If you do not willfully provide information to the IRS, they have a very powerful tool they can use to force you and third parties (banks, customers, brokerages, virtually anybody…) to hand over that information. This tool is known as the agency’s summons power, or the ability of the agency to get the federal courts to enforce their summonses and other demands for information or records under penalty of law. A recent 10th Circuit court case called Standing Akimbo, LLC v. United States has illustrated how the government has a very low burden of proof to get the court to enforce these types of administrative summonses.
Note: If you refuse to submit to a tour of your business or an in-person interview the IRS can use their summons power to force you to cooperate. What they basically are doing is utilizing the federal court’s power to issue fines and incarcerate you or third parties indefinitely until they cooperate.
Background of the Standing Akimbo Case
The case Standing Akimbo, LLC v. United States was decided by the U.S. Court of Appeals for the Tenth Circuit on April 7, 2020. In May 2017, the IRS began auditing Standing Akimbo, LLC, a Colorado medical-marijuana dispensary. The focus of the audit was whether the dispensary had claimed business deductions they were prohibited from receiving because of a law stating that these deductions could not go to any business that traffics in a controlled substance under federal law. While marijuana is legal under Colorado state law, it remains a controlled substance at the federal level.
As part of the audit process, the auditor sent Standing Akimbo a series of Information Document Requests (IDRs). These IDRs asked for a series of documents, including a list of licenses held by the dispensary and reports from the Colorado Department of Revenue’s Marijuana Enforcement Division’s Marijuana Enforcement Tracking Reporting Compliance (METRC) system. Standing Akimbo replied with information the IRS described as minimal and incomplete. As such, the IRS chose to use its summons power.
How Does the IRS’ Summons Tool Work?
When the IRS issues a summons for documents or other information and the taxpayer wishes to challenge it, they need to file what is known as a motion to quash the summons. An experienced tax attorney will be able to prep and file such a motion for you. A judge will then decide if the summons falls within the IRS’s jurisdiction, which is determined under a formula first put forward in a case called United States v. Powell. Under Powell, an agency seeking to enforce a summons must prove the following four factors:
- The investigation will be conducted pursuant to a legitimate purpose
- The inquiry may be relevant to this purpose
- The information sought is not already within the Commissioner’s possession
- The administrative steps required by the Code have been followed
If all four of these factors are met, the summons is valid and the taxpayer must comply under threat of legal penalties.
The Decision in the Standing Akimbo Case
In the Standing Akimbo case, the 10th Circuit ruled in favor of the IRS, denying the dispensary’s motion to quash the summons. With regard to the Powell factors, the court held that the summons was related to a legitimate, investigatory purpose of the IRS, and so the first two factors of the Powell test were met. As for the third factor, the IRS concluded that it possessed none of the requested licenses held by the Taxpayers as well as none of the specific METRC reports for tax years 2014 and 2015. These were not included in the minimal response by the dispensary. The court found that the fourth factor was met when the auditor followed all the rules and procedures of the IRS in in conducting the investigation and issuing the summons.
In their decision, they found that the taxpayers failed to show a genuine dispute as to any of the four Powell factors. As noted above, the government has a low burden to meet under the Powell test, and once the court finds that this burden has been proven, it shifts to the taxpayer to either factually refute the Powell test or factually supports an affirmative defense. This is a heavy burden for the taxpayer to prove, and the taxpayers, in this case, failed to do so.
It is important to note that, when handling sensitive tax issues such as this, it is best to deal with a professional who is either a tax attorney or a dual attorney/CPA as opposed to a tax professional who is only a CPA. That is because CPAs and other non-attorneys can be the target of the IRS’s summons tools, and they might be forced to turn over documents related to your case. With a licensed tax attorney/CPA like those at the Tax Law Offices of David W. Klasing, the attorney-client privilege applies and we can fight any summons asking for documents or testimony from our lawyers by invoking this privilege under most circumstances where we did not prepare the return at issue.
See the following video to understand more regarding why an attorney is a right choice in this situation:
If You Are Facing an IRS Summons, Contact Our Skilled Tax Attorneys Today
As demonstrated in the above case, the IRS has a broad and powerful summons tool that can force you and others to hand over documents and information related to your tax returns. You can try to fight this by filing a motion to quash the summons, but the burden of proof on the government is low and you will need a very strong case to succeed. That is why it is essential to involve an experienced tax attorney on your behalf. Our lawyers can represent on your behalf and even explore other options such as negotiating with the auditor on your behalf. To schedule a consultation, call us today at (800) 681-1295.
Regardless of your business needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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