Seventh Circuit: IRS summons upheld; not “re-inspection” of taxpayer’s records

Seventh Circuit: IRS summons upheld

The U.S. Court of Appeals for the Seventh Circuit today affirmed an order of a federal district court, directing the taxpayer to comply with an IRS summons. The Seventh Circuit rejected the taxpayer’s claim that the IRS summons was a “re-inspection” of previously examined records because the tax year under examination was not the same as a previously examined year (for which the records were summoned).

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The case is: United States v. Titan International, Inc., No. 14-3789 (7th Cir. February 1, 2016). Read the Seventh Circuit’s decision [PDF 132 KB]

Summary

The IRS in February 2014 issued an administrative summons to the taxpayer, for the IRS to inspect the taxpayer’s books and records from 2009 in connection with a Tax audit of the taxpayer’s 2010 tax return. The taxpayer had taken an operating-loss carryforward in the 2010 tax year for a loss that occurred in 2009. The taxpayer also had claimed this same loss in 2009, and the IRS had already audited the company’s return for that tax year. 

The taxpayer refused to comply with the 2014 summons, asserting that the IRS already had inspected the same records during its audit of the 2009 return. The taxpayer based its position on section 7605(b) that provides that “…only one inspection of a taxpayer’s books of account shall be made for each taxable year unless … the [Treasury] Secretary … notifies the taxpayer in writing that an additional inspection is necessary.”  As the taxpayer asserted, the Secretary had not issued this notice, and thus the “re-inspection” of the 2009 records was not permitted.  The federal district court disagreed and ordered the taxpayer to comply with the IRS summons.  

Today, the Seventh Circuit affirmed. The Seventh Circuit explained that section 7605(b) applies if the IRS seeks to inspect a taxpayer’s records when auditing a tax liability for a given year when the IRS has already inspected the records in auditing the taxpayer’s liability for that same tax year. Section 7605(b) does not apply when the IRS seeks already-inspected records for an audit of a different tax year. As the appeals court concluded, because the IRS summoned the 2009 records in connection with an audit of the 2010 return—not the 2009 return—section 7605(b) is not invoked and does not bar the IRS inspection.

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