by Brian Mahany
Although many people believe the IRS can do anything it wants, the government does have limits in how it gathers data. Some will argue with me and cite some of the scarier provisions in the various homeland security laws but the IRS still has a number of procedural limits on how it gathers information. A recent decision from a California federal court, however, gives even more power to the IRS.
Earlier this year the IRS sought permission to issue a John Doe subpoena to the California Board of Equalization. Uncle Sam wanted the names and addresses of anyone in the state that transferred property for little or no consideration. The purpose of the request was to determine if some people were gifting their real estate without paying federal gift tax. (The subpoena is called a John Doe subpoena because the IRS doesn’t know who these people are.)
The court initially said no. The judge was concerned that the IRS was using its power to force the state to do its research and work. Based upon a new IRS application, however, on December 15th the court gave the IRS a green light to proceed.
Congress previously passed legislation extending the IRS’ power to summons to situations where the identity of the taxpayer is unknown. See 26 U.S.C. 7609(f). To exercise that authority, however, the IRS must seek court approval and show that the investigation relates to an ascertainable class of taxpayers. An example of this are John Doe subpoenas directed to specific Swiss and foreign banks seeking the identities of Americans having accounts at the bank.
The IRS must also show that there is a reasonable basis to believe that this group of people may have tax problems.
Finally the IRS must show that there isn’t another readily available source of the information.
When challenged in this case, the IRS told the court that 60 to 90% of people who transfer property for little or no value should have filed a gift tax return but didn’t. The court also found that it was unduly burdensome to have the IRS go to each of the county deeds offices and search property transfer records.
In approving the request, the court almost summarily dismissed California’s sovereign immunity arguments.
The lesson here is that if the IRS can prove that an identifiable group of people has a history of tax noncompliance, the IRS can seek records from virtually anyone. Remember, this isn’t the case of the IRS asking for records of a specific person under investigation, it is a blanket request for the names of people who may have failed to pay taxes based solely on their “membership” in a group.
Does this mean the IRS can seek records of all Greek restaurants owners simply if some bureaucrat in the IRS claims 50% of Greek restaurant owners historically underpay taxes? What about people that live in certain identifiable ghetto neighborhoods if the IRS says that a higher percentage improperly claim the child care credit.
The ramifications are a bit chilling. As in many of these John Doe cases, it isn’t the facts of the specific case that are upsetting. Rather, it’s the broad power the court is giving to the IRS. Luckily, Congress says that the IRS must convince a federal judge before embarking on such a fishing expedition.
Invariably, these John Doe subpoenas always result in innocent taxpayers getting caught up in the audit dragnet simply because they are part of the wrong group.
If you have problems with the IRS, give us a call. Our tax attorneys have helped people across the U.S. with a variety of tax matters including audit defense, collection representation, criminal tax and complex welfare benefit audits. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and San Francisco, California.