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US v. Clarke SCOTUS Decision Favors Taxpayers

The SCOTUS clarified the11th Circuit Court of Appeals in the United States v. Clarke Et. Al. that…

“A taxpayer has a right to conduct an examination of IRS Officials regarding their reasons for issuing a summons when (s) he points to specific facts or circumstances plausibly raising an inference of bad faith.”

JUSTICE KAGAN delivered the opinion of the Court as follows.

“The Internal Revenue Service has broad statutory authority to summon a taxpayer to produce documents or give testimony relevant to determining tax liability. If the taxpayer fails to comply, the IRS may petition a federal district court to enforce the summons. In an enforcement proceeding, the IRS must show that it issued the summons in good faith.

This case requires us to consider when a taxpayer, as part of such a proceeding, has a right to question IRS officials about their reasons for issuing a summons. We hold, contrary to the Court of Appeals below, that a bare allegation of improper purpose does not entitle a taxpayer to examine IRS officials. Rather, the taxpayer has a right to conduct that examination when (s) he points to specific facts or circumstances plausibly raising an inference of bad faith.”

This decision is monumentally significant for my more hard nosed friends inside the IRS who are predisposed to engaging this authority at the drop of a hat. I personally am of the opinion that exercising summons authority is usually a bogus posturing move particularly when the taxpayer and the taxpayer’s representative are responsive and acting in good faith to get a disputed file settled. But it happens! ALL-THE-TIME!

Nevertheless I also appreciate the frustration of having taxpayers paralyzed with fear so much so that they retreat to battening down the hatches and waiting for the storm to hit before taking any action whatsoever, which usually starts with a phone call out to me seeking immediate assistance. Once actively engaged in a file though it is hard to NOT take offense when summons are prematurely issued by overzealous IRS employees as they tend to usually wreak of illicit motive and tend to fly in the face of the general precepts surrounding efficient tax administration.

There are 2 noteworthy exceptions to the ruling:

1. Deference is justified by the District Court only if based on correct legal standard.

2. The District Court’s latitude does not extend to legal issues about what counts as an illicit motive including in this file the respondents’ claim that the Government enacted summonses so as to gain an unfair advantage in Tax Court litigation.