Primer on Contesting IRS Third Party Summonses (7/22/21)

In Gaetano v. United States, No. 20-2182, 2021 U.S. App. LEXIS 21139 (6th Cir. July 16, 2021) (unpublished), CA 6 here, the Court rejected the taxpayers’ petition to quash IRS summonses to third parties.  As an unpublished opinion, it has less precedential weight.  Still, it offers a good summary of established law regarding contesting summonses.  

General on the Summons (cleaned up):

In United States v. Powell [379 U.S. 48, 57-58 (1964)] the Supreme Court held that the government can establish a prima facie case for judicial enforcement of an investigatory summons by demonstrating [*3]  that (1) the investigation will be conducted pursuant to a legitimate purpose, (2) the inquiry may be relevant to the purpose, (3) the information sought is not already within the [IRS] Commissioner's possession, and (4) that the administrative steps required by the Internal Revenue Code have been followed.

            The government generally makes this prima facie showing for enforcement through the submission of the affidavit of the agent who issued the summons. If the government makes this showing, the burden shifts to the taxpayer to disprove any of the required elements or to demonstrate that enforcement of the summons would be an abuse of the court's process. n2  Such an abuse would take place if the summons had been issued for an improper purpose."  That said, a taxpayer must provide specific facts and evidence to meet the heavy burden necessary to demonstrate an abuse of process.
   n2 Where, as here, "the IRS issues a summons not to the investigated taxpayer herself, but to a third party who may possess records related to the taxpayer . . . , the named taxpayer is entitled to notice that the summons has been issued, and has the right to intervene in the summons-enforcement proceeding." Byers v. United States, IRS, 963 F.3d 548, 553 (6th Cir. 2020) (citation omitted). No matter whether the IRS issues the summons to the investigated taxpayer or a third party, "[t]he same standards apply." Ibid.

Relevance (cleaned up):

            As to the relevance requirement of § 7602 and the Powell framework, the words "may be [relevant]" reflect Congress' express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation. The relevance [*4]  threshold needed to enforce a summons is lower than that required to admit evidence in federal court. The critical inquiry is not whether the records sought are relevant, but whether they might throw light upon the correctness of a return.

            Tax periods do not exist in a vacuum. Records from outside those designated timeframes may be relevant to a taxpayer's conduct in a given quarter or year. Noncontemporaneous records may illuminate important aspects of an investigation into tax liability, including the taxpayer's knowledge of filing requirements, the sources of assets or income, and the true nature of transactions with others. There is widespread acceptance that records from before or after the tax period under investigation can meet the low relevance threshold necessary for a summons.