Court Orders Compliance with Formal Document Request Upon Taxpayer Motion to Quash (12/30/15; 12/31/15)

Section 982, here, authorizes the IRS to issue a formal document request ("FDR") for foreign documentation.  The consequence of a failure to comply with the FDR is generally that, in a court proceeding, the court must prohibit the taxpayer from introducing the documents within the scope of the FDR.  The taxpayer may, however, bring a court proceeding to quash the FDR.  The taxpayer may bring a proceeding to quash the formal document request; if the taxpayer brings such a proceeding, the IRS “may seek to compel compliance with such request.”  § 982(c)(2)(A).  Thus, the taxpayer by moving to quash the FDR can turn the process from merely an evidence preclusion into a compulsory process.

In LaRue v. United States, 2015 U.S. Dist. LEXIS ______ (D. Or. 2015), here, the taxpayer brought a proceeding to quash.  The background stated by the court is interesting, important and short.  Here it is:

On August 27, 2013; May 8, 2014; and September 11, 2014; IRS Revenue Agent Ivan Bahamonde issued Information Document Requests (IDRs) in connection with the examination of Petitioners' tax returns. Declaration of Agent Bahamonde (Bahamonde Decl.) ¶¶ 7, 12, 16; ECF 10-1. Petitioners declined his requests for an interview and production of documents. Id. at ¶ 11, 15, 16. On May 8, 2014, and October 30, 2014, Agent Bahamonde issued summonses to Petitioners and requested the same information contained in the IDRs. Id. at ¶¶ 13, 18. In response to the October 30, 2014 summonses, Petitioners appeared before IRS Revenue Agent Susan Murrell and asserted their Fifth Amendment privilege under the act of production doctrine. Id. at ¶ 20. The IRS did not enforce the summonses and, instead, issued the present FDR on January 26, 2015. Id. at ¶ 21. 

According to Agent Bahamonde, the IRS has obtained information showing that Petitioners used Portcullis Trustnet Group to set up offshore trusts in order to avoid paying U.S. income tax. Id. at ¶ 4. The FDR seeks documents within the following categories of accounts over which Petitioners had signature or other authority or exercised control: foreign bank accounts; foreign credit, ATM, or charge accounts; foreign brokerage or securities accounts, in any name; foreign entities or structures; and foreign trusts. Id. at ¶ 24. The IRS is investigating: (1) the nature of the funds deposited into the offshore accounts; (2) whether income generated by the accounts was properly reported by Petitioners; (3) what happened to the funds when the offshore accounts were terminated; and (4) whether Petitioners filed the appropriate information returns related to interests in foreign bank accounts and entities during the tax periods at issue. Id. at ¶ 6.

The Court determined the standard to apply to the Government's request to compel as follows: