Compelled Production of Documents and Testimony Tax Examinations (Portfolio 633)

Tax Management Portfolio, Compelled Production of Documents and Testimony in Tax Examinations, No. 633, describes and analyzes the various methods by which taxpayers and third parties can be legally compelled to produce books, records and testimony pursuant to a civil or criminal tax investigation, as well as the privileges and defenses that may be available to protect such evidence from compelled production.

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Tax Management Portfolio, Compelled Production of Documents and Testimony in Tax Examinations, No. 633, describes and analyzes the various methods by which taxpayers and third parties can be legally compelled to produce books, records and testimony pursuant to a civil or criminal tax investigation, as well as the privileges and defenses that may be available to protect such evidence from compelled production.

Congress has granted the IRS broad investigatory powers to enforce the federal tax laws. The IRS may issue an administrative summons to a taxpayer under either civil or criminal investigation and to third parties who possess documents relevant to that taxpayer's case. In certain criminal investigations, the IRS may also seek to invoke a grand jury, which has wide latitude and discretion to demand the production of documents and testimony pursuant to the issuance of a grand jury subpoena. A taxpayer receiving a summons or subpoena has various defenses available to him, including the Fifth Amendment privilege against self-incrimination, the attorney-client privilege and the work product doctrine. Furthermore, there are certain limitations, both procedural and substantive, on the investigating power of the IRS, such as the John Doe summons rules

This Portfolio focuses on the power of the IRS and the grand jury to issue and seek enforcement of administrative summonses or subpoenas to taxpayers and third parties who possess documents and testimony relevant to tax investigations, and the limitations imposed on such power. It discusses the ability of the IRS and the grand jury to investigate both U.S. and foreign taxpayers, as well as the special procedures which may be applicable with respect to documents located in foreign countries. In this context, the Portfolio addresses the attendant jurisdictional issues, tax treaties, tax information exchange provisions and various specially enacted statutory provisions specifically pertaining to obtaining documents which are located abroad. The Worksheets include portions of the Internal Revenue Manual related to the production of testimony and documents and sample letters to be utilized to protect the attorney-client privilege in certain situations.

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John W. Schmehl, B.A., Muhlenberg College (cum laude, 1975); J.D., Dickinson School of Law (cum laude, 1978); Editor, Dickinson Law Review; LL.M. (Taxation), Temple University School of Law (1982); former Trial Attorney, Office of Chief Counsel, Internal Revenue Service; author and lecturer on various tax topics concerning corporate tax and tax procedure.

Richard L. Fox, B.A., J.D., Temple University (1981, 1986); LL.M. (Taxation), New York University School of Law (1990); member, Pennsylvania and New York Bars; Certified Public Accountant, Pennsylvania; member, American Institute of Certified Public Accountants.


