Examination Authority of the IRS
The IRS has very broad examination authority pursuant to IRC § 7601(a) and United States v. Bisceglia, 420 U.S. 141, 75-1 USTC ¶ 9247 (1975). This authority exists as follows:
- Examination without a summons pursuant to IRC §7602(a)(1).
- Examination by use of a summons pursuant to IRC §7602(a)(2).
- Examination under oath pursuant to IRC §7602(a)(3).
However, the IRS Restructuring and Reform Act of 1998 amended the Code to prohibit the use of financial status or economic reality examination techniques to determine the existence of unreported income of any taxpayer unless the Secretary has a reasonable indication that there is a likelihood of unreported income.
Generally, during a correspondence, an office, or a field audit, the Service will first attempt to voluntarily obtain information from the taxpayer. The service center or tax auditor conducting a correspondence or office audit will usually do so by making an informal request by letter. A revenue agent conducting a field audit will usually do so by issuing an Information Document Request. The success of an informal investigation is contingent on the taxpayer’s voluntary compliance. It is the practitioner’s duty to determine when it is in the taxpayer’s best interest to voluntarily comply.
If the taxpayer is unable or unwilling to voluntarily provide the requested documentation or testimony, the IRS can resort to the use of a formal summons procedure to compel production of the requested documents or testimony. An enforceable summons must contain the following:
- The name and address of the person whose records the IRS seeks to obtain.
- The periods under investigation.
- The identity of the person being summoned.
- A description of the documents or information requested.
- The date, place and time for return of the summoned documentation or testimony.
The summons must be personally delivered to the person being summoned or left at the person’s last and usual place of abode. The return date of the summons must be no sooner than 10 days from the date of service of the summons. IRC §7605(a). If a summons is issued to a third-party recordkeeper, additional procedures have to be followed as detailed below. Prior to the passage of the IRS Restructuring and Reform Act of 1998, third-party recordkeepers were generally persons who held financial information about the taxpayer, such as banks, brokers, attorneys, and accountants. The IRS Restructuring and Reform Act of 1998 expanded the definition of “third-party recordkeeper” procedures to apply to summonses issued to persons other than the taxpayer. Thus, the taxpayer whose liability is being investigated receives notice of the summons and is entitled to bring an action in the appropriate U.S. District Court to quash the summons. As under the current third-party recordkeeper provision, the statute of limitations on assessment and collection is stayed during the litigation, and certain kinds of summonses specified under present law are not subject to these requirements.
When the IRS issues a summons to a “third-party recordkeeper” relating to the business transactions or affairs of a taxpayer, notice of the summons must be given to the taxpayer within three days by certified or registered mail. The taxpayer is thereafter given up to 23 days to begin a court proceeding to quash the summons. Prior to the passage of the IRS Restructuring and Reform Act of 1998, the IRS was required to serve the summons on the third-party recordkeeper by either delivering the summons to the third-party recordkeeper personally or by leaving it at the usual place of abode. The law now permits service of third party recordkeeper summonses by registered or certified mail.
If the taxpayer does so, third-party recordkeepers are prohibited from complying with the summons until the court rules on the taxpayer's petition or motion to quash, but the statute of limitations for assessment and collection with respect to the taxpayer is stayed during the pendency of such a proceeding. The “third-party record keeper” summons provisions apply only to examinations summonses and not summonses issued in the course of collection.
The IRS Restructuring and Reform Act of 1998 amended IRC §7602(c )(1) to prohibit the IRS from contacting any person other than the taxpayer with respect to the determination or collection of the tax liability of the taxpayer without providing reasonable notice in advance to the taxpayer that the IRS may contact persons other than the taxpayer. It is intended that in general this notice will be provided as part of an existing IRS notice provided to taxpayers. The IRS is also required to provide periodically to the taxpayer a record of persons previously contacted during that period by the IRS with respect to the determination or collection that taxpayer’s liability. The record shall also be provided upon the request of the taxpayer. The provision does not apply in criminal tax matters, if the collection of the tax is in jeopardy, if the Secretary determines for good cause shown that disclosure may involve reprisal against any person, or if the taxpayer authorized the contact.
The taxpayer voluntarily complies with a summons by appearing at the specified time and place, and by producing the requested documents or testimony. Even if the person summoned objects to the scope or propriety of the summons, he or she must appear to raise the objections.
Any form of voluntary compliance can be withdrawn at any time. If the taxpayer withdraws his or her consent, the Service must return all original documents to the taxpayer, and can no longer make copies of originals. However, the Service is free to keep all copies of documents made prior to withdraw of the voluntary compliance. See Richard A. Vaughn, DDS, P.C. v. Baldwin, 950 F.2d 331 (6th Cir. 1991). Generally, if a taxpayer withdraws consent, and the Service no longer needs the documents, the Service returns the documents to the taxpayer. However, if the Service in not through examining the documents, the Service will seal the documents immediately upon receipt of the withdraw of consent, notify the taxpayer that the documents have been sealed (within two business days of the withdraw of consent), and begin a summons enforcement proceeding in federal district court. See IRM 52(12)(10) (7-15-92).
If the person summoned voluntarily complies but later withdraws consent, or if the person summoned appears to raise objections, or fails to appear, the IRS can enforce the summons by commencing a proceeding in federal district court. The proceeding is commenced by the Service’s filing of a petition in the federal district court where the person summoned resides or is found.
As a practical matter, a practitioner representing a party who intends to comply with the summons but who requires additional time to do so, can contact the revenue agent who issued the summons to request additional time. Provided that the time requested is reasonable, the revenue agent will usually agree to the extension. This is because the revenue agent alone cannot determine whether or not to proceed with a summons enforcement proceeding.
The revenue agent can recommend summons enforcement, but said recommendation must then be reviewed by District Counsel. If District Counsel agrees with summons enforcement, the case is sent to the to the U.S. Attorney’s Office for review. The U.S. Attorney is usually the office responsible for filing the enforcement petition with the federal district court. Thus, by the time the administrative review is complete, the person summoned would usually have complied on the extended date and the administrative review is a waste of time.
Essential Elements of Summons Enforcement
If the case proceeds to enforcement, the essential elements for enforcement of a summons were determined by the Supreme Court in United States v. Powell, 379 U.S. 48 (1964).
- The summons must be issued for a legitimate purpose.
- The records sought must be relevant to the legitimate purpose.
- The required administrative procedures must be followed.
- The records must not already be in possession of the IRS.
The government's burden on the Powell requirements is usually satisfied by the conclusory allegations in the agent's affidavit. The summonsed person then has the burden of establishing that some defense to the summons exists.
Privileges
The attorney-client privilege is not as broad as many attorneys think. Generally, it only applies to confidential communications which have not been otherwise disclosed. A common law privilege of confidentiality exists for communications between an attorney and client with respect to the legal advice the attorney gives the client. Communications protected by the attorney-client privilege must be based on facts of which the attorney is informed by the taxpayer, for the purpose of securing the professional advice of the attorney. The privilege may not be claimed where the purpose of the communication is the commission of a crime or tort. The taxpayer must either be a client of the attorney or be seeking to become a client of the attorney.
The privilege of confidentiality applies only where the attorney is advising the client on legal matters. It does not apply in situations where the attorney is acting in other capacities. Thus, a taxpayer may not claim the benefits of the attorney-client privilege simply by hiring an attorney to perform some other function. For example, if an attorney is retained to prepare a tax return, the attorney-client privilege will not automatically apply to communications and documents generated in the course of preparing the return.
The privilege of confidentiality also does not apply where the communication is made for further communication to third parties. For example, information that is communicated to an attorney for inclusion in a tax return is not privileged because it is communicated for the purpose of disclosure. The privilege of confidentiality does not apply where an attorney is acting in another capacity, or where an attorney who is licensed to practice another profession is performing such other profession.
The attorney-client privilege is considered waived if the communication is voluntarily disclosed to anyone other than the attorney, the client or the agents of the client or the attorney. See Colton v. United States, 306 F.2d 633 (2nd Cir 1962). See also, Graves, Attorney Client Privilege in Preparation of Income Tax Returns: What Every Attorney-Preparer Should Know, 42 Tax Lawyer 577 (ABA No. 3, 1989). Additionally, the attorney work product doctrine is applicable to IRS summonses. Upjohn Co. v. United States, 81-1 USTC (CCH) ¶ 9138 (1981). Generally, the doctrine protects materials prepared in anticipation of litigation.
