Supreme Court to Hear Case on IRS Summons Power

If the IRS, as part of a tax audit or examination, wants something from the taxpayer, they tend to ask nicely only once.

Sometimes it is difficult to hand over the books and every last financial detail to the IRS.  It can be somewhat like letting a stranger into your bedroom; even if you have nothing to hide, you don’t want them there.  Also, document requests can be quite burdensome.  Some items cannot be retrieved or compiled without expending inordinate amounts of time and money.  Lastly, the information sought by the IRS can sometimes appear to bear very little relevance to the issue(s) at hand.  But however difficult it may be to comply with a document request, or however ridiculous the request may seem, the IRS usually gets what it wants.

What if the taxpayer doesn’t comply to that initial polite request?  Maybe the IRS asks again with some emphasis, stronger words, or even a threat of summons.  Normally the IRS resorts to a summons only after the taxpayer has ignored a couple informal requests or after the taxpayer has openly refused to provide the information sought by the IRS.  When a taxpayer ignores a summons, the procedure is for the IRS to go to the Justice Department and request a court order to enforce the summons.  And courts have routinely rubber-stamped such requests.  A court-ordered summons is very serious and cannot be ignored without risk of civil or criminal contempt.

This week the US Supreme Court will decide whether or not a taxpayer should be granted an evidentiary hearing in which a judge would determine if a summons is proper and not simply intended to harass the taxpayer, over-complicate the issues, or delay the process.  This is a big case as it relates taxpayer rights.  The IRS should not be able to ask for anything and everything under the sun with no explanation as to its purpose and no procedural mechanism for the taxpayer to dispute it.

Supreme Court Expands Congressional Tax Power

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Tax relief for people who buy certain things? — sure (like real property).  A tax imposed on people who buy certain items? — sure (like cigarettes).  But a tax imposed on people who do not buying something?  That’s definitely new!  Apparently penalizing citizens for not purchasing health insurance now passes constitutional muster as a “tax,” or so says the Supreme Court.

Roberts recast the [health care] mandate as a tax, a rationale that was not in the law or the government’s case. He rewrote the administration’s position, baptized it, and then blessed it. Roberts’ defenders argue that he did so to avoid a constitutional crisis, but he may have created another by judicially re-legislating policy, a policy paid for and enforced by what could be essentially the largest tax increase in American history.

~William J. Bennett, CNN Contributor

 I guess it’s true what they say about the government’s taxing power.  It’s sort of a “catch-all” for federal programs that seem unconstitutional in all other respects.

Supreme Court Rules in Favor of Taxpayer on Assessment Statute Question

How many years should we be concerned about the possibility of an IRS audit?  Most people realize they are in the clear for taxes they filed in the 1990s.  The IRS can’t come back and audit you a decade later because audits and additional assessments are time bound by a 3-year statute of limitations.  In most cases you are in the clear after 3 years from the time you file or from the due date of the return.  However, there is an exception that allows the IRS to double the statutory period in cases where the taxpayer understates gross income by 25% or more.  The whole concept of understating income by 25% can be fairly convoluted as evidenced by the wide variations in how appellate courts have decided the question over the years.

But the highest court in the nation has recently sided with the taxpayer in a case that was expected by many to go the other way.  It was a tax shelter case.  The IRS wanted 6 years, but the Supreme Court ruled that the standard 3-year rule applied.  Some see this as a big win for taxpayers.  Apparently the circumstances that would allow the IRS to stray from the 3-year rule are fairly narrow.

IRS Audit Issue Going to Supreme Court

If the IRS is thinking about auditing you, they currently have 3 years from the date your return is filed to decide. It’s called the Assessment Statute Expiration Date (ASED). There is an exception: in cases where the taxpayer omits 25% or more of his gross income, the IRS has 6 years to initiate an audit.

A number of lower courts have ruled one way or another on what constitutes a 25% income omission, and now the US Supreme Court has agreed to review the issue. Of course the IRS would like as much time as they can get, so they argue for a liberal interpretation. They argue that anything having the same effect as a 25% income omission (like an overstated tax basis) should result in a 3 year extension of the statute.

The case that the Supreme Court agreed to hear is Home Concrete & Supply v. U.S.We need to keep an eye on this one. Currently it is not very common to see tax liabilities going back more than 10 years. The Collection Statute Expiration Date (CSED) on federal tax liabilities is 10 years; after that, the liability drops off the books. But the clock starts to run when the liability is assessed, so if the IRS waits 3 years to conduct an audit and assess the tax on your 2005 return, it would expire (at the very soonest) 13 years later — in 2019. This is assuming the return was filed on time (April 2006) and no other clock-stopping events have occurred in the interim.

If the Supreme Court rules in favor of the IRS, then we could start seeing more 16-year-old liabilities here and there.