The Irs's Failure to Comply: Does "shall" Still Mean "shall"?
| Publication year | 2016 |
The IRS's Failure to Comply: Does "Shall" Still Mean "Shall"?
Whitney B. Arp
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The Internal Revenue Service (IRS) routinely issues summonses to compel taxpayers or third parties to testify and produce "any books, papers, records or other data" relevant to an inquiry. 1 Section 7609(a)(1) of the Internal Revenue Code (the Code) requires that the notice of summonses "shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined."2 However, there is a discrepancy as to whether the IRS's failure to comply with the notice requirement renders the summons unenforceable.3
By answering this question, a court provides a bigger picture of whether "shall" represents a mandatory command or simply serves as a suggestion that does not demand compliance.4 "First, shall is the most important word of legal drafting—contracts, wills, trusts, and the many forms of public and private legislation . . . . Shall is the very word that is supposed to create a legal duty. Second, shall is the most misused word in the legal vocabulary."5 Unfortunately, even circuit courts have been unable to agree on the correct approach to address this issue.6
Five circuit courts—the First, Second, Fifth, Sixth, and Eleventh Circuit Court of Appeals—have openly refused to enforce the
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twenty-three day requirement as a mandatory command and upheld the IRS's summonses even if they were delivered after the deadline.7 The Tenth Circuit Court of Appeals recently decided Jewell v. United States, which not only reinforced "shall" as a mandatory command, but created a circuit split on the IRS's obligation to comply with § 7609(a)(1).8 This Note discusses the circuit split surrounding the IRS's third-party summonses, Code § 7609(a)(1)'s "shall be given" twenty-three day notice requirement, and courts' interpretations of the legal term "shall."9
Part I introduces the IRS's summons power10 and examines the limits on this power imposed by Congress and the additional rules governing third-party summons.11 Further, Part I presents the grounds for challenging a summons, particularly the IRS's failure to satisfy the requirements established in United States v. Powell.12 After examining the requirements for the IRS to make a prima facie case for enforcement of a summons, the issue will be narrowed to one simple element: "[whether] the administrative steps required by the Code have been followed."13 Lastly, Part I discusses the controlling precedent leading to the recent circuit split.14
Part II analyzes the divide between the circuits regarding the application of the Powell requirements,15 some courts' tendency to consider the totality of the circumstances,16 and the circuit split
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created by the Tenth Circuit's strict interpretation in Jewell v. United States.17
Finally, Part III discusses a proposal for an agreement that the IRS must follow the statutory requirements of the Code and a uniform enforcement of "shall" as a mandatory command. 18 This Part supports this proposal by discussing growing disapproval by courts of the IRS's failure to comply with its own Code 19 and the importance of the interpretation of "shall" within the legal community.20
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A. The IRS's Summons Power
The IRS has far-reaching examination and inspection powers, including the authority to issue a summons.21 "Traditionally, the IRS . . . used summonses only as a last resort after exhausting [all other] means of obtaining information."22 Code § 7602 grants the IRS summons powers for multiple purposes,23 but probable cause is not required to support the issuance or enforcement of a summons.24 "[A] summons may be issued merely on 'official curiosity.'"25 Additionally, the type of information the IRS can obtain is almost limitless.26 The IRS may issue a summons to compel a taxpayer or third party to testify and produce "any books, papers, records or other data" relevant or material to an inquiry.27
Not all IRS summonses are created equal.28 Summonses issued to third parties holding financial information about the taxpayer, such as banks, consumer reporting or credit agencies, brokers, attorneys, and accountants, are subject to special rules. 29 A "third-party recordkeeper" summons initiates deadlines and a procedure for
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objection that is governed by Code § 7609.30 First, the taxpayer named in the summons "shall be given" notice within three days of service on the third party and at least twenty-three days before the examination date.31 The taxpayer then has a deadline to file a petition to quash the summons and stop the third party's compliance pending judicial proceedings.32
