25.5.4  Examination of Books and Witnesses

Manual Transmittal

August 16, 2011

Purpose

(1) This transmits a revision to IRM 25.5.4, Examination of Books and Witnesses.

Material Changes

(1) IRM 25.5.4.4.3(2) is updated to reference Delegation Order 4-7, Notice of Additional Inspection of Books of Account, authority.

(2) IRM 25.5.4.4.3(6) is expanded to clarify subsequent review of records and when that review is considered a second examination.

(3) IRM 25.5.4.4.5 is expanded to clarify the notice date requirements to file a petition to quash a summons.

(4) IRM 25.5.4.4.9 is expanded to define a Consent Directive and give an example when a Consent Directive is beneficial.

(5) IRM 25.5.4.5 updates notice of contact with third parties to include:

  • When it is appropriate to complete the third-party contact report.

  • Publication 1, Your Rights as a Taxpayer, version 05/2005 and later, now includes advance general notice of potential third-party contact.

  • The current website for the third-party contact coordinator.

  • When notice of third-party contact does not apply.

(6) Editorial and grammatical changes and organizational structure updates are made throughout this section.

Effect on Other Documents

This IRM supersedes IRM 25.5.4 dated October 4, 2006.

Audience

All operating Divisions and Functions.

Effective Date

(08-16-2011)

Signed by
Scott D. Reisher
Director, Collection Policy

25.5.4.1  (04-30-1999)
Overview

  1. This section contains the following topics:

    • Purpose of Examination of Books and Witnesses

    • Withdrawal of Consent to Use the Records

    • Limitations on Authority of Summons

    • Notice of Contact with Third Parties

25.5.4.2  (10-04-2006)
Purpose of Examination of Books and Witnesses

  1. A summons may only be issued to examine books, papers, records or other data of taxpayers and third parties and to obtain testimony under oath that may be relevant or material in:

    1. Ascertaining the correctness of any return;

    2. Making a return where none has been made;

    3. Determining a tax liability;

    4. Collecting such liability;

    5. Inquiring into any offense connected with the administration or enforcement of the Internal Revenue laws (26 USC 7602).

  2. Any person having knowledge relating generally to a tax investigation may be required to testify and produce records that may be relevant to the investigation. Information may be obtained by a summons to identify records a witness possesses by interviewing the witness under oath. A subsequent summons may then be issued to compel the production of records. The summons requiring production of records should not be oppressive or unreasonable, for a summons may be held to be so onerous as to constitute an unreasonable search.

  3. IRC 7609 does not restrict the authority of the Service to examine any books or witnesses without issuing a summons, nor does it require the Service to give notice in the case of an examination without a summons. IRC 7609(j) expressly provides that nothing in section 7609 shall be interpreted as limiting the Service’s ability to obtain information, other than by summons, through formal or informal procedures authorized by IRC 7601 and 7602. Credentials or circular letters citing IRC 7602 authority may be used to obtain records from financial institutions except when:

    1. The financial institution is located in the Tenth Circuit (for a list of Tenth Circuit states, see IRM 25.5.1.4.1(2), Documents from Financial Institutions in the Tenth Circuit),

    2. The information sought concerns taxpayers residing in the Tenth Circuit (regardless of where the financial institution is located), or

    3. The Service’s office is located in the Tenth Circuit (regardless of where the financial institution is located or where the taxpayer resided). Refer to IRM 25.5.1.4.1 (1–6).

    In these circumstances, the Service must issue a third-party summons and follow section 7609 procedures.

    Note:

    Remember, circular letters may not disclose that the taxpayer is under criminal investigation.

  4. Apart from payments made for public records, no payments for expenses incurred in providing information are authorized without issuing a summons.

  5. A summons can only require a witness to appear on a given date to give testimony and to bring existing books, papers, and records. A summons cannot require a witness to prepare or create documents, including tax returns, that are not currently in existence.

25.5.4.2.1  (10-04-2006)
Collection

  1. By issuing an administrative summons, the Service cannot force a taxpayer to create a document, including a Collection Information Statement or a delinquent tax return. However, if a summoned taxpayer is willing to do so, collection personnel are authorized to:

    1. Prepare or assist the taxpayer in preparing such statements or returns based on the records produced.

    2. Prepare summaries or lists from books, papers, records, and testimony obtained at the time of examination.

25.5.4.2.2  (10-04-2006)
Criminal Investigation

  1. A summons may not be used in aid of a grand jury investigation but may be used in an administrative investigation.

25.5.4.2.3  (10-04-2006)
Examination

  1. Consult Associate Area Counsel for alternatives if serving a summons is not feasible.

25.5.4.3  (10-04-2006)
Withdrawal of Consent to the Use of Records

  1. An owner of records who produces summoned records to the Service without being ordered to do so by a court may at any time request their return. Such a request constitutes a withdrawal or revocation of consent to the use of records. The request may be formal or informal, written or oral, regardless of phrasing.

