IRS Summons – Defending Against the Summons

The United States Supreme Court is considering an investor’s objection to summonses issued by the IRS. United States v. Clarke, No. 13-301.  Mr. Clarke, the investor, is arguing the IRS improperly issued summonses as retribution against him and his business partners for resisting an audit and that he should have an opportunity, in a court evidentiary hearing, to ask an IRS agent why he issued summonses. A three judge panel of the 11th Circuit Court of Appeals determined Mr. Clarke is entitled to an evidentiary hearing. The IRS objects and is arguing that the taxpayer already has protection for his legal rights and legal paths to challenge the summonses. Adding an evidentiary hearing could unnecessarily slow down tax enforcement.

The Court heard the arguments on April 23, 2014, and should render a decision by the end of its term in late June. While we wait for that decision, it is a good time to reflect on the options for a taxpayer who has to deal with a summons. Are these options enough?

The IRS has broad statutory authority (IRC Section 7602) to examine returns and to obtain information, but that authority is limited. The IRS can issue administrative summons to compel the production of   books and records or the testimony of witnesses.  If a taxpayer receives a summons, the taxpayer is required to appear at the time and place specified or permit the agent to have or make copies of the documents requested.

A possible response to the summons is to request clarification of the IRS requests and suggest alternative approaches. This may establish good will and be more productive than contesting imprecise or improper requests. Another response is to object to the summons and force the IRS to get an Order from a U.S. District Court to enforce it.

To enforce a summons, the IRS must petition a U. S. District Court (IRC Section 7402 and 7604) and establish the following:

  1. The examination to which the summons relates is being conducted for a legitimate purpose;
  2. The summons is seeking information that is relevant to that purpose;
  3. The IRS is not already in possession of the requested information; and
  4. All administrative steps required by the Internal Revenue Code have been followed.

The taxpayer can challenge the summons for not fulfilling any of those requirements. The taxpayer can also argue the summons violates his or her privileges:

  1. Attorney-client privilege,
  2. Tax practitioner privilege,
  3. Work product doctrine, and
  4. Fifth Amendment privilege against self-incrimination.

The taxpayer can also present some non-privilege arguments:

  1. Taxpayer does not possess the documents,
  2. Documents do not exist (the IRS may not require the taxpayer to create responsive documents).

Fighting a summons without possessing information from the IRS as to why the summons was issued and the basis for the summons can create an overwhelming burden for a  taxpayer. The Court must weigh the rights of the taxpayer for this information against the burdens an evidentiary hearing would place on the IRS.