With recent attacks on the IRS's use of summons, a noteworthy opinion by the 11th Circuit Court of Appeals (later reversed by the Supreme Court), and newsworthy summons enforcement proceedings against Microsoft Corporation (when the IRS for the first time hired private civil litigators in a U.S. income tax audit (1)) and Facebook, Inc., (2) it seems time to present a quick primer on the nature of IRS summonses, their enforcement, defenses to them, and their impact on the statute of limitations.
To perform its investigative and tax collection functions, the IRS needs information from taxpayers and third parties. The most common reasons are when the IRS is auditing a tax return, attempting to collect tax due, and performing a criminal investigation. (3) How does an IRS employee obtain this information? The IRS employee can ask for it, make an informal written request together with the answer due date, (4) or issue a summons demanding the taxpayer or third party give testimony or produce the information by a specific date and time.
All a summons does is gather information. A summons does not establish tax liability, guilt or innocence, or enforcement action taken by the IRS. That is why summons enforcement proceedings are brief and summary in nature. (5)
The IRS is charged with administering and enforcing the Internal Revenue Code (I.R.C.). To do so, I.R.C. [section] 6201 authorizes the IRS to make inquiries, and I.R.C. [section] 7602 authorizes the IRS to summon, undertake examinations, and take testimony as a part of those responsibilities.
Types of Summonses
The IRS can issue a summons directly to a taxpayer, to witnesses, and to third-party recordkeepers. (6) With regard to criminal investigations, the IRS is permitted to issue summonses as a part of such an investigation. (7) This was not always the case. Due to uncertainty on when the IRS could issue a summons for a criminal investigation Congress amended the code to clarify that summonses could be issued by the IRS Criminal Investigation Division but, to give a bright-line test, Congress developed the "no Justice Department referral" requirement. (8) That is, once the IRS refers a case to the Department of Justice for criminal prosecution, the IRS can no longer issue a summons.
There are other kinds of summonses as well. For example, the IRS can issue a summons to determine if books and records are being kept, to determine the identity of a numbered bank account, and to obtain information where the name of the taxpayer is unknown (John Doe summons). (9)
The IRS must undertake special steps when it issues a summons to a cable company seeking personally identifiable information from the cable company, (10) when seeking health information protected by the Health Insurance Portability and Accountability Act (HIPAA), and when seeking any tax-related computer software code. (11)
Relevancy of Information Sought
The information sought in an IRS summons is not judged by the relevance standards used in deciding whether to admit evidence in federal court. Instead, the IRS may issue a summons for items of even potential relevance to an ongoing investigation, without regard to its admissibility. (12) The IRS may investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not. (13) The Fifth Circuit defined the test of relevancy in a summons enforcement proceeding as "whether the summons seeks information which 'might throw light upon the correctness of the taxpayer's return.'" (14) This definition was later narrowed to require a realistic expectation rather than an idle hope that something might be discovered. (15)
Administrative Steps to Issue Summons
A summons must be issued by a government official with authority. The Secretary of the Treasury delegated authority to the commissioner of the IRS and to redelegate this authority to IRS employees. (16) The Secretary of the Treasury also authorized the commissioner to redelegate this authority to IRS employees. (17)
In 1964, the U.S. Supreme Court issued its landmark decision in United States v. Powell, 379 U.S. 48 (1964). That case established the four requirements in order for an IRS summons to be valid: 1) The investigation must be pursuant to a legitimate purpose; 2) the inquiry must be relevant to that purpose; 3) the information sought must not already be in possession of the IRS, (18) and all administrative steps must be followed.
The IRS must properly serve the summons. Service of a summons directed to the taxpayer is to be served by an attested copy delivered in hand to the person to whom it is directed or left at his last and usual place of abode. (19) An "attested copy" of a document is one that has been examined and compared with the original, with a certificate or memorandum of its correctness, signed by the persons who have examined it. (20) Although the bulk of authority provides that "attested" copies of a summons need not be provided, (21) the Eighth Circuit requires attestation. (22) In addition, summonses issued to third-party recordkeepers may be served by certified or registered mail to the last known address of the third-party recordkeeper. (23)
Proper service of a summons does not require that the summons be left with a person of suitable age and discretion. Service is sufficient if it is left at summoned party's last and usual place of abode. (24) The IRS employee who issued the summons may also serve the summons. (25)
For summonses issued to third-party recordkeepers, the IRS must serve a copy of the third-party recordkeeper summons on the taxpayer by hand delivery, left at usual place of abode, or sent by certified or registered mail (26) within three days of the date the summons is served on the recordkeeper, but not later than 23 days before the day fixed in the summons as the day upon which such records are to be examined. (27) There is a split of authority on whether the 23-day period is mandatory. (28)
There are some notable exceptions to the requirement that the taxpayer receive advance notice of a summons issued to a third-party recordkeeper. Included in the list of "no notice" third-party recordkeeper summonses are those that seek only to determine whether records of the business transactions or affairs of a person identified in the summons have been made or kept, (29) the identity of a person owning a numbered bank account, (30) that are issued in aid of collection, (31) those issued by an IRS criminal investigator to a person who is not a defined third-party recordkeeper, (32) John Doe summons, (33) and when a court determines that there is a reasonable cause that there will be a spoliation of evidence. (34)
For anyone who has seen an IRS summons, (35) they look intimidating. The summons form has the seal of the Treasury Department and the word "SUMMONS" in large letters, and uses the words "you are hereby summoned and required to appear" along with a precise place, date, and time in which the summoned party is required to appear. But, what happens if a summoned party refuses to appear or otherwise comply with a summons? The IRS must seek enforcement of the summons through a proceeding in U.S. district court and obtain a court order to compel a taxpayer, witness, or third-party recordkeeper to appear and to produce information. (36)
Until the IRS seeks to enforce a previously issued summons, the issuance of a summons in and of itself does not present an art. III case or controversy, and the taxpayer or the person to whom the summons is directed cannot maintain an action to quash it. (37) It is only after the IRS seeks enforcement of the summons that the taxpayer or the person to whom the summons is directed has an opportunity to attack the merits of the summons. (38) Absent an effort by the IRS to seek enforcement through a U.S. district court, an IRS summons to appear, testify, or produce information "has no force on the summoned party and no punitive consequences can befall a summoned party who refuses, ignores, or otherwise does not comply with an IRS summons until that summons is backed by a [f]ederal court order." (39) The summoned party cannot be punished for disobedience of an IRS summons without providing an intervening opportunity to comply with a court order of enforcement. (40)
Prior to seeking enforcement, often the IRS will issue a "last chance letter" to the taxpayer to encourage compliance before a summons enforcement proceeding is initiated. (41)
To enforce a summons, the IRS files a petition in U.S. district court through an ex parte proceeding. Attached to such a petition is an affidavit by the agent who issued the summons which includes the necessary facts to establish that the agent's efforts have met the four Powell factors. This affidavit demonstrates that the summons was issued in good faith. (42) In response, the district court typically enters an order requiring the summoned party to show cause why the summons should not be enforced. (43) That order must be served by a U.S. marshal or another designated person (which can include an IRS employee). (44) The order to show cause includes a hearing date. A...