What do you dread more than a summons from the IRS? The tax authority is the closest thing to Dostoevsky’s Grand Inquisitor that our democracy allows. And today the U.S. Supreme Court made the Internal Revenue Service just a little bit stronger, overturning an appeals court opinion that would have allowed you to examine the IRS agents who summon you to find out if they have improper motives. The court established a reasonable-sounding rule: You can question the agents only if you can point to specific circumstances plausibly raising the inference of bad faith. In reality, however, it’ll be hard to pass this bar unless the courts share the skepticism of the IRS that is natural to most taxpayers.
The case, United States v. Clarke, grew out of an investigation of a partnership called Dynamo Holdings that had unusually high interest deduction claims. The investigation dragged on for several years. The IRS repeatedly asked the target to extend the three-year statute of limitations for assessing tax liability, which it agreed to do three times, presumably in the hopes of resolving the case in its favor. When the fourth request came around, Dynamo Holdings said no. The IRS then issued summonses to four people associated with the partnership. When they didn’t comply, the IRS enforced the summonses through court orders.
Instead of quaking in their boots and complying, the four who were summoned fought back. They argued that the timing of the summonses, immediately after Dynamo Holdings refused to grant the extension, was evidence of impropriety. They further claimed that the IRS’s decision to enforce the summonses was to gain an advantage in a lawsuit that Dynamo Holdings had by then filed against the IRS.
The U.S. Court of Appeals for the 11th Circuit bought the arguments offered by those summoned. It held that an allegation of improper purpose was enough to get the IRS agents examined. This holding was either remarkably brave or remarkably foolish, depending on your angle. No other court of appeals had gone as far. The stage was set for the 11th Circuit to be smacked down.
The Supreme Court duly reversed. It noted that, when you get a summons, you are entitled by law to a day in court. But in a unanimous opinion written by Justice Elena Kagan, the court emphasized that the hearing you get is “summary in nature.” Kagan’s opinion justified the limited nature of the hearing by insisting that the underlying purpose of an IRS summons is simply “to inquire,” not to accuse. It followed, she wrote, that the hearing should only ascertain that the summons was issued in good faith. No examination of the agents would be authorized unless the person summoned could provide specific evidence plausibly leading to an inference of bad faith.
Plausible as this reasoning sounds as a matter of law, it doesn’t precisely match the real world experience of a person who receives an IRS summons. It may be technically true that the summons formally signals an inquiry rather than an accusation, but the person on the wrong side of the summons will have to act as though an accusation is impending. At the very least, he will have to hire lawyers alongside his accountants, or more realistically pay more money to the lawyers he already has hired for just such a contingency.
What’s more, it will probably be extremely difficult for those who receive a summons to sufficiently satisfy the court's requirement of specific evidence plausibly leading to an inference about faith. The Supreme Court did not say that the timing evidence provided by those summoned in connection with Dynamo Holdings was insufficient to meet that standard. It sent the issue back to the court below to apply what it called the correct legal standard to the facts. But again, in the real world, lower courts tend to take being reversed on the law as a reason to reach a different conclusion on the facts. If I were Dynamo Holdings, I’d be preparing for the summonses to be enforced by the courts in short order.
Was the decision right? It’s easy to see the court’s institutional logic. If a bare allegation of impropriety triggers a full examination, that might lead everyone who receives a summons to make such an allegation. That would correspondingly make the job of the IRS more time-consuming and therefore more costly. In the end, the rest of the taxpayers would end up footing the bill.
Yet at the same time, it’s hard to escape the feeling that the 11th Circuit was onto something, at least symbolically. Interacting with the IRS fills every taxpayer, no matter how small, with feelings of horror -- because the bureaucracy is so large, its powers are so enormous -- and it has very little incentive to care if it wastes your time and money even if it ends up losing. Such powers need supervision by the courts to keep them honest, and to keep us free. The Supreme Court’s decision may well be right in the end. But somehow I feel a little less safe from the IRS as a result of it.
To contact the writer of this article: Noah Feldman at email@example.com.
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