    Note:

    If a court order is issued for the enforcement of the summons, the owner of the records cannot withdraw consent to the use of the records.

  2. Promptly photocopy records after their receipt and return them to the owner of record in the following circumstances:

    1. If there is reason to believe that consent will be withdrawn; or

    2. When an owner of records provides the sole set (whether originals or copies) of records.

  3. The Service is entitled to retain copies that are made before a summoned owner of records withdraws consent to the use of records.

  4. Honor a withdrawal of consent even if the owner of the summoned records retained copies of the records provided to the Service.

  5. When consent is withdrawn, use of the records, including photocopying, should cease.

  6. If consent is withdrawn and the records are no longer needed, return the records to the summoned owner of records.

  7. If consent is withdrawn and the records are still needed:

    1. Immediately seal them in an appropriate container.

    2. Mark the container with the date and time sealed.

    3. Secure the records according to area guidelines. This should occur on the date that consent to use of the records is withdrawn.

  8. Within two workdays of the withdrawal of consent, advise the summoned owner of records in writing:

    1. That the records have been sealed and secured.

    2. The records will not be used effective from the date and time the request was received.

    3. The Service will seek to enforce the summons.

    4. The records will not be returned pending the enforcement of the summons.

  9. Retain copies of the letter to the summoned owner of records for the case file and for the summons referral.

  10. Within three workdays from the date of receiving the withdrawal of consent, refer the summons to the appropriate function. The three workdays include the date of receipt of the withdrawal of the consent.

  11. If notified that the summons will not be enforced, immediately arrange to return the records to their owner.

25.5.4.4  (10-04-2006)
Limitations on Authority to Summon

  1. To be valid and enforceable, a summons must:

    1. seek information that may be relevant to the investigation,

    2. be issued pursuant to a proper purpose,

    3. seek information the Service does not already possess, and

    4. the Service must have followed all of the administrative steps required by the Internal Revenue Code. These requirements apply to all summonses, whether served on a taxpayer or a third-party witness. The Service should never serve a summons that makes arbitrary, irrelevant, unreasonable, or oppressive demands. Other limitations on information that can be summoned are discussed in the following subsections.

25.5.4.4.1  (10-04-2006)
Relevancy and Materiality of Summoned Information

  1. As required by IRC 7602(a)(2), all summoned information must be of a type that "may be relevant or material" to the Service's investigation.

  2. The "may be relevant" standard of section 7602 means any information that "might shed light" on the correctness of the taxpayer's return (or any other proper issue in a legitimate investigation, such as the location of collectible assets). The word "might" in this standard means that the Service has a realistic expectation, rather than an idle hope, that something useful may be discovered.

  3. It is important to note that when seeking records of a third party, the standard of relevancy is slightly higher. The Service must show a transactional connection between the third-party's records and the taxpayer's activities that are being investigated.

    1. A summons cannot be issued for an improper or ulterior purpose. For example, a summons cannot be issued to harass the taxpayer, to pressure the taxpayer into settling collateral disputes, or for any other purpose adversely reflecting on the good faith of the investigation.

    2. Special John Doe procedures must be used when the sole purpose of a summons is to investigate the tax liabilities of unknown and unidentified persons. The Supreme Court has ruled that the Service is not required to serve a John Doe summons when, during an investigation of a known taxpayer’s liability, it serves one summons to obtain information that may be relevant to the known taxpayer’s liability and to obtain the names of other taxpayers that the Service wishes to investigate. (This is known as a dual-purpose summons.) However, the Service must show that the identities of the unknown taxpayers may be relevant to the investigation of the known taxpayer. For example, the Service is investigating a tax shelter promoter’s potential liability under IRC 6700. As part of this investigation, the Service issues a summons requiring the promoter to produce records identifying those persons to whom he sold partnership interests. The summons is enforceable because the summoned records are relevant to the investigation and calculation of the promoter’s liability. This is true even though the summons serves the dual purpose of identifying unknown taxpayers that the Service wishes to investigate. Counsel should be consulted for advice before the issuance of a dual purpose summons.

