Generally, Internal Revenue Code (“IRC”) §7605(b) permits only one inspection of a taxpayer’s records for a tax year, unless the IRS can come up with a written justification for the re-inspection. However, a federal appeals court recently ruled that this limitation applies only to a single tax year, and inspection of records previously audited for different tax year is permitted.
In U.S. v. Titan Int’l, Inc., (7th Cir. 2016), the IRS issued a summons to inspect a taxpayer’s 2009 books and records in connection with a 2009 carryforward net operating loss at issue in the audit of the company’s 2010 income tax return. The IRS had previously requested and inspected the same records during a prior audit of the 2009 tax year.
The taxpayer refused to produce the records again, arguing that the Internal Revenue Code (“IRC”) §7605(b), mandates that “[n]o 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 tax year unless . . . the Secretary . . . notifies the taxpayer in writing that an additional inspection is necessary.”
However, the Titan court determined that IRC §7605(b) limitation only applies to an additional inspection of records for the same tax year. The court concluded that IRC §7605(b), does bar a demand for already-inspected records for an audit of a different tax year. Since the IRS summoned the 2009 records in connection with an audit of the taxpayers 2010 income tax return—not its 2009 return—IRC §7605(b) is inapplicable to prevent re-inspection.