In the recent case US v. Clarke, No. 13-301, slip. op. (U.S. Jun. 19, 2014), the IRS issued summons to four individuals associated with a partnership whom the Service believed had information and records relevant to the partnership’s tax obligations, which had previously come under scrutiny.  None of the individuals complied with the summons, and upon the IRS’ attempt to compel compliance, the respondent individuals alleged they were suspicious of the IRS’ motivations, and asked for an opportunity to question the responsible agents regarding such.  The District Court ruled in favor of the IRS, and the 11th Circuit Court of Appeals reversed.  The Supreme Court issued a slip opinion vacating the Court of Appeals’ judgment, on the grounds that the improper legal standard had been applied.  That standard, and the ensuing rule of entitlement to examine IRS motives in issuing summons, is laid out as follows:

“As part of the adversarial process concerning a summons’s validity, the taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s bad faith, at this threshold stage, will rarely if ever be available. And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded: The taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive. That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing.”
See United States v. Clarke, No. 13-301, slip op. (U.S. Jun 19, 2014).
Posted by Morgan Yuan, Esq., Associate Editor, Wealth Strategies Journal.