  4. Books and records sought by the summons must be of a type that may be relevant to the tax investigation and must be described with reasonable detail in the summons, including the periods relating to the investigation. Clearly explain the relevance of records requested for periods outside of the investigation time frame. This explanation should appear in the agent's declaration.

25.5.4.4.2  (10-04-2006)
Examinations Barred by Statute of Limitations

  1. The statute does not require the Service to show probable cause to suspect fraud. Where a summons has been served covering a closed year, the government need only show that the summons meets the requirements for validity described above in IRM 25.5.4.4(1), Limitations on Authority to Summons. However, if the taxpayer’s books of account have already been inspected, and the Service has determined that a second inspection is necessary, the Service must give notice under IRC 7605(b) as discussed below in IRM 25.5.4.4.3, Statutory Restrictions on Unnecessary Examinations..

  2. A taxpayer seeking to prevent enforcement of a summons because it covers closed years has the burden of showing it would be an abuse of court process. The taxpayer does not satisfy that burden by merely showing the statute of limitations has run out or the records have already been examined.

25.5.4.4.3  (08-16-2011)
Statutory Restrictions on Unnecessary Examinations

  1. IRC 7605(b) provides that no taxpayer shall be subjected to unnecessary examinations or investigations of his or her tax liability and that only one inspection shall be made of a taxpayer’s books of account for each taxable year except upon notice from the Commissioner or upon the taxpayer’s request.

  2. Review Delegation Order 4-7, Notice of Additional Inspection of Books of Account, to determine who can sign the notice to the taxpayer stating an additional inspection is necessary.

  3. The taxpayer may refuse access to his or her records until he or she has been given notice in writing.

  4. The limitations imposed by IRC 7605(b) apply only to the taxpayer under investigation and not to a third party.

  5. The facts of each investigation will determine whether enforcement of a summons to examine records will be prohibited as unnecessary. While the Service can summon persons having information or documents that may be relevant to the investigation, the Service should never issue a summons to pursue a "fishing expedition" for information unrelated to the taxpayer’s liability. Such a summons will not meet the requirements of United States v. Powell, 379 U.S. 48 (1964).

  6. Once an examination is open, the examination continues until the Area closes the investigation. Therefore, a subsequent review of the taxpayer's books and records is not considered a second examination when performed pursuant to a continuing investigation.

25.5.4.4.4  (10-04-2006)
Statutory Limitations on Issuing a Summons After a DOJ Referral

  1. No summons may be issued nor summons litigation commenced if a DOJ referral is in effect with respect to the taxpayer pursuant to IRC 7602(d). A DOJ referral is in effect if:

    1. The Service recommends to the Attorney General that a grand jury investigation of, or a criminal prosecution of, such person be commenced for any offense connected with the Internal Revenue laws; or

    2. The Attorney General (or Deputy Attorney General or Assistant Attorney General) makes a written request to the Service for any return or return information relating to a taxpayer which sets forth the need for disclosure for tax administration purposes.

  2. A DOJ referral ceases to exist when the Attorney General notifies the Service, in writing, that:

    1. The taxpayer will not be prosecuted for any offense connected with the administration or enforcement of the Internal Revenue laws;

    2. A grand jury investigation will not be authorized with respect to such offense;

    3. Any such grand jury investigation will be discontinued;

    4. A final disposition has been reached in a criminal proceeding, instituted by the Department of Justice against the taxpayer, relating to the enforcement of the Internal Revenue laws (this notification does not have to be in writing);

    5. The Attorney General, Deputy Attorney General, or Assistant Attorney General notifies the Service in writing that the Department will not prosecute such person for any offense connected with the administration or enforcement of the Internal Revenue laws relating to any written request for any return or return information.

  3. A DOJ referral remains in effect until it is terminated in accordance with the preceding section. Summonses may not be issued to obtain information in response to a DOJ request for supplemental investigation. Consult Associate Area Counsel before serving a summons where CI and Associate Area Counsel are considering whether the case should be resubmitted to DOJ under protest procedures.

  4. Treat each taxable period (or, in the instance of excise taxes, each taxable event) separately. The Service may issue a summons for one taxable year even if a DOJ referral is in effect for another taxable year.

  5. If CI decides to refer a recommendation of criminal prosecution or grand jury investigation to DOJ, seek the advice of Associate Area Counsel about issuing or seeking enforcement of any additional summons.

