IRS Failure to Communicate Does not Violate IRC § 7605(b)

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.[1]

If a taxpayer’s books and records are inspected while in the hands of his accountant or attorney, the taxpayer can object to a second inspection.[2] An inspection of a tax return is not an inspection of “books of account.”[3] The mere matching of third-party reported payment information against a taxpayer’s already-filed tax return is not considered an examination of the taxpayer’s books and records such to warrant consideration under IRC § 7605(b).[4]

The Tax Court has held on multiple occasions that the protections under IRC § 7605(b) are tenuous at best. Indeed, the Supreme Court has held that Congress intended “no severe restriction” when it enacted IRC § 7605(b).[5]  For example, a second examination will not be considered unnecessary, particularly where the taxpayer acknowledges additional taxes due or if, in order to determine the existence or nonexistence of fraud in the taxpayer’s returns, information is needed which is not already in the IRS’s possession.[6]

The provision’s sole purpose is to provide “relief from unnecessary annoyance” which may be caused by lack of supervision over examining agents.[7] As the court in Powell noted, “Congress recognized a need to curb the investigating powers of low-echelon revenue agents, and it considered that it met this need simply and fully by requiring such agents to clear any repetitive examination with a superior.”[8] There is no intimation in the legislative history that Congress intended the courts to oversee the Commissioner’s determinations to investigate.[9]  Indeed, the Ninth Circuit has noted that IRC § 7605 does not require the IRS to make an independent investigation of the need for a second inspection; the only requirement is that the agent’s recommendation should be reviewed by a superior.[10]

The Unnecessary Examination Provision – IRC § 7605(b)

In Essner v. Commissioner,[11] the petitioner argued that the IRS should be barred from assessing the proposed deficiency for 2014, because it violated IRC § 7605(b) by conducting a second inspection of petitioner’s books and records for 2014. In part, IRC § 7605(b) provides that a taxpayer must not 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 IRS, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.[12]

Inspections of Third Party’s Records does not Invoke IRC § 7605(b)

IRC § 7605(b) applies only to the individual taxpayer’s own records; by definition, it does not apply to records of third-party recordkeepers.[13] Indeed, the Second Circuit has noted that the Tax Reform Act of 1976, which granted taxpayers the right to intervene in summons enforcement actions directed against third-party recordkeepers, did not grant taxpayers the right to object to second examinations of a third-party’s records.[14]  Nor does the president of corporation or a sole shareholder, who was being audited, have standing to object to a second inspection of the corporation’s books and records.[15]

Looking Behind a Notice of Deficiency – The Narrow IRC § 7605(b) Exception

Generally, the Tax Court will not “look behind” the notice of deficiency to see what occurred during the course of an examination.[16] However, the petitioner’s IRC § 7605(b) argument opens a narrow exception to that rule; therefore, facts relating to the examination for petitioner’s 2014 tax year—and only his 2014 tax year—are material to these cases.

The IRC § 7605(b) Restriction in Practice

The Supreme Court has explained that IRC § 7605(b) imposes “no severe restriction” on the IRS’s power to investigate taxpayers.[17] As such, the Tax Court reads the restriction narrowly.[18] Mere communication with the taxpayer does not fall within the scope of IRC § 7605(b).[19] Additionally, IRC § 7605(b) does not limit the IRS’s ability to assemble and consult third-party records related to a taxpayer’s tax liability.[20] Nor does it limit the IRS’s ability to review already-filed tax returns in his possession.[21]

The Tax Court in Essner noted that the petitioner’s interactions with the IRS “would be confusing to an ordinary taxpayer.” Various offices of the IRS contacted petitioner without coordination, without clarity as to what the other parts were doing, and without providing petitioner a clear explanation as to why the IRS was “speaking out of many mouths.” Although the taxpayer ought not to have been subjected to such a “byzantine” examination, the Tax Court is simply not empowered to “police what ought to have occurred in an examination.” Instead, it must only consider whether the letter of IRC § 7605(b) was violated.[22]

The Tax Court in Essner held that under IRC § 7605(b), the electronic automated under-reporter program’s matching of third party-reported payment information against petitioner’s already-filed 2014 tax return was not an “examination of petitioner’s records” under IRC § 7605.[23] Therefore, no second examination of petitioner’s books and records could have occurred, regardless of the concurrent actions of the slightly-more human branch of the IRS (Exam).[24]

Bright Line Rule

The utter failure of the right hand of the IRS knowing what the left hand is doing, i.e., the complete “failure to coordinate and communicate” within the IRS, alone, does not violate IRC § 7605(b).


[1] IRC § 7605(b).

[2] United States v. McCarthy, 514 F.2d 368 (3d Cir. 1975).

[3] Curtis v. Commissioner, 84 T.C. 1349, 1351 (1985).

[4] Essner v. Commissioner, T.C. Memo. 2020-23.

[5] United States v. Powell, 379 U.S. 48, 53 (1964).

[6] Digby v. Commissioner, 103 T.C. 441 (1994).

[7] Powell, 379 U.S. at 54-56.

[8] Id.

[9] Zimmer v. Connett, 640 F.2d 208, 210 (9th Cir. 1981).

[10] Id.

[11] Essner, T.C. Memo. 2020-23 at *8.

[12] Powell, 379 U.S. at 53; Digby v. Commissioner, 103 T.C. 441, 446 (1994).

[13] United States v. Lask, 703 F.2d 293, 297 (8th Cir. 1983), cert. denied, 464 U.S. 829 (1983).

[14] United States v. Chem. Bank, 593 F.2d 451 (2d Cir. 1979).

[15] United States v. Howard, 360 F.2d 373 (3d Cir. 1966) (president); Geurkink v. United States, 354 F.2d 629 (7th Cir. 1965) (sole shareholder).

[16] See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974).

[17] United States v. Powell, 379 U.S. 48, 54 (1964).

[18] See De Masters v. Arend, 313 F.2d 79, 85-86 (9th Cir. 1963).

[19] Seidel v. Commissioner, T.C. Memo. 2005-67, *13.

[20] See Hubner v. Tucker, 245 F.2d 35, 38-39 (9th Cir. 1957).

[21] See Estate of Sower v. Commissioner, 149 T.C. 279, 289 (2017).

[22] See Greenberg’s Express, 62 T.C. at 327.

[23] See Hubner, 245 F.2d at 38-39.

[24] Essner, T.C. Memo. 2020-23 at *11.

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