You might end up here if you make a $9,999 cash deposit.

We're All Flies in the IRS's Widening Web

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The New York Times has a disturbing article on asset seizures by the Internal Revenue Service. To summarize: There is a rule requiring banks to report cash transactions over $10,000. This facilitates the detection and prosecution of tax cheats and drug dealers. A lot of paperwork is involved, which banks don't like, so perfectly legitimate people frequently structure their deposits to get around the requirement. This sort of structuring is also illegal, and when the IRS suspects it's happening, then poof! They take your account. The people who are profiled by the Times are small business owners who acquired the money by perfectly legitimate means, and do not seem to be cheating on their taxes, or otherwise breaking the law.

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.

One of the people they profile paid the IRS a settlement of $21,000, about a third of the college fund he had set up for his daughters. There appears to me no crime alleged other than making deposits under the $10,000 legal limit, something he says he was advised to do by a bank teller. Many of the other details offered by the Times range from Orwellian to Kafkaesque. It is illegal, for instance, for your bank to tell you that structuring your transactions is illegal:

Banks are not permitted to advise customers that their deposit habits may be illegal or educate them about structuring unless they ask, in which case they are given a federal pamphlet, Ms. Van Steenwyk said. "We're not allowed to tell them anything," she said.

Then there's this:

On Thursday, in response to questions from The New York Times, the I.R.S. announced that it would curtail the practice, focusing instead on cases where the money is believed to have been acquired illegally or seizure is deemed justified by "exceptional circumstances."

It's as if the IRS just noticed that they were grotesquely abusing their power in order to punish people who appear to have done nothing actually wrong. Did this not occur to them when the victims' lawyers pointed it out? Did none of their thousands of employees wonder aloud whether they really needed to make war on America's college funds?

This is, of course, not the only area this happens. Civil asset forfeiture is just as scandalous, allowing police departments to seize cars, money, and other items that they suspect may be used in the commission of a crime. It is all-too-frequently used by police departments as a way of harvesting cash from the powerless.

Both involve what you might call an acute case of alimentary fly infestation, a phenomenon I recently chronicled in Venezuela. The title harks back to the famous children's song:

There was an old woman who swallowed a bird,
How absurd! to swallow a bird,
She swallowed the bird to catch the spider,
That wriggled and jiggled and tickled inside her,
She swallowed the spider to catch the fly,
I don't know why she swallowed the fly,
Perhaps she'll die.

As every American who went to kindergarten will recall, the list of things she swallows to deal with the previous thing she swallowed goes on upward through dogs, goats, and eventually a horse. She died, of course.

So think about what has happened to our government agencies. We passed a law, to raise taxes, or curb the usage of addicting drugs. That law didn't work as well as we wanted, because a lot of people were evading it. So we passed new laws, to make it easier to enforce the original one, like requiring banks to report all transactions over $10,000. And then people evaded that, so we made another rule ... and now people who had no criminal intent find themselves coughing up tens of thousands of dollars they shouldn't owe. And those are the people who hire lawyers and try to get their stuff back; many of the victims, particularly in civil asset forfeiture cases, have no money to hire lawyers and simply give up in despair.

As in the case of the fly, we were better off leaving the original ailment alone. No, I'm not saying that we shouldn't try to catch tax evasion. I'm saying we shouldn't try so hard that we end up criminalizing a lot of innocent behavior. There are worse things than a country with some tax fraud. And one of those things is a government with vast and arbitrary power to punish people who have done no wrong.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net