The “Lack of Possession” Defense to an IRS Summons

As we noted in our post on challenges to an IRS summons, if a taxpayer claims that they do possess the documents requested, the burden is on them to show the court that they have undertaken all reasonable efforts to comply with the IRS’ request.

U.S. vs. Malhas

Dr. Wade Malhas was the subject of an IRS investigation into his tax liability for the years 2006-2008. The issue was the failure to report some offshore accounts that Malhas had with the Union Bank of Switzerland (UBS). After numerous requests to obtain the documentation, the IRS issued a summons; Malhas appeared but without any documentation. The government filed a petition to enforce the summons.

Malhas filed an affidavit asserting that he had taken all reasonable steps but was unable to comply. He claimed that signature authority over the account was transferred in 2004 to a Ms. Moosleeithner-Batliner, a third party whom he had never met, and that in 2008 the assets in the UBS account were transferred to another bank, Banque Baring Brothers Sturdza, SA (“Baring Sturdza”). The court determined that Malhas’ threshold showing in support of his affirmative “lack of possession” defense was sufficient to allow an evidentiary hearing.

However, that did not mean that Malhas was off the hook.

At the evidentiary hearing, the IRS brought forth a “plethora of documents and records” linking Malhas with international banks. Overriding Malhas’ claim that he had no signatory power over the account, the IRS showed the court that Malhas had a password that provided him with access to the account information without a signature. Apparently Malhas had also offered, but failed to contact UBS and Baring Sturdza to forward the banking records to him. The court was not impressed.

Burden of proof and IRS summons enforcement proceedings

At a summons enforcement proceeding, the IRS has the initial burden of showing that the summons is valid. This is a slight burden that can be met by satisfying the four Powell requirements. In U.S. v Clarke, the Supreme Court clarified that the IRS “need only demonstrate good faith in issuing the summons.”

If the district court determines that the government has made a prima facie showing that the summons is valid, the burden then shifts to the taxpayer to raise an affirmative defense and show cause why the summons should not be enforced. As the Malhas court noted, even if the district court has determined that the taxpayer is entitled to an evidentiary hearing, “the burden still rests heavily on the taxpayer” to raise a proper defense.

Some appellate courts hold that with a lack of possession defense, it is within the district court’s discretion to determine whether or not the taxpayer possesses the documents at issue. Others utilize the “credible evidence standard,” a sliding scale that puts a higher burden on the taxpayer where the government has more evidence showing that the taxpayer possesses the documents.

The Malhas court concluded that Malhas did not meet any of the commonly utilized standards – the government had overwhelming evidence that he had offshore accounts and even Malhas himself stated that it was likely that the foreign banks could provide the documentation sought by the IRS. The court concluded that Malhas did not meet his burden of proof and gave him two months to comply with the IRS summons.

Exceptional results with tax disputes

If you have been issued an IRS summons, do not try to handle it alone. The tax attorneys at Moskowitz, LLP are proud to achieve exceptional results for the firm’s clients and are available to assist you.

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