U.S. IRS wields summons to pry info out of wealthy, companies

Fri Aug 17, 2012 10:42pm IST

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* Taxpayers push back, increasing summons litigation

* Collections agency trying to speed investigations

By Kim Dixon

WASHINGTON, Aug 17 (Reuters) - The U.S. Internal Revenue Service is increasingly urging its examiners to make more use of a powerful legal tool - the administrative summons - to obtain sensitive documents from uncooperative taxpayers, agency officials and Washington lawyers said.

But targets of the summonses have been pushing back. As a result, litigation involving the IRS has increased sharply in recent years as the agency challenges more wealthy individuals and businesses it believes are underpaying.

Such summons-related legal disputes totaled 132 in 2011, up from 44 in 2005, according to the Taxpayer Advocate Service. The government watchdog, which oversees the IRS, said this was the most litigated issue that the agency faced last year.

"Agents are much more frequently throwing out the 'summons' word early in the process," said George Hani, a corporate lawyer at Miller & Chevalier and a former Treasury Department official.

"Any transaction that is perceived to be abusive or big-dollar, you are more likely to hear someone say 'summons.'"

The power of the summons, an order to hand over books, records or other data relevant to an agency investigation, is that it carries the threat of court enforcement. It inhibits negotiations that typically take place between taxpayers and agents, and it shows the IRS is playing hardball.

The jump in summons litigation reflects not only more frequent use of summonses, but also an effort by the agency to speed processing of investigations, lawyers said. In addition, they said, the IRS now has the ability to demand more types of documents about potentially aggressive tax practices.

At a time of fiscal urgency for the United States, the IRS is working on several fronts trying to raise more of the tax revenue to which the government says it is entitled.

IRS agents dream of "finding that one killer document," said Matt Lerner, a lawyer at Steptoe & Johnson. "So you if you ask for everything, you might find it."

Solid data on the number of summonses issued by the IRS was not available. Nor was information on how many times the agency threatened taxpayers with summonses without following through.

"My hunch is there are way more summonses issued and cases ultimately settled before ever becoming summons litigation," said Miriam Fisher, an attorney at Latham and Watkins and a former Department of Justice tax lawyer.

DON'T DILLY-DALLY

A top IRS official recently told corporate executives that the agency would be giving agents "refresher" training on the use of summons if taxpayers do not meet deadlines for document requests.

"If agreed-upon time frames are not met, taxpayers should expect a summons" as a "normal and expected part" of the exam process, Deputy Commissioner for Enforcement Steven Miller told the Tax Executives Institute on March 26.

The IRS would not provide an interview with Miller, but another top IRS official, who was not authorized to speak for attribution, said the agency was increasingly encouraging agents to use summons.

In his March speech, Miller also said the IRS was focusing more on international businesses, midmarket companies and partnerships with assets between $10 million and $250 million.

The IRS typically starts out seeking information from a taxpayer by issuing an information document request.

If a taxpayer refuses to comply, the agency can issue an administrative summons. If the target still resists, the IRS can take the matter to the Justice Department, which can provide a court order to enforce the summons. A target that still refuses to cooperate may face sanctions for criminal or civil contempt.

FIGHTING BACK

Taxpayers can protest IRS queries by asserting attorney-client or other types of privilege. But the law favors the agency, which only needs to show that its request is legitimate and relevant, and that it has followed proper procedures.

The IRS prevailed last year in more than 90 percent of summons litigation cases in court, the Taxpayer Advocate said.

In a 2010 case, Valero Energy Corp challenged an IRS summons seeking tax documents in connection with a merger.

The court denied Valero's bid to quash the summons for reason of attorney-client privilege, among other objections, according to court documents.

The summons tool "absolutely can be useful," said former Department of Justice lawyer Fisher. "It gets the taxpayer's attention."

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