Lyndon McLellan Finally Beats the IRS

Last year I referred readers to the abuse of civil asset forfeiture laws by the IRS in its attempt to take more than $107,000 from North Carolina small business owner Lyndon McLellan without charging him with any crime.

The IRS cleaned out Mr. McLellan’s business account because it suspected him of “structuring,” an offense whereby a person avoids legally-mandated financial reporting requirements by keeping their deposits and withdrawals under $10,000.  Because there are many perfectly legitimate reasons a business owner may deposit less than $10,000 at a time (for instance, if their insurance policy only covers $10,000 cash on hand), and because civil asset forfeiture allows the government to seize cash and property without proving any wrongdoing, IRS structuring seizures are prone to abuse.

Tacitly recognizing the abuse allowed by the law, former Attorney General Eric Holder announced changes to the use of civil forfeiture in structuring offenses last year.  The policy changes should have spared innocent business owners like Lyndon McLellan, but it seems some federal prosecutors never got the memo.  In fact, the Assistant U.S. Attorney in charge of the case responded to criticism by sending veiled threats to Lyndon McLellan and his lawyers at the Institute for Justice, warning them against publicizing the case lest it “ratchet up feelings” in the IRS offices.

The publicity worked. After significant public and political pressure, the IRS relented and returned the amount they had taken from Mr. McLellan’s bank account. As I noted last year, however, the IRS refused to reimburse Mr. McLellan for the costs of fighting the seizure or to pay interest on the money it had wrongfully seized.

But this week a federal judge ruled that the IRS must do more to make Mr. McLellan whole, and awarded him legal costs totalling more than $20,000.

The court held:

Certainly, the damage inflicted upon an innocent person or business is immense when, although it has done nothing wrong, its money and property are seized. Congress, acknowledging the harsh realities of civil forfeiture practice, sought to lessen the blow to innocent citizens who have had their property stripped from them by the Government… . This court will not discard lightly the right of a citizen to seek the relief Congress has afforded.

Fortunately, thanks to the efforts of Mr. McLellan and the Institute for Justice, the good guys won this time. Ultimately, however, the only way to ensure that civil forfeiture abuses stop happening is to abolish civil forfeiture. If the government cannot prove beyond a reasonable doubt that a person engaged in criminal activity, it should not be able to punish them as if they’re guilty.  As long as Congress and state legislatures allow this practice to continue, more innocent Americans will end up fighting for their livelihoods like Lyndon McLellan had to.  

For the Institute for Justice page detailing Mr. McLellan’s case, click here.

For Cato’s explainer on the troubling history of civil asset forfeiture, click here.