There is no Accountant-Client privilege under federal law. Couch v. United States, 409 U.S. 322, 335 (1973). However, communications and documentation between an accountant and an attorney, who was hired by the attorney for purposes of aiding the attorney in representing a client and rendering legal advice, are protected by the privilege. See U.S. v. Kovel, 296 F.2d 918 (1961).
The IRS Restructuring and Reform Act of 1998 added a provision which provides for the uniform application of confidentiality privilege to taxpayer communications with federally authorized practitioners.
The new law extends the present law attorney-client privilege of confidentiality to tax advice that is furnished to a client taxpayer (or potential client taxpayer) by any individual who is authorized under Federal law to practice before the IRS if such practice is subject to regulation under §330 of Title 31, United States Code. Individuals subject to regulation under §330 of Title 31, United States Code include attorneys, certified public accountants, enrolled agents and enrolled actuaries. Tax advice means advice that is within the scope of authority for such individual's practice with respect to matters under Title 26 (the Internal Revenue Code).
The provision allows taxpayers to consult with other qualified tax advisors in the same manner they currently may consult with tax advisors that are licensed to practice law.
The provision does not modify the attorney-client privilege of confidentiality, other than to extend it to other authorized practitioners. The privilege established by the provision applies only to the extent that communications would be privileged if they were between a taxpayer and an attorney. Accordingly, the privilege does not apply to any communication between a certified public accountant, enrolled agent, or enrolled actuary and such individual's client (or prospective client) if the communication would not have been privileged between an attorney and the attorney’s client or prospective client. For example, information disclosed to an attorney for the purpose of preparing a tax return is not privileged under present law. Such information would not be privileged under the provision whether it was disclosed to an attorney, certified public accountant, enrolled agent or enrolled actuary.
The privilege may not be asserted to prevent the disclosure of information to any regulatory body other than the IRS. The ability of any other regulatory body, including the Securities and Exchange Commission (SEC), to gain or compel information is unchanged by the provision. No privilege may be asserted under this provision by a taxpayer in dealings with such other regulatory bodies in an administrative or court proceeding.
The privilege of confidentiality created by this provision will not apply to any written communication between a federally authorized tax practitioner and any director, shareholder, officer1 employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in §6662(d)(2)(C)(iii)).
A tax shelter for this purpose is any partnership, entity, plan, or arrangement a significant purpose of which is the avoidance or evasion of income tax. Tax shelters for which no privilege of confidentiality will apply include, but are not limited to, those required to be registered as confidential corporate tax shelter arrangements under §6111(d) The Conferees do not understand the promotion of tax shelters to be part of the routine relationship between a tax practitioner and a client. Accordingly, the Conferees do not anticipate that the tax shelter limitation will adversely affect such routine relationships.
The privilege created by this provision may be waived in the same manner as the attorney-client privilege. For example, if a taxpayer or federally authorized tax practitioner discloses to a third party the substance of a communication protected by the privilege, the privilege for that communication and any related communications is considered to be waived to the same extent and in the same manner as the privilege would be waived if the disclosure related to an attorney-client communication.
The privilege of confidentiality may only be asserted in any noncriminal tax proceeding before the IRS, as well as in noncriminal tax proceedings in the Federal Courts where the IRS is a party to the proceeding or in the Federal courts with regard to a noncriminal tax proceeding where the United States is a party. This provision relates only to matters of privileged communications.
Lastly, the privilege against self-incrimination may apply pursuant to the Fifth Amendment to the United States Constitution. This privilege applies when the individual asserting the privilege can establish (1) compulsion, (2) a testimonial communication, and (3) the incriminating nature of the communication. An attorney cannot assert a fifth amendment privilege on behalf of a client. Additionally, in general, this privilege does not apply to corporations.
The taxpayer or any other witness cannot assert a blanket privilege in response to an IRS summons, IRS interrogation or grand jury proceeding. Instead, the taxpayer or testifying witness must appear and assert the privilege on a question-by-question or document-by-document basis. The privilege survives the death of the taxpayer.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