The taxpayer under investigation may challenge the summons on any appropriate ground, including: (1) the IRS failed to satisfy the requirements set out in United States v. Powell; (2) the summoned party does not have actual or constructive possession of the requested documents; (3) the summoned party has already complied with the summons; (4) the summoned materials are protected from disclosure; (5) compliance with the summons would impose an unreasonable burden on the summoned party; or (6) the summons violates a constitutional or express statutory protection.33 The taxpayer must act within the timeframe allotted to him under § 7609(b)(2), which is within twenty days of receiving notice, or his right to intervene and petition to quash the summons is lost.34
B. The Powell Standard
The IRS's compliance, or lack thereof, with the requirements in United States v. Powell, is the disputed issue within the context of third party summonses. Under Powell, the summons must: (1) be issued in an examination being conducted for a legitimate purpose; (2) seek information relevant to that purpose; (3) seek information not already within the IRS's possession; and (4) satisfy all administrative steps required by the Code.35 All four requirements are
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necessary for the IRS to make a prima facie case for enforcement of a summons, but most of the parties in the following cases agree that the fourth prong determines whether the summons must be quashed.36
"While failure to comply with required statutory or constitutional procedures generally renders the summons unenforceable," this element provides taxpayers the least amount of assistance in fighting against summonses.37 Courts are willing to enforce summonses despite the IRS violating one of its own internal procedures or guidelines,38 and are very generous to the IRS when defining sufficient notice.39 For various reasons, five circuit courts rejected petitions to quash summonses when the IRS failed to comply with the requirements under § 7609.40
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C. Creating a Circuit Split
The first decision, over fifteen years after the Supreme Court decided Powell, came from the Fifth Circuit in United States v. Bank of Moulton.41 The Fifth Circuit emphasized the government's good faith and the absence of material injury to the taxpayer, rejected the application of Powell, and justified enforcement of the summons to avoid promoting "form over substance."42 Twelve years later, the First Circuit decided Sylvestre v. United States.43 The First Circuit held the IRS summons enforceable despite the notice falling two days beyond the statutory provision's requirement.44 In addition to looking for bad faith or harm to the taxpayer, the court also considered the purpose of the notice statute.45 Because the taxpayer was able to timely move to quash the summons before any records were examined, the court felt the IRS complied with the intent of the statute.46
In 1997, the Sixth Circuit found the summonses in Cook v. United States enforceable despite the IRS conceding that it had technically violated Code § 7609(a)(1). 47 The Sixth Circuit reasoned that quashing the summonses for missing the deadline by one day was not an "effective and efficient enforcement of the national revenue laws" and created a "futile and pointless duplication of effort [for] the government . . . ."48 This allowed the trial court to exercise discretion in excusing the IRS's technical violation if the taxpayer was not substantially prejudiced by the violation.49 In Adamowicz v. United States IRS, the Second Circuit followed the other circuits and weighed the enforceability of the summons on "the totality of the
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circumstances, including the seriousness of the infringement, the harm or prejudice, if any, caused thereby, and the government's good faith."50 The Eleventh Circuit also came to the same conclusion in Azis v. United States Internal Revenue Service.51
Of these five circuits, four courts acknowledge the Powell requirement, but failed to interpret the "shall be given" notice requirement as a mandatory command. 52 Even after evaluating Powell, one court did not classify the twenty-three day notice requirement to be a tax Code administrative step.53 Recognizing that it was creating a split among circuits, the Tenth Circuit took a strict approach to the twenty-three day notice requirement and quashed a third-party summons because the IRS did not give the taxpayer proper notice.54 The Tenth Circuit classified the statutory notice requirement as an "administrative step," and felt obligated to apply the Supreme Court's Powell test.55 Further, the court clarified the meaning of "shall" as a mandatory intent, upholding "the age-old precept that 'shall' means 'shall.'"56
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From this brief overview of the decisions that have addressed this issue, it is clear that there is a divide among the circuits.57 Although there are many judicial decisions indicating that "shall" represents a mandatory command,58 most circuits struggle with extending that idea to Code § 7609(a)(1).59 Despite their...
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