In a previous blog post (click here), I discussed the duties and rights of a taxpayer who receives an IRS administrative summons for records or testimony. In this blog post, I will discuss the duties and rights of a third party who receives an IRS summons for records or testimony and the taxpayer’s right and duties with regard to a third party summons.
During an IRS examination, collection matter or particularly in a criminal investigation, the IRS will often seek information from a third party, such as a return preparer or bank. Although the IRS may try to obtain the information informally, a third party should insist on the issuance of a summons to avoid a taxpayer claim that the production of the information was adverse to the taxpayer. For example, a bank that permits the IRS to examine financial records pertaining to a taxpayer without insisting a summons be issued risks being held liable for violating the Right to Financial Privacy Act. Likewise, a CPA who provides client information to the IRS without a summons or authorization from the client risks violation of state accountancy board rules regarding maintaining the confidentiality of client records and information.
Pursuant to IRC Section 7602(a)(2), the IRS is authorized to issue an administrative summons for a third party to appear before an IRS representative to produce documents or electronic data or give testimony under oath. Just like a summons to a taxpayer, the IRS must comply with strict procedures in issuing and serving a summons on a third party. Failure to comply with these procedures could invalidate the summons and render it unenforceable.
1. The name and address of the person whose tax returns are under examination and the
tax periods under examination.
2. The identity of the person summoned. In the case of a corporation the summons must
be served on a corporate officer, director, managing agent or other person authorized to
accept service of process.
3. A description of the items summoned, with reasonable certainty. The IRS cannot
require a person to create a document, such as a summary chart, that does not exist.
4. The date, place and time for compliance. A summoned party may not be ordered to
appear sooner than 10 days from the date of service of the summons. Section 7605(a)
In addition, the IRS must give the taxpayer notice of a summons issued to a third party. Notice must be given within three days of service of a third party summons, but not less than 23 days before the compliance date. IRC Section 7609(a)(1). The notice must include a copy of the summons and an explanation of the taxpayer’s rights. Section 7609(1)(a). This notice allows the taxpayer to file a petition to quash the summons if necessary. If the taxpayer files a petition to quash a summons, the IRS cannot examine the requested documents without the permission of the court or the consent of the taxpayer who files the petition.
A taxpayer’s petition to quash a summons must be filed in U.S. District Court within 20 days after the notice is mailed or served. The taxpayer may contest the summons by asserting privileges, such as the attorney-client privilege, tax-advisor privilege or the work-product privilege. In addition, the taxpayer may raise procedural defects regarding the summons and the notice to the taxpayer. Once the IRS establishes the four requirements of U.S. v. Powell, 379 U.S. 48 (1964), discussed in the previous blog post (click here), the burden shifts to the taxpayer.
In Jewell v. U.S. , 749 F. 3d 1295 (10th Cir. 2014), Mr. Jewell filed petitions to quash summonses served by the IRS on four banks in Oklahoma for information related to Mr. Jewell and his businesses. In his petitions, Mr. Jewell claimed that he received the required notices less than 23 days before the records were to be examined. Mr. Jewell claimed that the IRS had failed to follow the “administrative steps required by the Internal Revenue Code” and therefore the IRS could not meet one of the requirements of Powell. The IRS admitted that Mr. Jewell had not received the statutory notices within the time required by the Internal Revenue Code, but argued that because Mr. Jewell had received the notices in time to file his petitions, the court should dismiss his petitions. The IRS also argued that the language in the statute that states the taxpayer “shall” be given notice not less than 23 days before the compliance date does not signify a mandatory intent. In holding for Mr. Jewell and quashing the summonses, the 10th Circuit Court Appeals found that “shall” means “shall”, ie mandatory.
If the summons is properly prepared, executed and served, and the taxpayer does not file a petition to quash the summons, the third-party record keeper cannot ignore it. Instead, the recipient must appear before the IRS agent who issued the summons at the time and place specified. In most cases where the taxpayer has not filed a motion to quash the summons, the recipient appears and provides the records and testimony covered by the summons. However, although the summoned person must appear, he or she is not required to comply with the summons if there is a good faith basis for objection, including procedural defects or privileges.
An IRS administrative summons is a very serious matter and failure to properly respond or object can have significant consequences. If you have any questions about a summons or any other tax issue, please do not hesitate to contact Joel Crouch at (214) 749-2456.