In prior blog posts, here and here, we discussed the IRS using a summons to obtain information and options a taxpayer or third party has for responding to or objecting to a summons. In this blog post, we will discuss an additional tool the IRS has to obtain information, a Formal Document Request (“FDR”).
IRC section 982(c) defines a FDR as any request (made after the normal request procedures have failed to produce the requested documentation) for the production of foreign-based documentation which is mailed by registered or certified mail to the taxpayer at his last known address and which sets forth:
- The time and place for the production of the documentation.
- A statement of the reason the documentation previously produced (if any) is not sufficient.
- A description of the documentation being sought, and
- The consequences to the taxpayer of the failure to produce the documentation.
Foreign-based documentation is “any documentation which is outside the United States and which may be relevant or material to any tax treatment of the examined item.” IRC Section 982(d). Before the IRS can issue a FDR the examiner must issue an Information Document Request (IDR) for the specific information and the taxpayer must fail to substantially answer the IDR. A FDR cannot request more information than was previously requested in an IDR and cannot be for testimony.
Unlike an IDR, the IRS cannot enforce a FDR through a summons enforcement proceeding. However, failure to properly respond to a FDR can have potentially dire consequences to a taxpayer. Unless the taxpayer establishes reasonable cause for failure to substantially comply with a FDR within 90 days of mailing, the taxpayer may be prohibited from introducing the foreign-based documentation covered by the FDR at trial. Substantial compliance is a facts and circumstances test. For example, if taxpayer submits seven out of eight requested items and a court determines the missing item is the most substantial, the taxpayer may be found to have failed to substantially comply with the FDR. Likewise, reasonable cause is a facts and circumstances test. However, foreign nondisclosure laws are not reasonable cause under IRC section 982. Therefore, taxpayers cannot use secrecy laws as a defense. In addition, the presence of secrecy laws do not make a FDR unreasonable. If the foreign country makes it impossible to remove the original documents requested, not because of secrecy laws but due to foreign tax laws or laws as to the rights of creditors, true copies may be sufficient.
IRC section 982(c)(2) allows a taxpayer to bring a proceeding in the United States District Court for the district in which the taxpayer resides or is found to quash a FDR not later than the 90th day after the day such request was mailed. The standard for quashing a FDR is the same standard for quashing a summons. As long as the IRS satisfies the four requirements set forth in U.S. v. Powell 379 U.S. 48 (1964), it has broad authority to request virtually any relevant information. Under Powell, the IRS must show (1) the investigation is being conducted for a legitimate purpose, (2) the inquiry may be relevant to that purpose, (3) the IRS does not already possess the information requested, and (4) the administrative steps required by the Internal Revenue Code have been followed. To prevail in a proceeding to quash a FDR, the taxpayer must disprove one of these requirements, prove that the requested information is irrelevant or available in the United States or that there is reasonable cause for the taxpayer’s noncompliance. Any proceeding to quash a FDR will suspend the running of the 90-day period for complying with the FDR while the proceeding is pending.
A taxpayer who receives a FDR must proceed with caution when considering an action to quash the FDR. As set forth above, a taxpayer who fails to substantially comply with a FDR may be prohibited from introducing the foreign-based documentation at trial. The IRS cannot enforce a FDR through a summons enforcement proceeding. However, if the taxpayer files an action to quash a FDR, Section 982 allows the IRS to seek to compel compliance with the FDR. If a court orders the taxpayer to comply with the FDR and the taxpayer fails to do so, the taxpayer may be found in civil or criminal contempt and subject to continuing fines or even incarceration until compliance.
For any questions on this or any other tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or firstname.lastname@example.org.