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 IDR was issued, the court did not look only to the named recipient of the IDR. Instead, the court considered the facts that showed the parties clear understanding that the IDR was intended for the Taxpayer. For example, the IDR’s request number was formatted consistently with other IDRs issued to the Taxpayer, not with IDRs issued to the Walters. The Taxpayer and the IRS discussed the IDR, and the Taxpayer ultimately responded to it, without arguing that the IDR was issued to the wrong party. The court held that in discussing and then responding to the FDR, the Taxpayer had waived its right to argue that the FDR was not properly issued.
In deciding that the FDR itself met the Internal Revenue Code requirements, the court held that the IRS had sufficiently explained the reason the documentation previously produced was not sufficient. The IRS’s letter to Veg Corp. stating that Veg Corp. “did not provide the requested information” was sufficient, and consistent with the Internal Revenue Service’s Manual.
The court also held that a FDR is not invalid simply because the IDR on which it is based requests information in addition to documents. The court held that the IDR may be modified, so that the FDR in fact requests documents only, not simply information.
In the Veg Corp. decision, the court upheld the IRS’s FDR, relying in part on waiver arguments. This decision means that, if a taxpayer receives a FDR, it is critically important to scrutinize the FDR carefully, and to raise all arguments that might invalidate the FDR prior to responding to the FDR.