Federal Case Serving as Benchmark for IRS Info-Gathering Power

Tuesday, December 27, 2011 Print Email

A new federal court case is demonstrating the depth of information the IRS is seeking - and getting - fr om states regarding the financial affairs of residents.

In "In the Matter of the Tax Liabilities of: John Does," the IRS sought permission to issue a John Doe summons (any summons wh ere the name of the taxpayer under investigation is unknown and therefore not specifically identified) to the California Board of Equalization. The summons requested information about "United States taxpayers, who during any part of the period Jan. 1, 2005, through Dec. 31, 2010, transferred property in the State of California for little or no consideration." The IRS wanted the records to determine what transfers of real estate between family members were not reported on gift tax returns, and has already received this information from nearly a third of the states.

The district court for the Eastern District of California initially denied the request because it failed to show that the information sought was not readily available through other sources. In its revised request, the IRS met the burden to show this.

In its initial order denying the summons, the court voiced "serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe summons upon a state," and advised the IRS that if a second petition were to be submitted it would have to address four additional inquiries: whether a state is a "person," whether a state's sovereign immunity precludes issuance of the summons, whether all administrative remedies must first be exhausted, and whether the IRS should be required to pursue all state court remedies before seeking federal court relief. In its revised petition, the IRS answered all of these concerns to the satisfaction of the court, and the summons request was granted.

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