The U.S. Supreme Court knocked down the Internal Revenue Service on Thursday by ruling that the target of an IRS summons is entitled to an evidentiary hearing to argue that the summons was wrongful. The decision, however, requires that the target of a summons must “offer some credible evidence supporting a charge [of bad faith]” in order to be entitled to such a hearing.
In a unanimous decision, the Supreme Court reversed the Court of Appeals for the Eleventh Circuit’s determination that the “bare allegation of improper motive entitles a person objecting to an IRS summons to examine the responsible officials.” However, the Supreme Court made clear that a taxpayer can challenge an Internal Revenue Service summons enforcement action in court when he can demonstrate the tax agency might have issued the summons in bad faith. The decision is important because it will provide taxpayers with an opportunity to establish, through an evidentiary hearing, that the IRS acted in bad faith when issuing a summons. However, the taxpayer must come forth with more than “naked allegations of improper purpose” in order to be entitled to the evidentiary hearing.
Given the political issues currently stirring in the background, it is hard to imagine that recent IRS scandals did not sway the Judges’ decision. Despite this backdrop, however, the Supreme Court recognized that a summons is an evidentiary tool which provides a “crucial backstop in a tax system based on self-reporting.” In the end, the Court probably struck a reasonable balance by determining that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons when “the taxpayer makes a showing of facts that give rise to a plausible inference of improper purpose.” How this standard will be applied by the lower courts remains to be seen.
The Court’s decision, United States v Clarke, et al, U.S. Supreme Court, No. 13-301, can be obtained by clicking here.