Can IRS Summons Taxpayers about Foreign Assets or Income

Can IRS Summons Taxpayers for Foreign Income or Asset Exams?

Is a Summons for Foreign Income and Asset Reporting Valid?

In most circumstances, when a U.S. Person is under audit or examination for a tax matter, they will not be subject to a formal summons under Internal Revenue Code section 7602. In general, most IRS audits and examinations are less formal and do not require the issuance of a summons. But, depending on the nature of the preceding and the facts and circumstances surrounding the examination, the Internal Revenue Service does have the power to issue a summons to examine any books, paper, records, or other data. As the IRS provides in the Internal Revenue Manual, it is their pattern and practice to typically refrain from issuing a formal summons unless it is a situation in which the taxpayer refuses to provide the information requested by the IRS. But, even if the IRS were to issue a summons, the taxpayer does have an opportunity to try to avoid or quash the summons if they believe the summons is improper. Unfortunately, oftentimes taxpayers are unsuccessful when seeking to quash a summons as was the case in Kish, which involved a Form 5471 non-compliance issue. It is important for taxpayers who have international income and foreign account and asset reporting requirements to be aware that the IRS does have the right to pursue a summons in these types of cases. Most recently, the IRS issued several summonses to taxpayers in matters involving the Malta Pension Plan (aka Maltese Retirement Schemes). Let’s take a brief look at what the IRS must show to successfully issue with summons to a taxpayer.

First, What is an IRS Summons?

Under the Internal Revenue Code section 7602, in certain circumstances, the IRS has the authority to examine Taxpayer books and witnesses.

26 U.S.C 7602 (Examination of Books and Witnesses)

In pertinent part:

• • • “(a) Authority to summon, etc. For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized—

      • (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;

      • (2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and (3)To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry. (b)Purpose may include inquiry into offense The purposes for which the Secretary may take any action described in paragraph (1), (2), or (3) of subsection (a) include the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws.

U.S. v Powell (Supreme Court)

In United States v. Powell, the Supreme Court laid out the specific requirements necessary to show what the IRS must establish to pursue a summons.

As provided in the Department of Justice tax manual, there are four main elements:

• • • “The Supreme Court established the framework for judicial review of a summons in United States v. Powell, 379 U.S. 48 (1964). In that case the Court held that the IRS did not have to satisfy any standard of probable cause in order to issue a valid summons. All that the Government must show is that the summons

      • (1) is issued for a legitimate purpose;

      • (2) seeks information that may be relevant to that purpose;

      • (3) seeks information that is not already within the IRS’s possession; and

      • (4) satisfies all administrative steps required by the Internal Revenue Code.”

In addition, the case of power also established that the summons cannot be issued for an improper purpose. As provided by the Internal Revenue manual:

• • • • “Powell also held that a summons cannot be issued for an “improper purpose.” This includes using a summons:

        • To harass the taxpayer

        • To pressure the taxpayer into settling a collateral dispute, or

        • For any other purpose adversely reflecting on the “good faith” of the investigation.

When Does the IRS Issue a Summons?          

Due to the formal nature of issuing the summons, it is not a tool the IRS employs for all audits and examinations. It is typically limited to situations in which the taxpayer is not cooperating with the IRS.

As provided in the Internal Revenue Manual:

• • • “In general, the IRS should issue summonses only when the taxpayer (or other witness) will not produce the desired records or information voluntarily. When a taxpayer or third party is willing to testify and produce documents voluntarily, a summons may not be required. In such cases, revenue officers may only need to produce their credentials. Caution: Refer to IRM 5.17.6.5.2(7), Notice and Waiting Period Requirements, regarding the requirement to serve a summons on a bank in the Tenth Circuit.

    • Before issuing any summons, the IRS should consider:

      • The possibility that judicial enforcement will be required, and

      • The adverse effect on future voluntary compliance if enforcement is abandoned.

        • Note: The IRS should only issue a summons when it is prepared to seek judicial enforcement if the summoned party fails to fully comply.

      • The summons should not require the witness to do anything other than appear on a given date to give testimony or produce existing books, papers, records, or other data. A summons cannot require a witness to prepare or create documents, including tax returns, that do not currently exist. However, a taxpayer may be required by a summons to appear and give testimony, or produce records that would allow the IRS to complete a tax return for that taxpayer.”

What Can the Summons Require from the Taxpayer?

It is important to note that the summons does not require the taxpayer to create any documentation but rather can require the taxpayer to both appear in person and provide documents and information as required by the IRS.

As provided in the Internal Revenue Manual:

• • • The summons should not require the witness to do anything other than appear on a given date to give testimony or produce existing books, papers, records, or other data. A summons cannot require a witness to prepare or create documents, including tax returns, that do not currently exist. However, a taxpayer may be required by a summons to appear and give testimony, or produce records that would allow the IRS to complete a tax return for that taxpayer.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: International Tax Law Specialists

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.