25.5.4.4.5  (08-16-2011)
Statutory Limitations of IRC 7609 on Summoning Information from a Third Party

  1. The IRS must meet the procedural requirements of IRC 7609 when summoning a third party to produce a taxpayer’s records or to give testimony. All parties not exempt from notice per IRC 7609(c)(2) must be given no less than 23 full days after the date notice is given to file a petition to quash the summons. Therefore, set the appearance date no earlier than the 24th day after giving notice. These requirements are discussed in detail in IRM 25.5.6, Summonses on Third-Party Witnesses.

25.5.4.4.6  (10-04-2006)
Statutory limitations on Acquiring Credit Reports From a Consumer Reporting Agency-Summons Required

  1. The Fair Credit Reporting Act restricts the means by which the Service can obtain a taxpayer’s credit report from a consumer reporting agency. The Service must not try to obtain a credit report by informal means unless the sole purpose of securing a credit report is to collect an assessed tax. The Service must serve an IRC 7609 third-party summons on the consumer reporting agency. Thereafter, the consumer reporting agency must produce the summoned materials unless a noticee files a timely petition to quash. It is not necessary for the Service to obtain a district court order enforcing the summons before the consumer reporting agency is allowed to produce the summoned documents. The consumer reporting agency may rely on the Service’s certificate stating that the consumer has not filed a timely petition to quash.

  2. The Fair Credit Reporting Act allows a consumer reporting agency to provide government agencies with a consumer’s name, address, former addresses, places of employment, or former places of employment. The Service can obtain this information without issuing a summons. As indicated above, the Service can also obtain a credit report without a summons if the sole purpose of securing the report is to collect an assessed tax.

25.5.4.4.7  (10-04-2006)
Limitations on Summoning Tax Accrual Workpapers

  1. See IRM 4.10.20, Requesting Audit, Tax Accrual or Tax Reconciliation Workpapers, for detailed procedures for requesting audit, tax accrual, or tax reconciliation workpapers.

25.5.4.4.8  (10-04-2006)
Effect of a Statutory Notice of Deficiency Or a Tax Court Proceeding On a Summons

  1. The Tax Court has established a framework for determining when it is appropriate to prevent summoned information from being entered into evidence if the Service's use of a summons conflicts with the court's interest in administering its discovery rules

  2. If a summons is issued after a Tax Court petition is filed and that summons pertains to the same taxpayers and same taxable years as those before the court, the court will exercise its supervisory power and exclude the information, unless the Service can show the summons was issued for sufficient reason, independent of that litigation. If the post-petition summons pertains to different taxpayers or different taxable years as those before the court, the court will not normally exercise its supervisory power unless the taxpayer can show a lack of an independent and sufficient reason for the summons.

  3. In all but extraordinarily rare cases, the Service must not issue a summons after a Statutory Notice of Deficiency (SND) is mailed to the taxpayer to continue the investigation of the same taxable periods and liabilities covered by the SND. After an SND is mailed, the Service should no longer be in the process of gathering the data to support a determination because the SND represents the Service's presumptively correct determination and indicates the examination has been concluded. If the Service issues a summons after mailing the SND, this could be perceived as an effort to circumvent the Tax Court's discovery processes, which might lead the court to exclude the summoned evidence.

    Note:

    It may be appropriate to issue a summons after an SND has been mailed but before a Tax Court petition has been filed in rare situations in which an independent and sufficient reason exists to justify this action. An example of an independent and sufficient reason is when the Service is approached by a confidential informant after an SND is mailed. The informant identifies an issue that was not found during the examination, such as a hidden source of unreported income, and the Service needs to obtain evidence to prove the existence and amount of this income. In any case in which the Service seeks to issue a summons after an SND is mailed, the Service should obtain Associate Area Counsel's approval before issuing the summons. If field counsel approves the summons, the Service should make a record for its administrative file of the circumstances that gave rise to the post-SND summons and why field counsel concluded the circumstances justified the summons. This information may be necessary if the taxpayer seeks to exclude the summoned information from the Tax Court record.

25.5.4.4.9  (08-16-2011)
Compelling a Taxpayer To Sign a Consent Directive To Obtain Foreign Records

  1. During an investigation, the Service may need access to books and records outside the United States, such as a taxpayer's foreign bank account records. Foreign entities or individuals may refuse to release the records without the taxpayer's consent, which he or she can give by signing a consent directive. A consent directive, sometimes known as a disclosure directive, is a document signed by a taxpayer that authorizes and directs a specific foreign person (a bank, trustee, or other entity or individual) who possesses documents belonging to or controlled by the taxpayer, to disclose those documents to the IRS.

