In Appenrodt v. United States, No. 3:16-cv-02010-LB (N.D. Cal. 2016), the court concluded that the IRS did not harass a taxpayer by subjecting the taxpayer to five audits in ten years.
Facts & Procedural History
The IRS conducted an audit to Mr. Appenrodt’s individual income tax returns for tax years 2005-2008. It made audit adjustments for tax years 2005, 2007, and 2008, and made no changes for the 2006 tax year.
The 2009 and 2010 tax years were filed in accordance with a U.S. Tax Court decision.
The IRS then selected Mr. Appenrodt’s 2011, 2012, and 2013 tax returns for audit.
The current dispute related to summonses the IRS issued to Mr. Appenrodt and his bank for the 2011-2013 tax years.
About the IRS’s Summons
IRS is authorized to issue administrative summonses to obtain testimony and/or records. It typically does not do so unless its agents have made attempts to obtain the information or the taxpayer asks the IRS to issue the summons.
IRS summonses are not self-enforcing. The IRS has to ask the courts to enforce its summonses.
The courts generally enforce IRS summonses if the Powell factors are met. These factors require the government to show the following:
- the investigation will be conducted pursuant to a legitimate purpose,
- the inquiry may be relevant to that purpose,
- the information sought is not already in the government’s possession, and
- that all administrative steps have been followed, including proper notice.
The taxpayer can also start the process by filing an action to quash the summons.
Legitimate vs. Improper Purpose
Mr. Appenrodt argued that the IRS issued the summonses for harassment, rather than for a legitimate purpose. He argued that the IRS summonses should not be enforced as the IRS violated his rights to privacy, confidentiality, to retain representation, and a fair tax system protected by the Taxpayer Bill of Rights.
The IRS contended that the summonses were issued for a legitimate purpose — to inquire into Mr. Appenrodt’s tax liability — and that the requested records were relevant to that purpose. The IRS also asserted that the summonses were neither duplicative nor unnecessary, were not issued to harass Mr. Appenrodt, and did not violate any applicable regulations.
Not for Harassment or Other Improper Motive
As Mr. Appendrodt correctly noted, summonses issued for an improper purpose, such as to harass the taxpayer, are not enforced by courts as enforcement would constitute an abuse of the court’s process. The burden to show an improper purpose is then on the taxpayer.
Given the recent United States v. Clarke, 134 S.Ct. 2361 (2014), case, the taxpayer has to make a showing of bad faith by facts that give rise to a plausible inference of improper motive. This is not easy to do in most cases. The taxpayer was able to make this showing in Clark by establishing that the IRS had issued the summons because the taxpayer refused to sign a consent to extend the IRS’s time to conduct the audit and the IRS issued the summons to get around the court’s discovery rules. The taxpayer was not legally obligated to sign the extension. Thus, it was improper for the IRS to issue the summons as retaliation for not signing the extension.
As noted by the Supreme Court in Clark, the IRS can rebut this bad faith showing by submitting a simple affidavit from the investigating agent saying that the summons was issued for a legitimate purpose. This makes is very difficult for taxpayers to prevail in a summons enforcement case based on the legitimate purpose Powell factor.
Multiple Audits Are Not Harassment
Section 7605(b) generally prohibits the IRS from conducting second audits for the same tax year. The prohibition has little meaning, as it goes on to say that the IRS can conduct a second audit by giving the taxpayer written notice of its need to conduct a second audit.
Section 7605(b) was not as issue in Appenrodt. In Appenrodt, Mr. Appenrodt was upset about IRS audits for different tax years. Mr. Appenrodt argued that five audits in ten years amounted to harassment and this showed bad faith by the IRS.
The court noted that “these facts would certainly be frustrating to any taxpayer.” The court did not agree with Mr. Appendrodt, however. It concluded that multiple audits were not illegal and does not rise to the level of harassment.
The court concluded that this was not sufficient bad faith by the IRS to overturn the IRS summonses at issue in the case. To prevail, Mr. Appendrodt would have needed to establish something more, as the taxpayer did in Clark with its refusal to sign an extension that it had no legal obligation to sign.