Posted by: evanjdavis | September 25, 2019

Court Confirms the IRS Can’t Get Blood from a Stone by Evan J. Davis

For the most part, the deck is stacked in the IRS’s favor when it comes to enforcing administrative summonses.  It’s relatively easy for the government to show that it is entitled to enforcement of a summons through submitting a declaration from an IRS employee that states (often with no supporting facts):

  • The investigation is being conducted pursuant to a legitimate purpose;
  • The inquiry may be relevant to the purpose;
  • The information sought is not already within the Service’s possession; and
  • All administrative steps required by the Code have been followed.

The burden then shifts to the taxpayer to show one of the handful of allowable affirmative defenses.  One defense, not surprisingly, is that the taxpayer doesn’t possess responsive documents.  And, unlike the IRS that’s often allowed to make its showing without providing support, the taxpayers’ affirmative defense only works if she provides “more than conclusory or self-serving claims of non-possession.”  United States v. Sharon Santoso, Docket No. 817-cv-3030-PWG (D. MD. 08/29/2019).  What does that mean? A taxpayer “must demonstrate not only that she does not possess the documents, but also that she has taken reasonable steps to obtain them if they are within her control.”  Id.

Proving the negative – that she does not possess them – is difficult beyond stating that the documents are not in her possession.  In Santoso, the district court took the taxpayer at her word, which she stated twice in declarations and once in oral testimony.  The harder task is to show that her efforts to obtain missing documents were enough beyond “a pro forma effort” to satisfy the judge.

They were in Ms. Santoso’s case.

Noting that there’s little case law showing how much is enough, the district court appeared to have little trouble in saying that Ms. Santoso’s efforts were sufficient to qualify as “reasonable steps” to obtain the information.  I would argue Ms. Santoso went well beyond reasonable, by having her lawyer reach out to every likely source of summoned information and implore them to provide the documents to her lawyer.  She also personally reviewed a massive amount of information as well as having her lawyer (presumably generating substantial fees) also review files to ensure she did not have additional responsive records.  In a smart twist, she also submitted Freedom of Information Act requests to the IRS to see if the IRS already had some responsive documents, but the IRS denied the requests (perhaps legally permissible but it undermines the government’s argument if they didn’t want to bother looking or refused to turn over documents that they claimed the taxpayer needed to provide).

Notwithstanding what sounds like more-than-reasonable efforts by the taxpayer, the IRS got the Department of Justice to file suit to enforce the summons and argue that the efforts didn’t go far enough.

The district court demonstrated that the government’s arguments that Ms. Santoso could have done more were weak.  The district court reiterated the many steps, including follow-ups, by Ms. Santoso’s lawyer, and noted that “while there may always be additional steps that could be taken, the actions taken by Ms. Santos and her attorney, as described above, can hardly be considered inaction.”  Noting that all she had to show was that she cleared the “pro forma efforts” bar, the district court found Ms. Santoso’s efforts “are certainly more than that.”

The case reinforces that honest efforts to comply with a summons are, at least sometimes, rewarded despite the IRS’s insistence that more should be done.  The IRS is hardly perfect and can’t demand perfection from others.

EVAN J. DAVIS – For more information please contact Evan Davis – or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez, P.C.  He spent 11 years as an AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) where he handed civil and criminal tax cases, and of the Major Frauds Section of the Criminal Division where he handled white-collar, tax, and other fraud cases through jury trial and appeal.  As an AUSA, he served as the Bankruptcy Fraud coordinator, Financial Institution Fraud coordinator, and Securities Fraud coordinator, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.  Before becoming an AUSA, Mr. Davis was a civil trial attorney in the Department of Justice’s Tax Division in Washington, D.C. for nearly 8 years. 

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including money laundering and health care fraud.  He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (Streamlined Procedures and otherwise).


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