IRS Double Standards: Only You Can Get Penalized for Lost Records


The Congressional inquiry into the IRS’s actions of targeting conservative political groups has taken a bizarre turn. For the past year, Congressional committees have been pushing the IRS and the White House to release the e-mails generated by Lois Lerner between 2010 and 2012, the period during which the IRS targeted numerous groups for improper, politically motivated scrutiny.

In a letter dated June 13, 2014, from the IRS’s Legislative Affairs Director Leonard Oursler to both the chairman and ranking member of the Senate Finance Committee, it was pointed out that Lerner’s IRS e-mail account “contains very few emails prior to April 2011, while the number of Ms. Lerner’s custodial emails dated after April 2011 is more voluminous.

Why are there so few e-mails during the period prior to April 2011? The letter explains: “Although the IRS is unable to interview Ms. Lerner to learn more, the IRS has determined that Ms. Lerner’s computer crashed in mid-2011.”

Not only did the drive crash, but according to IRS Commissioner John Koskinen, the drive itself was “destroyed and recycled.” Thus, we simply have to take the IRS’s
word that the data on the drive was unrecoverable.

Lost Records and the Fifth Amendment –
What Would Happen to YOU?

We all know that Lerner pleaded the Fifth Amendment during her first appearance before Rep. Darrell Issa’s House Committee on Oversight and Government Reform. What do you suppose would happen to you if you, a) lost or destroyed records regarding your tax matters, or b) stood on your Fifth Amendment rights with regard to producing records?

In more than three decades of experience dealing with tax audit and collection issues, I have seen numerous cases where citizens have lost their records. The problem is the burden of proof is on you when it comes to the claims in your tax return. You must have the evidence to prove your return is correct or the IRS will simply disallow your

I was involved in a case years ago in which a doctor came under audit for three tax returns. His CPA brought three full boxes of documents to the IRS, one for each year under audit, and left them with the examiner. Several months later, the agent called the CPA and said, in essence, there’s good news and bad news. “The good news is the audit is over. The bad news is we lost all your documents and because there’s no proof of any deductions, we have to disallow all of them.”

The result was a tax bill of over $500,000, including substantial “accuracy” penalties, all of which the IRS undertook to collect with a vengeance.

The fact is the IRS does not relax the legal burden of proof, nor does it go soft on collection, merely because a person lost or destroyed his records, regardless of how much that person might like to “take corrective action” and “move beyond the problems and concerns.” Instead, that person faces substantial penalties and interest and the IRS uses every collection tool at its disposal to get the money.

Do Everything You Can to Make
Yourself “High Fruit” for IRS Auditors

importance of securing your records in a safe and orderly manner is paramount. Consider the Tax Court case of Robbins v. Commissioner, 42 T.C. Memo. 809 (1981). I write about this case in my book, IRS, Taxes and the Beast. Robbins was a real estate agent who incurred substantial expenses in operating his business. He lost some of his records to a tornado and others because an airline lost his luggage containing many of his business documents.

After his audit, during which he told the auditor that the records were lost, the IRS disallowed all his expenses and imposed the penalty for failure to pay. Robbins soon found himself in Tax Court where he was able to save a portion of his deductions through the process of reconstructing some of his expenses.

But as the Court noted, “he failed to duplicate all his lost records.” Because he could not reconstruct his entire financial picture, the Tax Court sustained the disallowance of many deductions as well as the IRSimposed penalty. In doing so, the Court stated:

“Section 6001 imposes upon all taxpayers the obligation to maintain at all times accurate books and records to enable substantiation of income and expenses. Because
[Robbins] failed to maintain such records at all times, we conclude that he is responsible for payment of any addition to tax under section 6653(a).”

The bottom line for a citizen: lost your records; can’t reconstruct them? You owe additional taxes and penalties.

Bottom line for the IRS: lost e-mails; can’t reconstruct them? That’s okay.

Court Rules Your
Constitutional Rights Don’t Apply

And what about the Fifth Amendment? We all know drug dealers and bank robbers have a Fifth Amendment right. But what about taxpayers when it comes to producing records the IRS demands? Let’s examine just one case in which the IRS pressed a citizen for his private records to see how a federal judge might treat an individual in the face of his Fifth Amendment objection to IRS demands.

The case is United States v. Grable, 98 F.3d 251 (6th Cir. 1996). The case involved an IRS summons issued to a taxpayer demanding the release of his personal records. Grable asserted his Fifth Amendment rights and refused to produce any records. As a result, the IRS filed a summons enforcement proceeding in the United States District Court seeking an order requiring production of the documents.

In the hearing that followed, the district court unceremoniously dismissed Grable’s Fifth Amendment claim, bluntly advising him that “no Fifth Amendment privilege applies to an order from the IRS to provide tax information… There is no Fifth Amendment right not to share information with the Internal Revenue Service, period. That is the law.”

At the conclusion of the hearing, the court found Grable in contempt and ordered him into custody. This is not an isolated case. The stories of cases in which citizens were jailed for not providing records to the IRS could fill a volume.

Moreover, the IRS’s use of its summons power is on the rise. The IRS has recently issued a policy statement requiring agents to more quickly and more often issue summonses and to pursue summons enforcement actions in federal court when taxpayers fail or refuse to provide records.