Can a Taxpayer Refuse an IRS Summons?
- Steven L. Walker PLC
- Apr 24, 2024
- 2 min read
During the course of an IRS investigation, the IRS has the authority to issue an administrative summons seeking records and testimony (Sec. 7602). The IRS may summons records, whether they are in the taxpayer’s or a third party’s possession, including in the possession of the taxpayer’s business associates, acquaintances, prior employers, and even financial institutions (Internal Revenue Manual (IRM) §25.5.5.2). One exception to this sweeping rule is that the IRS may not issue a summons or commence an enforcement proceeding if the IRS has referred a criminal tax case to the Department of Justice (Sec. 7602(d)).
Assume that during an IRS audit of a company’s tax returns, the IRS questions large interest expense deductions on the returns. Time is running out on the statute of limitation for assessing a liability for the year under examination, so the IRS asks the taxpayer for an extension of time. The taxpayer refuses. The IRS agent then prepares and signs her final audit report setting forth the proposed adjustments.
But before issuing the final report to the taxpayer, in an effort to gather information for the investigation, the agent issues a summons to the CFO of another company, who was the counterparty to the transactions that are under audit. The summons directs the CFO to give testimony and produce books and records relating to the IRS’s investigation. The summonsed party is then placed in the not-so-desirable position of having to respond to the IRS summons (i.e., appear before the IRS to give testimony and produce for examination the documents identified in the summons).
At this stage in the proceedings, what options does the CFO have to resist the summons in court? Should a court allow an adversarial hearing where the summonsed party has the opportunity to examine the IRS agent about her motives for issuing the summons? Or is the summonsed party limited to making legal arguments based on the evidence already in his possession without the benefit of discovery?
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