Taxpayers often do not want the IRS to have access to their information. This is understandable. The IRS has had problems keeping taxpayer information confidential.
Take the case of Ward v. United States, 973 F. Supp. 996 (D. Colo. 1997). In that case, the IRS director and agent disclosed the taxpayer’s information in a live radio interview broadcast in the taxpayer’s local area, the IRS disclosed information again by providing a written “fact sheet” to the Inside Edition/American Journal, and the IRS revenue officer disclosed the information to the public by posing notices on the outside of the taxpayer’s store. The court ordered the IRS to pay $325,000 in damages, but this was hardly enough to compensate the taxpayer for its actual damages. This is just one example.
Taxpayers may also wonder what the IRS is going to do with the information. The IRS is a government agency. It has the power to investigate and recommend criminal prosecution. As the recent controversy surrounding the IRS’s Tax Exempt Division denying non-profit applications to conservative political organizations shows, the IRS functions can be taken over by bad actors and used by those actors to harm particular taxpayers or groups.
Even if the IRS is able to keep information confidential and use it for an appropriate purpose, taxpayers may still wonder if the IRS is using its information gathering to harass or intimate them. The United States v. Clarke, 134 S.Ct. 2361 (2014) case is an example. In Clarke, the court found that the IRS issued an IRS summons in bad faith. See also, Five Audits in Ten Years is Not Harassment.
The courts have allowed the IRS to fish for information. But how much fishing is permissible? How much is overbroad?
There has to be a balance these concerns with the IRS’s legitimate need for information. But where exactly is that line? The IRS summons enforcement cases provide the answer.
This brings us to the recent Byers v. United States, No. 19-1893 (6th Cir. 2020) case. In Byers, the court considered whether there is a “reasonable basis” requirement for all IRS summonses. Those who receive an IRS summons may be dismayed by the answer.
Facts & Procedural History
The petitioner in this case received notice from her bank that the IRS issued a summons to obtain her records. The bank noted that the records were being requested for her then ex-husband.
An IRS agent then requested an interview with the petitioner. It was in relation to the petitioner being liable for tax promoter or similar penalties.
The IRS agent issued additional summonses.
Litigation with the IRS ensued. The petitioner filed a motion to quash, which the district court denied.
The petitioner appealed the case, asking the question “Shouldn’t the government have to give a reason why it wants my information?”
About the IRS Summons Power
Section 6201 provides the IRS’s general grant of authority to make inquires and assess tax. The courts have read this grant of authority broadly, allowing the IRS to issue summonses to obtain information related to a tax liability, tax penalty, etc.
The IRS summons is just a piece of paper that is sent to the taxpayer or third party. It is an administrative document, not a court document. If the recipient does not comply with the IRS summons, the IRS has to ask the Federal district court to enforce the summons.
The IRS’s authority is not limited to issuing summonses to the taxpayer. It can issue the summons to third parties, such as the taxpayer’s banks, customers, vendors, etc. Section 7602 gives the IRS this authority. Subsection 7602(c) requires the IRS to provide the taxpayer with notice of the summons and Section 7609 affords the taxpayer the ability to contest the summons.
The taxpayer who receives an IRS summons or notice of the summons issued to a third party can file a motion to quash the IRS summons. This motion is filed in Federal district court.
The government’s response is typically to file a motion to dismiss and, in the alternative, a motion for summary judgment.
The IRS also has the authority to issue summonses to third parties and not identify the taxpayer. These summonses are referred to as “John Doe” summonses (here is an article covering John Doe summonses). This authority is found in Section 7609. It requires the court to authorize the issuance of the summons. There are several additional limits on the IRS’s ability to issue John Doe summonses, including the requirement that there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with our tax laws.
The Powell Factors
Not surprisingly, there have been quite a few challenges to IRS summonses. These court cases clarify that the IRS has some limitations on its broad summons power and what the court will consider at the court hearing.
Section 7602(d) and the courts have made it clear that the IRS’s civil summons cannot be issued as part of a criminal investigation. The IRS summons can be, and sometimes is, issued by the IRS prior to the referral to the Department of Justice. The IRS summons can be issued when the IRS agent or officer has a full belief that the case will eventually be referred to the Department of Justice. This often comes up in cases where there is a problem tax return, such as a tax return that omits a significant amount of taxable income. Given this limitation, the court will first require the IRS to show that a referral has not been made to the Department of Justice as part of the summons enforcement hearing.
Then the court moves on to the requirements for a valid summons. These requirements are set out in the leading court case, United States v. Powell, 379 U.S. 48 (1964). This court case sets out four factors that the IRS has to establish for a summons to be upheld. These “Powell factors” are that the:
- investigation will be conducted pursuant to a legitimate purpose,
- inquiry may be relevant to the purpose,
- information sought is not already within the IRS’s possession, and
- administrative steps required by the tax code have been followed.
The hearing on a motion to quash is a limited evidentiary hearing to allow the court to decide whether the Powell factors have been established.
The Reasonable Basis Requirement
With this background, we can consider the current case. The case did not involve a John Doe summons. It identified the petitioner’s then ex-husband as the taxpayer.
The petitioner argued that the “reasonable basis” requirement for John Doe summonses should apply. She cited Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985). Tiffany Fine Arts involves a summons for known and unknown persons who may have violated the tax laws. The Court focused on the addition of the “unknown” persons. The Court said that the IRS summons did not have to comply with the John Doe requirements if it was issued for a specific person and unknown persons in combination. If it was just for unknown persons, then the IRS summons had to comply with the John Doe summons requirements. By combining the summons with a known taxpayer, it was no longer a John Doe summons.
The court in the current case did not agree with the petitioner. It refused to read the Code to imply that there was a “reasonable basis” requirement for IRS summonses that identify specific taxpayers.
The court did not feel that it needed to add a “reasonable basis” requirement as the Powell factors provide limits on the IRS’s summons power. As shown by the petitioner’s arguments in the case, the Powell factors provide a very minimal check on the IRS’s summons powers. This case confirms that the IRS has broad authority to obtain information.
While not an issue, in this case, the IRS can also reach tax attorney communications despite claims of attorney-client privilege. If the IRS is seeking privileged communications, one has to carefully study the crime-fraud exception to the attorney-client privilege.
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