District Court Clarifies Rules Related To IRS Formal Document Requests For Documents Outside The U.S.

In Veg Corp. v. U.S., No. 2:17-cv-02893 (D. Nev. July 30, 2018), the district court refused to analyze compliance with IRS document requests in a vacuum, and, instead, considered the parties' understanding of the document requests.

Background on IRS Document Requests

During examinations, the IRS may request taxpayers provide documents, via an information document request ("IDR"). If the IRS does not think that a taxpayer provided the requested documents or responded to the IDR, the IRS may issue a formal document request ("FDR"), pursuant to Internal Revenue Code Sec. 982. FDRs are limited to documents located outside of the U.S. District courts enforce FDRs: taxpayers may move to quash FDRs in district courts, and, in turn, the IRS may seek to compel compliance with FDRs.

When enforcing FDRs, courts have applied the Supreme Court's standards in enforcing IRS summons upheld in Yujuico v. U.S., IRS., 818 F. Supp. 285, 287 (N.D. Cal 1993) (citing U.S. v. Powell, 379 U.S. 48, 57-58 (1964)). Under Powell, the IRS must first show that four requirements are met: (i) the investigation is being conducted for a legitimate purpose, (ii) the inquiry may be relevant to that purpose, (iii) the IRS does not already possess the information requested, and (iv) the administrative steps required by the Internal Revenue Code (e.g., IDR) have been followed. If the IRS shows these four requirements, the party moving to quash must then either disprove one of these requirements, or show that the IRS issued the summons in bad faith or in an abusive manner.

Veg Corp - Factual Background

In the Veg Corp. case, the IRS was examining a couple, Mr. and Mrs. Walters, the owners of Veg Corp. The IRS was investigating whether the Walters, through Veg Corp., had engaged in offshore sports betting, and had attempted to report improperly their revenue to the IRS. The IRS issued many IDRs to both the Walters and to Veg Corp.

In Veg Corp., Veg Corp. (the "Taxpayer") moved to quash a FDR on the basis that the preceding IDR had been issued to the Walters, and not the Taxpayer.

Veg Corp - Decision

In analyzing the IDR, the court noted that it did not do so "in a vacuum." The court looked at various facts in order to determine the parties' "clear understanding."

In determining to whom the...