people had suffered? What was the annual revenue from the scheme? And how did federal agencies spend their ill-gotten gains?

The IRS wasn't talking, so the Institute for Justice sued with outside counsel to get answers. The database is large, and sorting through the raw information will take time. But once findings are available, they will be shared. Sadly, government efforts to hide forfeiture data will continue—and not just at the federal level. Many state and local agencies withhold information, making scrutiny difficult.

"Policing for Profit," a 2020 report by the Institute for Justice, represents the largest and most comprehensive forfeiture study ever attempted. Yet gaps remain.

Some states require law enforcement agencies to report only combined data, allowing them to leave out the details necessary to detect abuse. Other states do not require any reporting. Records are never created in the first place, making public disclosure impossible. The worst offenders are Alaska, Delaware, Louisiana, and Montana, which all earn failing grades on a transparency report card included within "Policing for Profit."

The best policy solution is simple: Lawmakers should follow New Mexico's example and end civil forfeiture, an inherently corrupt practice. Short of that, lawmakers should improve transparency.

IRS auditors don't ask politely for information. Neither do police officers when serving a warrant. They bust open doors, rummage through closets, and pore over computer files. Along the way, if they find cash, they take it. The least the government could do is provide detailed accounts of every seizure and track the money through the system.

The information belongs to the public anyway. The more the public knows about civil forfeiture, the less they like it. The IRS and other agencies know the score, which is why they prefer secrecy.