Detailed Analysis

I. IRS Summons Power and the Powell Test

Introductory Material

A. Permissible Purposes for IRS Summonses

1. Civil Purposes

2. Criminal Purposes

B. Identification of the Taxpayer

C. Service of the Summons

1. Manner of Service

2. Lack of Attestation

3. Proof of Service

D. Time and Place of Examination

E. Tolling of Statute of Limitations During Certain Enforcement Actions - The Designated Summons

1. General Rule

2. Designated Summons to Corporations

a. Limited to CIC Examinations

b. Definition

c. Tolling of Statute of Limitations

d. Issuance to Cooperative Taxpayer

F. Rights of Persons Summoned

1. Right to Counsel and Professional Assistance

a. Taxpayer Interviews

b. Third-Party Interviews

2. Recordings and Transcripts

3. Affidavits and Document Preparation: Handwriting Exemplars and Photographs

4. Witness Fees, Mileage and Costs

II. Limitations on the Summons Power

A. Relevancy

1. In General

2. Summons Must Not Be Vague, Overbroad or Overly Burdensome; Applicability of Fourth Amendment

3. Summons Power Not Limited by the Statute of Limitations

B. Criminal Referral to the Department of Justice: The "Bright Line" Test of § 7602(d)

1. Pre-TEFRA "Criminal Purpose" Cases - No Longer Good Law

2. Definition of "Referral"

3. Year-by-Year and Chapter-by-Chapter Test

4. Termination of a Referral

5. Enforcement Actions After Referral

6. Effect of Department of Justice Request for Supplemental Information

C. Legitimate Purpose

1. Research Projects

2. Unidentified Taxpayers

3. Treaty Requests

4. Bad Faith - Abuse of Process

D. Unnecessary Examinations and Second Inspections

1. Unnecessary Examinations

2. Second Inspections

E. IRS' Possession

F. Summons of Grand Jury Material

G. Meaning of Books, Papers, Records, or Other Data

III. Summons Enforcement

A. Appearance Before the Issuing Agent

B. General Guidelines For Enforcement of Summons

1. Supreme Court Standards

2. Proving a Prima Facie Case

3. Burden Imposed on Objecting Party

C. Petition and Order to Show Cause

D. Discovery and Evidentiary Hearing

1. Pre-TEFRA Background

a. Limited Pre-Hearing Discovery Approach

b. Mere Allegations Approach

c. Preliminary Showing of Abuse Approach

2. Procedure Subsequent to TEFRA

a. Purpose and Application of Likely New Standard

b. Disclosure of Justice Department Referral

E. Delay in Enforcement

F. Restrictions on Use of Summoned Information

G. Review of an Order Enforcing a Summons

1. Appeal

2. Stay

3. Contempt

IV. Summonses to Third-Parties

A. Third-Party Summonses Served On or Before July 22, 1998

B. Third-Party Summonses After July 22, 1998

1. Notice of Summons

2. Proceeding to Quash

3. Standing of the Taxpayer to Contest Enforcement

4. Duty of the Summoned Party

5. Exclusions from Section 7609

6. Waiver of Section 7609 Notice to Avoid Destruction, Flight, or Intimidation

7. Suspension of the Statute of Limitations

8. John Doe and "Dual Purpose" Summonses

a. Procedure to Be Followed

b. Dual Purpose Summonses

c. Remedies

C. Intervention

D. Collateral Use of Improperly Summoned Documents

E. Voluntary Compliance by a Third Party

1. In Response to a Summons

2. Without a Summons

F. Attempts to Circumvent the Third-Party Summons Process

1. Summons of Taxpayer to Compel Consent

2. Use of Section 6001

G. Advance Notice Requirement for Third-Party Contacts

V. Church Tax Inquiries and Examinations

Introductory Material

A. Church Tax Inquiries

B. Church Tax Examinations

1. Examination Notice

2. Conference Opportunity

C. Restrictions on Examinations

1. Failure to Specify Records or Activities in Examination Notice

2. Scope of Examination

3. Meaning of "To the Extent Necessary"

D. Time Limit on Church Audits

E. Regional Counsel Approval of Final Action

F. Compliance with Section 7611

G. Limitations on Additional Inquiries or Examinations

H. Investigations Outside the Scope of Church Audit Procedures

I. Constitutional Objections

VI. Special Aspects of Foreign Records

Introductory Material

A. Information Document Request

B. Formal Document Request Under Section 982

1. Procedures

2. Substantial Compliance

3. Motion to Quash Formal Document Request

4. Definition of Foreign-Based Documentation

5. Reasonable Cause Exception

C. Compelled Production of Foreign Records Pursuant to IRS Summons or Grand Jury Subpoena

1. Custody and Control

2. Jurisdiction Over Individuals

3. Jurisdiction Over Corporations

a. Domestic Corporations

b. Foreign Corporations

(1) Generally

(2) Jurisdiction Over Foreign Corporations Not Engaged In Business Activities Within the United States (Including Foreign Corporations With U.S. Subsidiaries)

(3) Foreign Entities Owned or Controlled by U.S. Persons

4. Issuing IRS Summons to Assist Tax Investigations by Foreign Countries Where U.S. Tax Liability is Not at Issue

5. Service of Process

a. U.S. Citizens or Residents Abroad

b. Foreign Corporations

6. Venue for Enforcement of Summons Issued to Foreign Residents and Corporations

7. Walsh Act: Power of U.S. Court to Order Appearance or Production of Documents of U.S. National or Resident

8. Effect of Foreign Bank Secrecy Laws

a. Case Law

b. Restatement (Third) of the Foreign Relations Law of the United States

c. Compelled Consent to the Production of Foreign Bank Records

9. Other Means of Obtaining Evidence from Abroad Administratively

a. Assistance by Assistant Commissioner (International)

b. IRS Agent Entering Foreign Country

D. Other Statutory Provisions Relating to the Compelled Production of Foreign Records

1. Section 7456(b): Tax Court Order for Production of Foreign Records By Foreign Person or Entity Filing Tax Court Petition

2. Sections 6038A and 6038C

a. Section 6038A: U.S. Corporations Having At Least 25-Percent Foreign Ownership

b. Section 6038C: Foreign Corporations Engaged in Trade or Business Within the United States

