In its Annual Report to Congress, the Taxpayer Advocate Service (TAS) recently reported summons enforcement actions under Internal Revenue Code (Code) Sections 7602, 7604, and 7609 as one of the “Most Litigated Issues” this year. Below, we summarize the general law related to summons enforcements actions and the findings set forth in the Annual Report.
Code Section 7602 authorizes the Internal Revenue Service (IRS) to issue a summons to examine taxpayers’ books and records or demand testimony under oath. The IRS’s authority to issue a summons to acquire information also extends to third parties. A summons is not self-enforcing; thus, the government must file suit in local district court to seek enforcement of a summons issued to the taxpayer.The taxpayer may then oppose enforcement and assert appropriate defenses. In circumstances dealing with third party summons, any person entitled to notice of the summons may petition to quash the summons and may intervene in any proceeding regarding the summons’ enforceability.
Every year since 2005, summons enforcement actions have been designated as a Most Litigated Issue in TAS’ Annual Report to Congress. In 2005, TAS identified 44 cases involving IRS summons enforcement issues. The IRS pushed to initiate more summons enforcement, resulting in a steady increase until a peak at 158 cases involving summons enforcement issues for the period ending May 31, 2009. Since the May 31, 2009 peak, the number of cases involving summons enforcement issues also steadily declined with the exception of an uptick for the period ending for the year ending May 31, 2012. During the fiscal year between June 1, 2015 and May 31, 2016, 87 federal cases involved IRS summons enforcement issues, a small jump from 84 cases in the preceding fiscal year.
The IRS has prevailed in most summons enforcement actions. For example, in the period between June 1, 2015 and May 31, 2016, the IRS obtained a 91 percent success rate, prevailing in 79 of the 87 federal cases decided involving IRS summons enforcement issues. A substantial percentage of taxpayers appeared pro se. Of the 87 summons enforcement cases, taxpayers were represented in 38 cases and appeared pro se in the remaining 49 cases.
To enforce an IRS summons, the IRS bears the low initial burden to show the requirements set forth in United States v. Powell, 379 US 48 (1964) are satisfied. For the period between June 1, 2015 and May 31, 2016 the government petitioned to enforce 58 cases. The government failed to meet its initial burden in only one case where the IRS was already in possession of the documents it sought, and therefore failed the Powell test.
The burden shifts to the recipient of the summons if the IRS satisfies the Powell requirements. The summons can be challenged in many ways, including: (1) demonstrating enforcement of the summons would be an abuse of process; or (2) establishing that the information is protected by a privilege such as the Fifth Amendment privilege, attorney-client privilege, tax practitioner privilege under Code Section 7525, or work product privilege.
Given the government’s low threshold to meet the Powell requirements, taxpayers many times assert privilege claims as a defense to enforcement. During the fiscal year ended May 31, 2016, two US Courts of Appeals facing cases of first impression each unanimously held that the Bank Secrecy Act’s requirement for taxpayers’ maintain records falls under the required records exception of the Fifth Amendment privilege. Taxpayers, therefore, could not successfully invoke the Fifth Amendment privilege to avoid producing the records that are required to be maintained under the Bank Secrecy Act.
In a highly publicized case, Microsoft was able meet the standard for obtaining an evidentiary hearing. It did so by asserting that the IRS improperly delegated a government function when the IRS hired an outside law firm to assist in an audit. Although Microsoft successfully obtained an evidentiary hearing, the court concluded that the delegation was not prohibited by Code Section 7602, and granted the IRS’ petition to enforce the summons.
Practice Point: While the number of cases involving summons enforcement issues has come down since its peak in 2005, this area continues to be a notable source of litigation. Taxpayers that anticipate receiving a summons, or that have received a summons, need to be aware of all available defenses and the strength of their specific case in deciding whether to comply with the summons or challenge any enforcement action in court. In making this decision, taxpayers need to consider any waiver issues and all the fact that summons enforcement proceedings in district court are a matter of public record and might attract attention in the press.