Taxes: "You Are Hereby Summoned…"
The title of this article is taken from the language of a summons the IRS can use to compel your appearance to give testimony or to produce your books, records, papers, and other data. The information they're looking for can be about your own taxes, or someone else's.
The power to issue summonses is given by Congress to the IRS for "the purpose of ascertaining the correctness of any return, making a return where none has been made," and so on. It's all spelled out in sections 7602 through 7610 of the Internal Revenue Code.
The summons power is broad and sweeping, subject only to occasional lip-service to the Fourth and Fifth amendments and a handful of other limitations: the IRS can't already have the material sought; the material must be reasonably related to the subject under investigation; it must be relevant to a determination of civil tax liability; the proper procedures must be followed; and you usually can't be examined more than once for any tax year.
That gives the feds a lot of room to roam around. They can even issue "John Doe" summonses, which don't name the taxpayer under investigation and are often used to sniff out members of barter exchanges and other tax evasion schemes.
When a case has been referred to the Justice Department for criminal prosecution, the IRS can't use summonses. Instead, it uses grand jury subpoenas. But until the formal decision is made to prosecute, the IRS thugs can freely use summonses—which are far more convenient for them.
I've seen IRS agents walking around with preprinted, gummed pads of summonses. Whenever they feel like it (in some cases their supervisor has to give prior approval) they whip out a pad, slip in some carbon paper, and fill the thing out, writing in your name and the documents they want you to turn over. By this appallingly simple process, the full might of the federal government is aimed right at you.
So it's important to understand how much power the feds have and how few your rights are when they set their collective minds to move against you.
Anyone who has records relating to your tax liability can be compelled to deliver them to the feds. Banks, brokerage firms, accountants, and others are routinely plundered for information.
If certain third-party recordkeepers (like banks) have been given a summons as a part of your tax investigation, the IRS usually has to give you notice—but not if it's a "John Doe" investigation and they don't know who you are yet, and not if (unknown to you) the feds get a prior court ruling that giving you notice might cause you to conceal, destroy, or alter your records, or bribe or intimidate witnesses, or actually flee. If you're one of the lucky ones who do get notice of a third-party summons, you have 20 days to challenge it; after that, you'll be in court for an enforcement action.
If you yourself get a summons about your taxes, you have 10 days to show up with the summoned material at the appointed time and place, where you can present your defenses to the summons. Some defenses that might work are: the IRS already has the information; the material is not relevant to the purpose for which the summons was issued; the IRS has already decided (alas!) to bring a criminal prosecution; or you don't have the papers. Also, if the summons is served on your attorney, it may violate your attorney-client privilege if he hands over the documents. (There is no federally recognized accountant-client privilege, so don't leave sensitive records with your CPA.)
If the feds don't like your excuses (they won't) and if you still refuse to comply with the summons, they'll bring an enforcement action against you. There will be a hearing in federal court, which is quite routine. The IRS agent gives his well-rehearsed reasons for wanting the material, and then the burden shifts to you. You present your reasons for noncompliance, and then the judge rules—on the spot, usually. If he rules against you and you still don't comply, you'll be arrested, the same as if you were in contempt of any other court order.
Now then, young freedom fighter, what records exist that might be summoned by the IRS and used against you? You read REASON, so you probably already know that records of your accounts at U.S. banks and brokerage firms are virtually public documents. But what about other records? You may not realize it, but you've been creating evidence of your activities (and income) all over the place.
Here are a few targets of third-party summonses that the IRS has successfully coerced to give out information about citizens—a hint of the sources that can be tapped to learn about you: stores you shop at (do you buy expensive gifts?); telephone company records (with whom do you talk?); records of your customers (do they jibe with yours?); casinos that give you credit (hi, big spender!); credit card company records (remember that info you gave them when you applied for those cards?); hospital records (how busy are you, doc?); airline records (do you travel a lot?); charities (did you contribute overvalued property?); telephone answering services (think about that one!); and tax-return preparers (but of course!).
Isn't life grand in the land of the free?
Warren Salomon is an attorney and tax specialist practicing in Miami.