Changes in third-party summons rules.

The Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) significantly expanded the scope of taxpayer protections under the "third-party recordkeeper" summons rules. The first (and perhaps most important) change is that these rules now apply to summonses issued to all third parties, not just to third-party recordkeepers. The IRSRRA '98 also allows the IRS to serve a summons either in person or by certified or registered mail, and requires it to provide reasonable advance notice that it may need to contact third parties in connection with its examination or collection activities. Although these changes do not restrict the Service's ability to contact or obtain information from third parties, they do alter the process for doing so. In addition, the IRSRRA '98 provides taxpayers with additional information on third-party contacts and a degree of additional protection when the IRS uses its broad information-gathering and summons authority inappropriately.

IRS Summons Power

The Service has authority to issue summonses for the production of books, records or other materials, and to compel testimony from taxpayers under Sec. 7602. Under Sec. 7609, special procedures and rules previously applied to summonses issued to "third-party recordkeepers" a particular category of third parties. A third-party recordkeeper is defined as any (1) mutual savings bank, cooperative bank, domestic building and loan association, or other savings institution chartered and supervised as a savings and loan or similar association under Federal or state law, or bank or credit union, (2) consumer reporting agency, (3) person extending credit through the use of credit cards or similar devices, (4) broker, (5) attorney, (6) accountant, (7) barter exchange, (8) regulated investment company (RIC) and agent of such RIC when acting as an agent thereof and (9) enrolled agent.

Because a summons is not self-enforcing, the Department of Justice (on behalf of the IRS) must file a petition with the district court and demonstrate that the requirements under Powell, 379 US 48 (1964), have been met. At the enforcement hearing, the government must show that (1) the summons was issued in an investigation conducted pursuant to a legitimate purpose, (2) the information summoned may be relevant to the investigation, (3) the information sought is not within the Service's possession and (4) the administrative steps required by the Code have been followed.

A taxpayer may challenge a summons "on any appropriate grounds," such as failure of the IRS to satisfy the requirements under Powell; see Reisman v. Caplin, 375 US 440 (1964). However, once the Service satisfies the Powell requirements, the burden shifts to the taxpayer to rebut the existence of a valid determination or collection purpose (LaSalle National Bank, 437 US 298, (1978)). Because of the IRS's broad summons authority, the burden on a taxpayer challenging enforcement is heavy.

Once a district court issues an order enforcing a summons, a taxpayer must comply with it. If the taxpayer fails to comply, the Service Can request the court to issue an order requiring the taxpayer to show cause as to why the taxpayer should not be held in contempt. If a taxpayer does not show good cause and still refuses to comply with the summons, the court may hold the taxpayer in contempt of court (i.e., coerce compliance through imprisonment or other means).

For summonses issued to a third-party recordkeeper within the meaning of Sec. 7609, the IRS must notify a taxpayer that a summons has been issued. A taxpayer has 20 days after notice is given to initiate a proceeding to quash the summons. A taxpayer's right to seek to quash a summons is not contingent on a Service-initiated summons enforcemennt proceeding against a summoned party (but the taxpayer may intervene in such a proceeding).

Changes under the IRSRRA '98

Expansion of the third-party record-keeper summons rules to all third parties. The IRSRRA '98 significantly expanded the scope of the third-party recordkeeper summons rules. Effective for all summonses served after July 22, 1998, the IRS notification requirements for the issuance of a Sec. 7609 summons were expanded to include almost all summonses issued to any third party, not just to third-party recordkeepers. This expansion of the Sec. 7609 safeguards provides taxpayers with additional protection against inappropriate summonses.

Service of summons permitted by mail. The Service now may serve any summons either in person or by certified or registered mail. Under prior law, the IRS was required to serve a summons by an attested copy delivered in hand to a person to whom it was directed or by leaving the summons at the person's last and usual place of abode. The reason for allowing a summons to be served by certified or registered mail is that Congress concluded that the personal appearance of a Service official at a place of business for the purpose of serving a summons may be unnecessarily disruptive. Thus, the new law allows the IRS to be more discrete with both third parties and taxpayers by having the option of serving a summons either in person or by certified or registered mail.

Notice of IRS contact of third parties. The IRSRRA '98 also added new Sec. 7602(c), requiring the Service to provide reasonable notice to a taxpayer that it may contact third parties to determine or collect the taxpayer's tax liability. The IRS must also "periodically" provide a taxpayer with a record of persons previously contacted during the period in question. (Currently, the term "periodically" remains undefined) The Service also must provide this record of contacted persons on the taxpayer's request. It should be noted that reports of third-party contacts provided to a taxpayer (whether periodically or on request) will be issued after such third parties have been contacted. The notice requirements do not apply (1) to criminal tax matters, (2) if collection of the tax liability is in jeopardy, (3) if the RIS determines for good cause shown that a disclosure may involve reprisals against any person or (4) if the taxpayer authorizes the contact.

The Service's initial reaction to the Sec. 7602(c) requirements was to issue generic letters to all taxpayers who were the subject of an ongoing examination or collection activity. In IR 1999-28, however, the RIS announced that, beginning March 29, 1999, it would stop sending third-party contact letters on a blanket basis to taxpayers under examination. Instead, third-party contact notices will be issued only when the Service is actually going to contact a third party (e.g., when it cannot secure necessary information from a taxpayer). However, in cases involving tax collection, the IRS will continue to send out third-party notices on a general basis.

Taxpayers should be aware that the Service is issuing these letters simply to comply with the new Sec. 7602(c) requirements and that no action is necessary on their receipt. However, if a taxpayer is concerned about the IRS's efforts to contact third parties, he may wish periodically to request a record of the Service's third-party contacts.

FROM LORI A. WHISENANT, J.D., CPA, MICHAEL URBAN, J.D., MLT, AND JANA S. DESIRGH, J.D., LL.M., WASHINGTON, DC