The IRS has quite a few powers to encourage taxpayers to cooperate. The IRS summons is the most powerful tool the IRS has in its arsenal. While the taxpayer may not agree that the underlying tax is even owed, they still have to comply with the IRS’s summons.
The recent United States v. Battle, 213 F. App’x 307 (5th Cir 2007) provides a good example of this. The case involves unfiled tax returns. The IRS frequently uses the IRS summons to get records to enable it to prepare returns when a taxpayer fails to voluntarily file their own tax returns.
Facts & Procedural History
The taxpayer in this case is a Houston physician who filed “inaccurate tax returns,” thereby failing to pay $600,000 of income taxes for four tax years, and filed no tax returns for six tax years.
The IRS issued an administrative summons to the doctor to request that he turn over his records. The doctor failed to comply with the summons.
The government then petitioned the district court to enforce the summons.
About the IRS Summons
The authority for an IRS summons is found in Section 7602. An IRS summons is a legal document that requires a person or entity to provide information or documentation relevant to a tax investigation or audit.
The IRS summons can be issued to a third party or to the taxpayer. If served on a third party, the IRS still has to provide notice of the summons to the taxpayer (but not in collection cases, as there is an exception to notice in IRS summons collection cases).
The IRS may issue a summons to obtain a wide range of information, including books and records, testimony, and other documents relevant to the examination or investigation of a taxpayer’s tax liability. The taxpayer can then decide whether to comply or not.
If a taxpayer fails to comply with a summons, the IRS may seek enforcement of the summons in court. A court order compelling compliance with the summons can result in monetary penalties or even imprisonment for contempt of court if the person continues to refuse to comply.
The Powell Factors
The Powell factors are a set of four factors that a court may consider when determining whether to enforce an IRS summons. These factors were established in United States v. Powell, 379 U.S. 48 (1964). The four factors are:
- The investigation must be conducted for a legitimate purpose, such as determining the taxpayer’s correct tax liability.
- The information sought must be relevant to that purpose.
- The IRS must not already possess the information it seeks through the summons.
- The IRS must have followed the administrative steps required by the Internal Revenue Code, including the issuance of a summons that satisfies the requirements of the statute and relevant regulations, and the taxpayer must have been given notice of the summons and an opportunity to be heard.
The other question is whether the records are privileged, such as records protected by the attorney-client privilege.
These factors provide a framework for courts to evaluate whether an IRS summons is valid and enforceable. The burden of proof is generally on the IRS to demonstrate that the summons satisfies each of the four factors. If the court determines that the IRS has met this burden, it may enforce the summons, and failure to comply with the summons may result in penalties or other legal consequences.
Contesting the Liability
The doctor in this case did not raise an issue with any of the Powell factors. Instead, the doctor opted to represent himself at the summons enforcement hearing.
The doctor tried to use the hearing to contest the underlying tax assessment. As the court noted, the summons enforcement hearing is not an appropriate forum to contest the underlying tax assessment. The issue in a summons enforcement hearing is whether the taxpayer is required to turn over documents.
The district court ordered the doctor to appear in two weeks with an “attorney or accountant” to present the doctor’s challenges to the summons and to bring the records that the IRS requested to court with him. The court also suggested that the doctor pay 70% of the taxes assessed by the IRS to demonstrate the doctor’s good faith effort to comply with our tax laws.
The doctor appeared in court on the prescribed day with an accountant, but without a tax attorney or the records, and without paying any taxes. The court entered an enforcement order, requiring the doctor to appear with the records later that same day.
The doctor showed up later that day, again without the records or a tax attorney. The doctor argued that he had a Fifth Amendment right to not produce the documents, which the court gave little credence to.
The court then held the doctor in contempt of court and had him taken into custody. Three days later the doctor’s associate produced the requested records and the doctor was set free.
The doctor then appealed the contempt order and the enforcement order to the Fifth Circuit Court of Appeal – again, without the help of a tax attorney. In this appeal, the doctor made various arguments – all of which were, well, unsuccessful.
The IRS summons is a powerful tool that the IRS can use to obtain information and documentation relevant to a tax investigation or audit. Failure to comply with a summons can result in penalties, fines, and even imprisonment for contempt of court. The Powell factors provide a framework for courts to evaluate whether an IRS summons is valid and enforceable, and taxpayers can challenge the summons based on these factors. However, a summons enforcement hearing is not an appropriate forum to contest the underlying tax assessment. Taxpayers who receive a summons should seek the advice of a tax attorney who can help them navigate the process and explore options such as proffers, settlements, or other resolution methods.
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