    Example: A situation where a consent directive is useful is when the IRS summonses a U.S. branch of a foreign bank or a U.S. bank with a foreign subsidiary. The bank will claim that it cannot produce records without violating the bank secrecy laws of the foreign jurisdiction. The consent directive, when signed by the taxpayer, gives the bank assurance to comply with the summons without violating their bank secrecy laws.

    Note:

    Do not use a consent directive to acquire records from a domestic financial institution.

  2. In some cases, a consent directive can be obtained voluntarily from the taxpayer. When a consent directive is obtained voluntarily, some foreign countries will view this favorably and will allow compliance with the consent directive.

  3. A summons cannot be used to directly compel a taxpayer to sign a consent directive. However, if a summons for the foreign records is served on the taxpayer while in the United States, a federal district court can enforce the summons by directly ordering the taxpayer to produce the documents in his or her custody or control. Moreover, the Service can seek an order under IRC 7402(a) compelling a taxpayer to sign a consent directive authorizing the foreign institution to produce its records. Some countries may not honor a consent directive that was compelled by court order.

  4. Consult with Area Counsel prior to considering a Consent Directive. Area Counsel will coordinate as necessary with the Office of Associate Chief Counsel (International). See CCDM 34.6.3.7, Issuance of Summons for Books and Records Abroad, for guidance. Any summons drafted for this purpose must receive pre-issuance review by the appropriate Associate Area Counsel office.

25.5.4.5  (08-16-2011)
Notice of Contact With Third Parties

  1. Section 7602(c) requires that the IRS:

    1. Provide advance notice to the taxpayer that third-party contacts may be made.

    2. Periodically provide a list of all contacts to the taxpayer.

    3. Provide a list of contacts to the taxpayer upon request.

      Note:

      Effective May 16, 2005, Publication 1, Your Rights as a Taxpayer, version 05/2005, was revised to include the advance general notice of potential third-party contact that is required by section 7602(c). If Publication 1 is mailed, the employee must wait 10 days before a third-party contact is made (30 days if mailed to an address outside the U.S. excluding Puerto Rico and the Virgin Islands). If the third-party notice is hand delivered or if mailed and acknowledgement is received prior to the 10 days (30 days outside the U.S.), contact can begin immediately.

  2. If a third-party contact is made, complete Form 12175, Third-Party Contact Report Form, for each contact made. A copy of Form 12175 will be retained in the case file and a copy faxed to the third-party contact coordinator (for the employee's state). The third-party contact coordinator will provide the record of contacts to the taxpayer upon request. The third-party contact coordinators are listed on the IRWeb at: http://mysbse.web.irs.gov/Collection/toolsprocesses/3rdParty/contacts/default.aspx.

  3. Section 7602(c), Notice of contact of third parties does not apply when:

    • The taxpayer has authorized contact;

    • If notification would jeopardize collection of any tax;

    • If notification would result in reprisal against any person; or

    • There is a pending criminal investigation.

  4. Serving a third-party summons is treated as a third-party contact. However, third-party summonses subject to the notice requirement under section 7609(a) do not require a third-party contact record (Form 12175) be made or provided to the taxpayer because the taxpayer has been given a similar record pursuant to another statute (the 7609(a) notice). Collection summonses are exempt from the notice requirement of 7609(a) and therefore a third-party contact record (Form 12175) must be made. If a third-party Collection summons is generated through the Integrated Collection System (ICS), the third-party contact record is captured electronically. If the Collection summons is generated manually, the Form 12175 must be completed and faxed per paragraph (2) above.

  5. Other third-party summonses listed in section 7609 for which a record of contacts must be kept under section 7602(c)(2) are:

    1. Summonses issued to determine whether or not records of the business transactions or affairs of an identified person have been made or kept, and

    2. Summonses issued solely to determine the identity of any person having a numbered account with a bank.

    Consult with Counsel if you are dealing with a third-party summons for which a court, pursuant to IRC 7609(g), has authorized service without giving notice under 7609(a).

  6. For further guidance, see IRM 4.10.1.6.12, Third Party Contacts -- Background, IRM 4.11.57, Third Party Contacts, and IRM 5.1.17, Third Party Contacts.


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