E. United States Tax Treaties

1. Generally

2. Model Treaty Provisions

3. Limitations on Obligation to Honor

4. Limitations on Use of Information

5. Limitations on Scope

6. Tax Information Exchange Agreements

F. Comprehensive Crime Control Act of 1984

1. Suspension of Statute of Limitations While Government seeks to Gather Evidence in Foreign Countries

2. Extension of Time Under The Speedy Trial Act

3. Service of Pleadings Upon United States

4. Admissibility of Foreign Business Records

5. Appointment of Special Master

VII. Tax Grand Jury Investigations

A. Function of Grand Jury

B. Impanelment, Composition, Term of Grand Jury and Witnesses

C. Grand Jury Investigations of Tax Crimes

1. An Impasse is Reached or Anticipated in an IRS Administrative Investigation

2. Supplemental Investigation Is Required

3. Nontax Grand Jury Investigation Discovering Possible Tax Crime

4. Money Laundering Crimes

D. Authorization for Grand Jury Tax Investigation

E. Grand Jury Subpoena Power

F. Motion to Quash or Modify Subpoena

1. Relevancy

2. Reasonable Specificity

3. Reasonable Time Period

4. Unreasonable or Oppressive

G. Appeal of Order on Motion to Quash or Modify

H. Enforcement and Contempt

1. Civil Contempt

2. Criminal Contempt

3. Contempt Hearing

I. Judicial Intervention to Prevent Grand Jury Abuse

J. Grand Jury Secrecy

VIII. Other Means of Obtaining Information: Search Warrants, Mail Covers, Electronic Surveillance, and Undercover Tax Investigations

IX. Documentary Privileges

Introductory Material

A. The Fifth Amendment Privilege Against Self-Incrimination

1. Scope of the Privilege

a. Compelled Testimonial Communication

(1) Books and Records of An Individual Taxpayer

(2) Personal Non-Business Records of an Individual Taxpayer

(3) Act of Production May Be Privileged

b. Personal Nature of Privilege

(1) Generally

(2) Records Held by Lawyers or Accountants

(a) Lawyers

(b) Accountants

(3) Records Considered to be in Constructive Possession of Taxpayer

2. Meaning of Self-Incrimination

3. Immunity

4. Waiver of Privilege

5. Required Records Doctrine

6. Corporations and Corporate Custodians

a. Books and Records

b. Nature of Corporate Records

c. Identification of Corporate Records by Oral Testimony

7. Partnerships

8. Associations, Trusts, etc.

B. The Attorney-Client Privilege

1. Burden of Proving That Privilege Applies

2. Privilege May Apply to Those Assisting Attorney

3. The Purpose of the Communication Must Be to Provide Legal Services

a. Tax Return Preparation

b. Identity of the Client and Fee Arrangements

4. The Communication Must Not Be in Furtherance of a Crime or Fraud

5. The Communication Must Have Been Made in Confidence

6. The Privilege Must Be Claimed and Not Waived

a. Proper Procedure for Assertion of Privilege

b. Waiver

c. Return of Privileged Documents

7. The Privilege Is the Client's and Not the Lawyer's

8. The Privilege in the Corporate Setting

9. Effect of Transfer of Pre-Existing Records to Attorney

C. Work Product Doctrine

1. Attorney Work Product Doctrine

2. IRS Use of Attorney Work Product Doctrine

3. Accountant's Workpapers

4. Claiming The Privilege and Waiver

D. Federally Authorized Tax Practitioner Privilege

1. Scope of the Privilege

2. Limitations

3. Identity Privilege


Working Papers

Table of Worksheets

Worksheet 1 Excerpts from Summons Handbook IRM 25.5.1 - 25.5.10

Worksheet 2 IRM Exhibit 25.5.10-3, Sample of a Declaration

Worksheet 3 IRM 4.61.1, International Audit Guidelines Handbook: Overview of Handbook and Information Reporting and Recordkeeping

Worksheet 4 IRM Exhibit 4.61.2-1, Obtaining Information, Books, and Records of U.S. and Foreign Entities

Worksheet 5 IRM Exhibit 4.61.2-2, Overview of Information Reporting and Recordkeeping Requirements

Worksheet 6 IRM Exhibit 4.61.4-1, Formal Document Request IRC § 982

Worksheet 7 Sample "Kovel" Letter Whereby Attorney Employs Accountant in the Course of an IRS Examination.

Worksheet 8 Joint Defense Agreement to Protect Attorney-Client Privilege and Work-Product Doctrine.




Treasury Regulations:

Legislative History:

Treaties and Conventions

Other Releases and Guidelines:

Federal Rules of Procedure

Treasury Rulings: