A. Technical or Administrative Noncompliance. A summons may be resisted where it does not comply with the administrative steps required, and/or contain necessary information, such as identification of the taxpayer, the periods at issue, the records sought, or the time and place for the witness to appear. While courts may expect the IRS to adhere to administrative formalities, minor failures may be excused where there is no prejudice to the taxpayer. Unless there is another basis to resist, technical noncompliance easily can be cured by withdrawal of the defective summons and the issuance of a new one. Instead, the practitioner would serve the taxpayer best by working with the Service to agree on the scope of the summons as well as the time, place, and method of compliance.
B. Relevance. Any summons can be challenged on the ground that it seeks irrelevant information.
While the IRM indicates that the examining agent must describe why the information sought is relevant, relevance is not measured in the sense of evidence. As noted in Part I of this blog post, the government thinks this burden is so slight as to allow a fishing expedition into a taxpayer’s records.
While the test is not onerous, some connection between the information sought and the purpose of the examination should be provided. The articulated standard is simply that the information “might…throw…light upon the correctness of a return.” Relevance can only be determined on a case-by-case basis and will depend on the particular problem faced by the taxpayer.
C. Improper Purpose. As noted in Part I, one of the Powell requirements is that a summons be
issued in good faith for a proper purpose. Thus, a taxpayer may argue improper purpose to defeat
a summons. Proper purpose is not determined by looking at the individual IRS agent’s personal
intent or motivation, but by an examination of the so-called “institutional posture” of the IRS. This
approach was first enunciated in United States v. LaSalle Nat’l Bank, 437 U.S. 298 (1978), which
reduced the challenges taxpayers can raise to summonses by eliminating the agent’s personal motivation
for and objective in gathering evidence. The focus of the inquiry is on the IRS’s motivation as an institution. Thus, the taxpayer must essentially disprove the existence of a valid purpose by the IRS in issuing the summons.
Institutional bad faith is a relatively hot topic in summons enforcement. In United States v. Clarke,
517 Fed. Appx. 689 (11th Cir. 2013), the Eleventh Circuit held that a summonsed party who merely
alleged improper purpose was entitled to an evidentiary hearing to question IRS officials about their
reasons for issuing the summons. In Clarke, the summons opponent alleged at least four improper
bases for issuing the summons (without evidentiary support), including retaliation for refusing to
extend a statute of limitations deadline. The Eleventh Circuit referred to its position as “the legitimate
offspring of the Supreme Court’s decision in [United States] v. Powell.” In United States v.
Powell, 379 U.S. 48 (1964), the Supreme Court explained that a party opposing a summons is entitled
to an adversary hearing where the summons may be challenged on any appropriate ground.
The Third and Fifth Circuits had long permitted limited discovery at the outset of a summons enforcement proceeding. The Firth Circuit went so far as to suggest that a taxpayer who merely alleges
the IRS summonsed him for an improper purpose should be entitled to a deposition of the
agent. Slightly more stringent was the First Circuit’s approach, suggesting that the agent could be
cross-examined at the summons enforcement hearing. The United States Supreme Court granted
certiorari for an appeal of the Eleventh Circuit’s Clarke decision. On June 19, 2014,8 the United States Supreme Court unanimously overruled the Eleventh Circuit (and resolved any circuit split) by ruling that a simple “allegation of improper purpose” without any “factual support” is not a sufficient enough to entitle a taxpayer to “question IRS officials concerning the Service’s reason’s for issuing the summons:” As part of the adversarial process concerning a summons’s validity, the taxpayer is
entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge .... [A]lthough bare assertion or conjecture is not enough, neither is a fleshed out case demanded: The taxpayer need only make a showing of facts that
give rise to improper motive. The goal, the Court said, is to avoid “turning every summons dispute into a fishing expedition for official wrongdoing.” Whether a taxpayer provides enough evidence to support an allegation of improper purpose will now be decided under the new “specific facts or circumstances plausibly raising an inference of improper motive” standard. Clarke’s more stringent evidentiary standard for challenging a summons should help to keep down the cost of summons enforcement for the government by limiting challenges to cases where the taxpayer does have some evidence of improper purpose. Specific arguments a taxpayer may raise as improper purpose include more than the harassment alleged in Clarke. Other examples of improper purpose include (1) improper communications between Examination Division and IRS Office of Appeals; (2) retaliation for the taxpayer’s assertion of other rights; (3) using a summons to circumvent a court’s discovery rules; (4) using “fruit of the poisonous tree” to prepare a summons; (5) using information to prepare summons that was obtained by fraud; and (6) affirmative misrepresentations by civil examiners regarding the nature of the examination. (i.e. criminal rather than civil).
D. Material in Service’s Possession. As noted above, to obtain enforcement, the government must make a prima facie showing that the requested information is not in its possession. The summonsed
party will then have the burden of showing the opposite. Unless the party previously provided the information, or can specifically demonstrate that it was provided by someone else, this defense is not likely to succeed. Practically speaking, the summonsed party should be able to make such a showing to the Service, if at all, before a summons enforcement proceeding is even commenced. Also relevant in this regard is IRC § 7605(b), which provides the general rule that the IRS is entitled to only one examination of a taxpayer’s books and records for each taxable year. This rule does not apply to third-party summonses. Despite this “one-inspection rule,” the IRS has been successful in showing it does not have “possession” of information in cases where it seeks another look for a different or additional purpose. (In cases where the IRS seeks repeated examinations of the same records, a taxpayer could also argue harassment as an improper purpose defense, see above). The IRS also has been successful in showing it does not have “possession” in cases where documents are difficult to retrieve,10 and where documents sought are originals rather than copies.
E. Documents Not in Party’s Possession, Custody, or Control. Possession, custody, and/or control issues must be raised as a defense in the summons enforcement action. Where the summonsed party can sufficiently demonstrate a present inability to produce the requested documents, the summons cannot be enforced.
F. Justice Department Referral in Effect. Before the Tax Equity and Fiscal Responsibility Act
(TEFRA) was enacted in 1982, controlling Supreme Court precedent prohibited the IRS from issuing a summons in connection with a criminal investigation. IRC § 7602(b) now permits the use of a summons to gather information for a criminal investigation. IRC § 7602(d), however, limits the use of a summons to cases in which there is no Justice Department referral in effect. A “Justice Department referral” is in effect when (i) the Secretary has recommended to the Attorney General a grand jury investigation or the criminal prosecution of a person with respect to any offense connected to the administration or enforcement of the internal revenue laws, or (ii) any request is made by the Attorney General for disclosure of a taxpayer’s return information pursuant to IRC § 6103(h)(3) (B). Even if a Justice Department referral is not in effect, the IRS may not issue a summons or seek enforcement of a summons if it has already made an institutional decision to make such a referral. This would constitute improper purpose under LaSalle Nat’l Bank’s institutional purpose test.
G. Fourth Amendment. An IRS summons requiring disclosure of records constitutes a Fourth
Amendment “search.” Noticeably absent from Powell’s four-part test for enforceability of a summons
is probable cause. Powell does not require probable cause, and a summons that complies with its requirements generally satisfies the Fourth Amendment prohibition against unreasonable searches and seizures. Where the information used to prepare a summons resulted from an unconstitutional search, however, the summons may be challenged under the Fourth Amendment (as well as improper purpose, see above).
H. Fifth Amendment Privilege Against Self Incrimination. A summonsed party is certainly entitled
to assert the Fifth Amendment privilege against self-incrimination. As in other situations, this privilege is limited to protect the witness against real dangers, and it is up to a court of law to determine whether invocation is justified. The protection is not available to avoid the production of records of a collective entity (e.g., a corporation, partnership, or LLC) held by the summonsed party in a representative capacity. It should be kept in mind that blanket assertion of the privilege is not sufficient; it must be asserted in response to specific inquiries. If the summonsed party is not given the opportunity to invoke the privilege question by question, he has not waived it. In other words, it is the government’s responsibility to ask specific questions. If the IRS, on the basis of a blanket assertion, excuses the summonsed party, the Service may be found to have waived compliance, making the summons unenforceable. A common Fifth Amendment issue is when the summonsed party invokes the privilege claiming that the act of production itself is “testimony” which may incriminate the witness. The argument is that the production itself is an admission that the records exist and are in the possession or control of the summonsed party. The act of production may also constitute an authentication of the records because they are produced pursuant to the “belief that the papers are those described in the summons.” This argument is, however, limited by two exceptions, the “foregone conclusion” doctrine
and the “required records” exception.
The Fifth Amendment does not protect the production of documents where the IRS demonstrates
the existence, possession, and authenticity of the requested documents as a “foregone conclusion.”
Said another way, where the IRS already knows about the documents (and can provide some level of proof), the act of production no longer rises to the level of “testimony,” and is therefore not protected by the Fifth Amendment.
The “required records” exception applies to the disclosure of documents which persons in certain
industries are required to keep by statute or regulation. Courts generally apply a three part test to
determine whether the required records exception is applicable: (1) the purpose of the investigation
must be essentially regulatory, (2) records sought are of a kind which the regulated party customarily
keeps, and (3) records have assumed “public aspects” which make them analogous to public documents. For example, the “required records” exception has been specifically and repeatedly
invoked to compel production of records of foreign bank accounts required to be kept under the
Bank Secrecy Act. Conversely, records merely maintained to determine a taxpayer’s liability for
personal income tax have been held to be not within the required records exception.
I. Attorney Client and Work Product Privileges. While the scope of this article does not permit a comprehensive discussion of the elements of the attorney-client and attorney work product privileges,
the practitioner should be aware that, when cited appropriately, they can be used to prevent summons enforcement. A few observations on privilege are appropriate. Blanket assertions of privilege are generally unacceptable; as with the Fifth Amendment privilege, these privileges must be asserted in response to a specific question or document. Matters of fact, such as a client’s identity or the fees charged by the attorney are not privileged. The IRS may take the position that retainer agreements or engagement letters are not privileged, but where they describe the representation in any way, care should be exercised. Legal invoices that have descriptions of the work performed should be regarded as privileged, and if they must be produced, all detail (other than number of hours and rates) should be redacted carefully. Be aware of the rules regarding waiver, and take care to limit the scope of any express or implied waiver. Documents and communications that were not intended to be privileged do not become so simply because they were provided to an attorney.
J. Tax Practitioner Privilege. IRC § 7525 creates a statutory privilege providing the same common
law protections of the attorney-client privilege to communications pertaining to “tax advice”
between a taxpayer and any “federally-authorized tax practitioner.” The privilege applies to the same extent as if the communication were between a taxpayer and an attorney. The privilege under IRC § 7525 may only be asserted in non-criminal tax matters before the IRS and non-criminal tax proceedings in federal court actions brought by or against the United States. The privilege cannot be asserted against any other federal or state agencies. In addition, the privilege does not apply to any written communication in connection with the promotion of or participation in a tax shelter. IRC § 7525(b). Practitioners should note that the privilege has been held inapplicable to communications relating to the preparation of tax returns.
K. Withdrawal of Consent. It should be noted that the owner of records already produced pursuant
to summons (without a court order) may at any time request their return. Such a request constitutes
revocation of consent to use the records. The request may be formal or informal, written or oral, and there is no specific revocation language required. If the IRS retains records once consent is withdrawn, the Fourth Amendment may apply absent a court order allowing the IRS’s use of the documents.
Practitioners should also be aware that fees and costs are available for summoned witnesses. This
is important because in larger cases, third parties may be summonsed to search for and produce large volumes of information. Costs of compliance can be substantial in those cases. IRC § 7610 provides for witness fees and costs for witnesses summoned to appear before the IRS. In addition to the witness fee and mileage (or other transportation costs), the IRS is required to reimburse reasonably necessary costs incurred by the witness in searching for, reproducing, or transporting books, papers, records, or other data requested in a summons. Search and reproduction costs are not available to persons to whom the requested records belong or to the taxpayer being examined, his officers, employees, agents, accountants, or attorneys, acting in such capacity at the time the summons is served. In other words, recovery these costs are only available to third parties. The procedure for obtaining search and reproduction costs can be found at IRM § 25.5.9.
Generally, costs are payable upon request where the witness has satisfactorily complied with the
summons and submitted an itemized bill or invoice. Defective invoices must be returned to the witness
within 7 days along with notice, in writing, of all such defects and a request for resubmission.
All other invoices must be timely processed and paid. Witness fees and travel expenses are also payable upon request and include a per diem rate (currently $40), and travel/mileage expenses as
provided by 28 U.S.C. § 1821 and the General Services Administration (GSA).
The conclusion to be drawn is that the IRS certainly has the advantage in summons enforcement
proceedings. The law recognizes the importance of the IRS’s ability to summons records relevant to its investigations, both civil and criminal. Its authority is not unfettered however, and the savvy practitioner will know when there is an opportunity to present a valid defense to an IRS summons.
Defenses should be selected wisely, however, for a frivolous or weak argument may instead be seen as an indicia of fraud and do more harm than good.
http://www.law.cornell.edu/supct/cert/13-301
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