The IRS may summon any person to produce books, papers, records or any data that may be relevant in an exam. If a summoned party refuses to comply, the IRS must petition a district court to enforce the summons. The summoned party can then present any arguments against enforcement to the district court. These include arguments that compliance would be overly burdensome or that the government has issued the summons for an improper purpose (i.e., to harass the taxpayer or coerce settlement).
The Supreme Court recently heard oral arguments (transcript available here) in a case that involves when a taxpayer is entitled to an evidentiary hearing when challenging summons enforcement. In Clarke, the taxpayer’s 2005 – 2007 tax years were under audit. While the taxpayer had twice agreed to extend the statute of limitations, the taxpayer declined to do so a third time in 2010. In September and October 2010, the IRS issued a summons to the taxpayer’s CFO, Clarke. In December 2010, the IRS issued an FPAA that had been signed in August 2010. The taxpayer challenged the FPAA in Tax Court in February 2011. In late April 2011—almost three months after the partnership filed its petition in Tax Court—the IRS filed a summons enforcement action in district court.
Clarke asked the district court for an evidentiary hearing, alleging the summons was issued for an improper purpose because the summons was issued (1) to acquire information to use in the examination of another taxpayer for which Clarke was the CFO; (2) in retaliation for the taxpayer’s refusal to extend the statute of limitations; and (3) to circumvent the Tax Court’s limitations on the scope of discovery. The district court rejected Clarke’s arguments and ordered enforcement of the summons.
Clarke appealed to the Eleventh Circuit. The Eleventh Circuit reversed, finding that an allegation of improper purpose is sufficient to trigger a limited evidentiary hearing where the taxpayer may question the IRS officials on the reasons for issuing the summons. The Eleventh Circuit’s opinion is available here. The government appealed and the Supreme Court granted cert. A decision is expected in June.
This case is important in light of the new Information Document Request (IDR) process, which will likely lead to more summons enforcement proceedings.