IRS's summons power faces test in Supreme Court

By Patrick Temple-West WASHINGTON (Reuters) - The Internal Revenue Service will go before the U.S. Supreme Court on Wednesday to defend the way it enforces its power to issue legal summonses to obtain sensitive documents from taxpayers who refuse to cooperate with audits. The IRS is squaring off against Michael Clarke, a West Palm Beach, Florida, investor who is arguing that the U.S. tax agency in 2011 improperly issued a summons "as retribution" against him and his business partners for resisting an audit. At issue is what legal standards taxpayers must meet to get a court hearing if they think the IRS has issued a summons for an improper purpose. Clarke maintains he should have gotten a hearing, while the IRS says such hearings are unnecessary. Clarke maintains, according to court filings, that the IRS should have to explain its summons intentions at an evidentiary hearing before a court order is approved by a judge. But the IRS argues that Clarke does not need a hearing because taxpayers already have the legal rights to challenge a summons. Taxpayers cannot "engage in a fishing expedition about the motives of IRS agents," the government said in court documents, adding that a win for Clarke would bog down tax enforcement with another layer of litigation. A lawyer for Clarke declined to make his client available for comment. The IRS also declined to comment. CLARKE'S 'CATCH-22' Multinational businesses that do battle with the IRS over taxation regularly will be watching the Clarke case to see if the agency's summons power can be checked, tax lawyers said. Under the law, the IRS can issue a summons for information when a taxpayer refuses to provide it voluntarily. If the taxpayer ignores the summons, the IRS can then ask the U.S. Justice Department to seek a court order from a judge. Judges routinely rubber-stamp requests for court orders to enforce summonses without first holding evidentiary hearings. In December 2010, the IRS sent a $17 million tax bill to Clarke, who was chief financial officer of an investment partnership. He is contesting the tax bill in a separate dispute with the IRS currently docketed in U.S. Tax Court. In April 2011, the IRS started enforcing a summons against Clarke in a Florida district court. The court authorized the summons and denied Clarke's request for an evidentiary hearing. But on appeal last year, the 11th Circuit Court of Appeals in Atlanta reversed the district court's ruling, saying Clarke should get a hearing. The three-judge appellate panel said that without such a hearing, taxpayers face an "impermissible Catch-22" in proving a summons was improperly issued. The IRS appealed the decision to the Supreme Court, which often reconciles conflicting appellate court precedents. No other U.S. appeals court has ruled that evidentiary hearings should be as broadly obtainable as the 11th Circuit did. The Supreme Court said in 1964 that if the IRS wants a court order to enforce a summons, the agency must show that the summons was issued for "a legitimate purpose." In the years since, however, the courts have routinely sided with the IRS in disputes, making contesting them difficult for taxpayers. DISPUTES ON THE RISE Ignoring a court-ordered summons can lead to sanctions for criminal or civil contempt. Summons-related legal disputes have increased in recent years. There were more than 100 in the 12 months ended in May 2013 and 2012, compared with just 44 in the same period for 2005, according to the Taxpayer Advocate Service, an IRS watchdog. In January, the IRS started using summonses as a way to get documents faster from large companies, saying it could seek a summons after 49 days if information it wants is not divulged. The most important implication of the Clarke case is "the new information document request process for large businesses," said Robert Kovacev, a former Justice Department tax lawyer and now a partner with law firm Steptoe & Johnson LLP. Assistant Solicitor General Sarah Harrington will argue the case for the IRS while Edward Marod, a lawyer with Gunster Yoakley & Stewart PA, will argue for Clarke. The case is No. 13-301 United States v. Clarke. (Editing by Kevin Drawbaugh and G Crosse)