IRS Information Gathering
Information Document Requests
The IRS typically asks that taxpayers provide information to the IRS. These IRS requests usually made in writing by way of an “information document request” or IDR.
The IDR is a Form 4562. There is no requirement to respond to an IDR.
To the extent the information is not provided, the IRS may issue an administrative summons to try to compel the production of information. The IRS summons is the primary means of enforcing information requests.
IRS Third Party Contacts
The IRS may also gather information by making third party contacts. The IRS’s ability to do so is limited.
Section 7602 provides that the IRS may not contact third parties without first providing the taxpayer under audit with notice of its intent to do so. The IRS also has to keep records of its third party contacts and it has to make these records available to the taxpayer under audit upon request.
Practically speaking, the IRS notifies taxpayers under audit of its intent to contact third parties in every audit. This requirement is satisfied by the IRS providing form letters and publications to the taxpayer at the start of the audit.
The IRS also has to follow certain protocols in making these third party contacts. This includes identifying the taxpayer and that the IRS employee actually works for the IRS. The IRS employee also has to explain that the contact is being made to determine a tax liability or to collect taxes.
The IRS Summons
If the IRS is not able to get the information it wants by issuing an IDR or making a third party contact, it may decide to issue an IRS summons.
The IRS summons is the IRS’s primary tool for fishing for taxpayer records and information.
The IRS’s summons power is broad. It can even reach records located in foreign countries.
With limited exceptions, the IRS has the authority to issue an IRS summons without court approval. Like a subpoena, the IRS summons must be served on the taxpayer or third party. This service is accomplished by hand delivery, leaving a copy at the last abode, or for third party record keepers, by delivery by certified or registered mail.
Once served, the taxpayer must act to comply with the IRS summons, choose not to comply with the summons, or bring a proceeding to quash the summons.
If the taxpayer fails to comply with the summons, the IRS may seek to have a court enforce the IRS summons. They court my or may not enforce the summons. If the court does not uphold the summons based on a technical foot fault, there is not much standing in the IRS’s way of issuing yet another summons.
It should also be noted that if the taxpayer brings suit to quash the IRS summons, the filing will suspend the statute of limitations for the assessment of tax and criminal liability.
If the taxpayer fails to act after a court has ordered enforcement, the court can and does impose sanctions on the taxpayer.
The Designated Summons
The IRS can also issue a “designated summons.” This is a special type of IRS summons that can only be issued to large corporate taxpayers.
This type of summons is unique in that the issuance of this type of summons unilaterally extends the statute of limitations for assessing tax. While this type of IRS summons is rare, the IRS uses this summons when the statute is about to expire and it needs more information.
How do you know if you received a designated summons? That part is easy. The document itself will say that it is a designated summons and it will cite Section 6503(j).
Choosing to Not Comply With an IRS Summons
Just because the IRS issues a summons does not mean that the IRS followed the law in doing so. It does not mean that the taxpayer or third party has to comply with the summons.
The leading court case is a prime example of this. The case is Powell v. United States, 379 U.S. 48 (1964). In Powell, the IRS issued a summons for information in a year that was outside of the normal three year audit period. The Supreme Court set out a four-factor test for determining whether an IRS summons is valid:
- The IRS summons is issued for a legitimate purpose,
- The inquiry may be relevant to the legitimate purpose,
- The IRS is not already in possession of the information, and
- The administrative steps set out in the Code have been followed.
If these factors are met, taxpayers may be forced to comply with the IRS summons.
The John Doe Summons
The John Doe summons warrants special care. This term refers to an IRS summons issued to a third party for taxpayers whose identities are not known.
There are special rules for John Doe summonses given that the IRS cannot provide the taxpayer name, which is required for IRS summonses. These rules obligate the IRS to first obtain court approval before issuing the summons. To do so, the IRS has to convince the court that there is a defined and identifiable group.
John Doe summonses are not to be taken lightly. The IRS often uses these summonses in sensitive and controversial cases, such as tax shelter cases. That the IRS chooses to use the John Doe summons says a lot.
The IRS has even asserted and one court has agreed that the John Doe summons trumps the attorney-client privilege. Thus, even attorneys may have to disclose their client list in response to a John Doe summons.
Get Help With Your IRS Problem
We are experienced tax attorneys in Houston, Texas. We help clients with IRS efforts to gather information, including IDRs, third party contacts, and IRS summonses.
If the IRS issues you and IDR or an IRS summons, you should contact you tax attorney immediately.
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