Small-Town NC Case Shows Federal Overreach | Eastern North Carolina Now

    Publisher's note: This post, by Elliot Engstrom, was originally published in the Budget & Taxes section of Civitas's online edition.


    In recent weeks, the small town of Fairmont, N.C. has received what is likely the most national media coverage it has seen in years. The Robeson County town of less than 3,000 is home to Lyndon McLellan, who owns and operates a local convenience store. Last summer, his entire business bank account, totaling $107,702.66, was seized by the Internal Revenue Service.

    McLellan was never accused of criminal activity. Rather, his money was taken under a law that allows the IRS to seize money if its agents detect a pattern of cash deposits of just under $10,000. The law is designed to catch drug lords, terrorists, and others who are seeking to evade federal financial reporting requirements.

    Here's how it works. Generally, any person who receives more than $10,000 in cash in a single transaction or a series of related transactions must complete a "Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business." Transactions are only considered "related" if they occur within a 24-hour period or if the recipient knows, or has reason to know, that each is one of a series of connected transactions. The idea is that large cash transactions might tend to have a criminal purpose, so the IRS requires recipients of such cash to declare their non-criminal purpose. This is not the rule that McLellan allegedly broke, because he received money in amounts that were less than $10,000 at a time and therefore was not required to report anything.

    Instead, the IRS is alleging that Mr. McLellan did something called "structuring." This is where cash transactions are structured in such a way as to avoid the $10,000 reporting requirement. The law exists because, once the IRS instituted the requirement, criminals could have easily structured cash payments in increments of $9,999 to fly under the radar.

    However, Mr. McLellan's case demonstrates a fundamental problem. Intended to catch criminals, the law ensnares small-business owners who are not trying to avoid reporting requirements, but are either simply trying to avoid burdensome paperwork or have no idea the structuring rule exists. This is why the IRS and Justice Department recently announced that they would cease using "structuring" as a reason to go after small business owners who are not suspected of crimes. So why is McLellan still having to fight for his hard-earned money?

    First, the new rules were announced after Mr. McLellan's assets were seized, and no provision was made for their mandatory retroactive application. Therefore, the announcement did not require any action on his case by anyone at the federal level.

    Second, the federal prosecutor involved, Steve West, has declined to dismiss Mr. McLellan's case. To be clear, he does have the power to drop the charges. Just this past December, federal prosecutors in Iowa dropped the charges against small-business owner Carole Hinders in a similar case. However, West has told McLellan's attorney he needs to either resolve or litigate his case, and that no amount of publicity will lead to its dismissal. This despite the fact that Congress and the IRS commissioner have specifically said his case fails to follow new federal forfeiture policies.

    West's idea of "resolving" the case would be for McLellan to enter into a settlement with the IRS in which he loses only half of his money - almost $60,000! It took McLellan over 13 years to earn this sum, and he is not giving it up without a fight.

    This is hardly the first time that innocent small-business owners have become victim of excessive federal rules and battle-hungry prosecutors. For that reason, attempts have been made to reform the practice at the federal level. The Fifth Amendment Integrity Restoration Act (FAIR Act) has been introduced as a bill in both the U.S. Senate and the House of Representatives. The act is supported by both the left-leaning ACLU and the libertarian Institute for Justice, showing that even if there is no bipartisan consensus, there are at least non-traditional alliances on this important issue.

    For now, McLellan's only recourse is to take his case to court, and he is doing just that. His attorney, Robert Everett Johnson of the Institute for Justice, will be seeking to keep the IRS from taking a single cent of his hard-earned savings. IJ has been at the forefront of civil asset forfeiture reform. In 2014, the national libertarian law firm published Seize First, Question Later, a study on IRS structuring forfeitures. While the McLellan case is still in its early stages, the hope is that it will set a benchmark for when IRS agents and federal prosecutors go too far.