IRC § 7601 authorizes the Service to inquire about any person who may be liable to pay any internal revenue tax. The authority under 7601 to inquire does not include the authority to summon.
IRC § 7602 authorizes the Service to summon a witness to testify and to produce books, papers, records, or other data that may be relevant or material to an investigation. United States v. Powell, 379 U.S. 48 (1964).
IRC § 7602 and the corresponding regulations, 26 CFR § 301.7602-1, also identify the purposes for which the Service may issue summonses.
The purposes are:
To ascertain the correctness of any return;
To prepare a return where none has been made;
To determine the liability of a person for any internal revenue tax;
To determine the liability at law or in equity of a transferee or fiduciary of a person in respect of any internal revenue tax;
To collect any internal revenue tax liability; or
To inquire into any offense (civil or criminal) connected with the administration or enforcement of the internal revenue laws.
The Service’s right to examine records provided by IRC § 7602 includes the right to photocopy such records.
The following persons may be summoned under the authority of IRC § 7602(a)(2):
The person liable for the tax or required to perform the act (prepare a return);
Any officer or employee of such person who has information that may be relevant to the investigation;
Any person having possession, custody, or care of books, papers, records, or other data that may be relevant to the investigation; and
Any other person the Secretary deems proper.
IRC § 7602(d)(1) prohibits a summons from being issued or enforced with respect to any person if a Justice Department referral is in effect with respect to such person. Under IRC § 7602(d)(2), a “referral” is in effect with respect to a person when either:
The Service has recommended to the Justice Department a grand jury investigation of, or the criminal prosecution of, such person for any offense connected with the administration or enforcement of internal revenue laws; or
The Justice Department requests, pursuant to IRC § 6103(h)(3)(B), the disclosure of a return or return information relating to such person, as when the Justice Department requests the Service’s criminal investigators to join an ongoing federal grand jury investigation of the person for non-tax crimes, such as narcotic trafficking or racketeering, to investigate potential tax charges.
The limitation of IRC § 7602(d)(1) applies only when the Service has referred to the Justice Department the taxpayer whose liabilities are at issue. The Service is not barred from summoning a third-party witness when the Service has referred the third-party witness to the Justice Department. Khan v. United States, 548 F.3d 549 (7th Cir. 2008); 26 CFR § 301.7602-1(c)(1).
Other IRC sections concerning the proper use and enforcement of a summons are:
Section 7603 — Service of Summons
Section 7604 — Enforcement of Summons
Section 7605 — Time and Place of Examination
Section 7609 — Special Procedures for Third-Party Summonses
Section 7610 — Fees and Costs for Witnesses
Section 7611 — Restrictions on Church Tax Inquiries and Examinations
Section 7612 — Special Procedures For Summonses For Computer Software
Section 7402 — Jurisdiction of District Courts
Section 7210 — Failure to Obey Summons
Section 7521 — Procedures Involving Taxpayer Interviews
In United States v. Powell, 379 U.S. 48, 57-58 (1964), the Supreme Court set forth the standards the Service must meet to have its summons enforced. The Service must show that:
The investigation will be conducted pursuant to a legitimate purpose;
The inquiry may be relevant to the purpose;
The information sought is not already within the Service’s possession; and
All administrative steps required by the Code have been followed.
Powell also held that a summons cannot be issued for an “improper purpose.” This includes using a summons:
To harass the taxpayer;
To pressure the taxpayer into settling a collateral dispute; or
For any other purpose adversely reflecting on the “good faith” of the investigation.
In United States v. Clarke, 573 U.S. 248, 254-255 (2014), the Supreme Court described procedures and standards for the Service to establish its proper purpose for issuing a summons, saying that
Summons enforcement procedures are meant to be summary in nature;
Absent contrary evidence, the Service can establish its satisfaction of the Powell standard, including its good faith, by submitting a simple affidavit (Declaration) from the investigating agent; and
The taxpayer is only entitled to question the investigating agent in a summons enforcement case when the taxpayer has presented credible evidence that plausibly raises an inference of bad faith by the Service.
If you have received an IRS summons, you should contact a tax attorney right away to determine how best to respond. Wilson Tax Law Group has handled summons responses for numerous clients before the IRS, including summons disputes in Federal Court.