The IRS Can “Re-Inspect” Records, Sometimes.

Receiving a summons^[1] from the Internal Revenue Service (IRS) can trigger immediate discomfort and worry.  While it’s true that the IRS’s examination and inspection power is very broad, it is not absolute.[2] In February 1, 2016, the Seventh Circuit Court of Appeals in United States v. Titan International, Inc. examined one statutory restriction, specifically Internal Revenue Code (IRC) § 7605(b) which restricts unnecessary examinations.^[3] Generally, the IRS can “examine any books, papers, records, or other data which may be relevant or material to such inquiry” to ascertain “the correctness of any return, making a return where none has been made, [and determine] the liability of any person for any internal revenue tax . . . .”^[4] However, § 7605(b) states:

“(b) Restrictions on examination of taxpayer.–No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.”^[5]

In the Titan case, the IRS issued an administrative summons to inspect taxpayer Titan International’s 2009 books and records while the IRS was auditing its 2010 tax return.^[6]  Titan refused to comply with the summons, arguing that the IRS already inspected those 2009 records when it conducted a previous audit of its 2009 tax return.^{[7] [8]}  Titan reasoned that § 7605(b) limits the IRS to only one inspection of a “taxpayer’s books or account” for any given tax year. ^[9]

The Seventh Circuit, focusing on the language “only one inspection of the taxpayer’s books of account shall be made for each taxable year”, disagreed with Titan.^[10]  Specifically, the Court held that the “natural reading of this language limits the IRS to one inspection of a taxpayer’s books per audit of a given year’s tax return (subject, of course, to notice and a finding by the Secretary that a second inspection is necessary).”^{[11] [12]}  Section 7605(b) “does not apply when the IRS seeks already-inspected records for an audit of a different tax year.”^[13]  Accordingly, the Court concluded that because the summons seeks 2009 records in connection with an audit of the 2010 tax return, not the 2009 return, the summons did not trigger § 7605(b), and thus is not barred.^[14]

While Titan and taxpayers alike would’ve preferred that the Seventh Circuit had broadened the interpretation § 7605(b)’s restriction on the IRS’s examination and inspection power, it appears the IRS can lawfully “re-inspect” tax returns. In other words, simply because a certain year’s tax return has already been audited by the IRS doesn’t mean those books and records can’t or won’t be inspected again.

—By Keobopha Keopong, Esq., Barnes Law

Keo Keopong is an associate attorney with Barnes Law, licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

^[1] The IRS can issue summonses in order to determine the correctness of a tax return, make a substitute return where one was not filed, or determine the a person’s liability for any internal revenue tax, pursuant to the IRC.

[2] Limitations to IRC § 7602 include: constitutional limitations under the Fourth and Fifth amendments, a requirement of reasonable time and place for examination as provided under IRC section 7605(a), a restriction of unnecessary examinations under IRC section 7605(b), and a requirement for relevant questions when information is compelled by administrative summons.

^[3] United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016) <http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D02-01/C:14-3789:J:Sykes:aut:T:fnOp:N:1695969:S:0>

^[4] IRC § 7602.

^[5] IRC § 7605(b) (emphasis added).

^[6] United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016) <http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D02-01/C:14-3789:J:Sykes:aut:T:fnOp:N:1695969:S:0>

^[7] The two audits related to an operating-loss carryforward. (United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016).)

^[8] United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016) <http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D02-01/C:14-3789:J:Sykes:aut:T:fnOp:N:1695969:S:0>

^[9] Ibid.

^[10] Ibid.

^[11] The Court looked to other cases to confirm its interpretation of the statute, e.g. Reineman v. United States, 301 F.2d 267 (7th Cir. 1962) and Digby v. Commissioner, 103 T.C. 441 (1994). (United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016).)

^[12] United States v. Titan International, Inc., No. 14-3789 (7th Cir. Feb. 1, 2016) <http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2016/D02-01/C:14-3789:J:Sykes:aut:T:fnOp:N:1695969:S:0>

^[13] Ibid.

^[14] Ibid.