Taxpayers frequently ask their tax attorney what they need to do if they receive an IRS summons. Internal Revenue Code (IRC) § 7602 provides the Internal Revenue Service with summons authority. IRC § 7601 authorizes the IRS to inquire about any person or taxpayer who may be liable to pay any internal revenue tax. Moreover, IRC § 7602 authorizes the Service to summon a witness to testify and to produce books, papers, records, or other data that may be relevant or material to an investigation. United States v. Powell, 379 U.S. 48 (1964).
The authority under 7601 to inquire about the books and records does not include the authority to summon. In general, the Internal Revenue Service should issue summonses only when the taxpayer (or other witnesses) will not produce the desired records or other information voluntarily. Therefore, when a taxpayer or third person is willing to testify and/or produce documents voluntarily, a summons should not be required. In such cases, revenue officers and revenue agents may only need to produce their credentials or use an IRS information document request.
What is a Third Party Summons?
An IRS third-party summons is a summons issued to any person other than the taxpayer being examined or investigated, or an officer, employee, agent, accountant, or attorney of a taxpayer. Also, third-party recordkeepers are defined in IRC § 7603(b)(2). Pursuant to that section, third-party records are defined as books, papers, records, or other data in which the taxpayer does not have a proprietary interest at the time the summons is served. Typically, this is a bank.
How did the Taxpayer First Act Change the IRS Summons Notice Requirements?
During the course of an IRS audit, the IRS is required to notify a taxpayer before initiating third-party contacts to investigate the taxpayer. Testimony before Congress about IRS summons notice stated that this notice had become routine at the beginning of any given audit. Moreover, it no longer served to provide actual notice to the taxpayer under audit of impending contact with third parties. Previous law said the IRS may not contact anyone other than the taxpayer to determine or collect taxes without providing reasonable notice.
However, the Taxpayer First Act requires that the IRS provide notice to taxpayers before contacting third parties, including friends, neighbors, and clients, closer in time to such contacts being made. The new notice requirements are found in IRC 7602(c). New IRC 7602(c) now requires 45 days’ notice before the beginning of the period of contact. Also, the period of contact may not be greater than one year, which must be specified in the notice. The Act requires that the IRS notify the taxpayer only if there is a present intent at the time that the notice is given to the taxpayer for IRS to make such contacts.
What can an IRS Summons Require?
Before an IRS Revenue Agent or Revenue Officer issues any summons, the Service should consider:
- The possibility that judicial enforcement will be required, and
- The adverse effect on future voluntary compliance if enforcement is abandoned.
The summons should not require the witness to do anything other than appear on a given date to give testimony or produce existing books, papers, records, or other data. Furthermore, a summons cannot require a witness to prepare or create documents, including tax returns, that do not currently exist. However, a taxpayer may be required by a summons to appear and give testimony, or produce records that would allow the Service to complete a tax return for that taxpayer.
IRC § 7602 and the corresponding regulations, 26 CFR § 301.7602-1, also identify the purposes for which the Service may issue summonses. The purposes are:
- To ascertain the correctness of any return;
- To prepare a return where none has been made;
- To determine the liability of a person for any internal revenue tax;
- To determine the liability at law or in equity of a transferee or fiduciary of a person in respect of any internal revenue tax;
- To collect any internal revenue tax liability; or
- To inquire into any offense (civil or criminal) connected with the administration or enforcement of the internal revenue laws.
How do I Know if the IRS Summons is Valid?
In United States v. Powell, 379 U.S. 48, 57-58 (1964), the Supreme Court stated the standards the Service must meet to have its summons enforced. The Service must show that:
- The investigation will be conducted pursuant to a legitimate purpose;
- The inquiry may be relevant to the purpose;
- The information sought is not already within the Service’s possession; and
- All administrative steps required by the Code have been followed.
Moreover, the Supreme Court also held in Powell that a summons cannot be issued for an “improper purpose.” This includes using a summons:
- To harass the taxpayer;
- To pressure the taxpayer into settling a collateral dispute; or
- For any other purpose adversely reflecting on the “good faith” of the investigation.
Relevance and Immateriality of an IRS Summons
IRC § 7602 authorizes the Service to issue a summons to any person to produce for examination by the IRS any books, papers, records, or other data. Accordingly, this section also require such person to give such testimony, under oath, as may be relevant or material to the determination or collection of any internal revenue tax.
The question of what “may be relevant or material” depends on the facts and circumstances of each case. Subsequently, the Supreme Court has construed the words “may be relevant” as reflecting an express intent by Congress to allow the IRS to obtain items of even “potential relevance” to an ongoing investigation. United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984). At the same time, courts generally will not allow the IRS to use a summons as a mere “fishing expedition.” Furthermore, the test to determine “materiality” is whether the summoned documents or testimony “might throw light upon” the subject under legitimate inquiry.
Have you received an IRS Summons?
If you have received an IRS summons and have questions about it, contact Disparte Tax Law. You may have questions for a tax attorney about how to respond to such a summons.