The IRS has a lot of weapons in its arsenal and it's not afraid to use them. Lately, it's been bringing out one of its big guns: an "administrative summons" that compels taxpayers to hand over the books and other sensitive documents where they may have been hiding their dirty secrets.
But some taxpayers have been mounting a defense. According to a new report from the Taxpayer Advocate Service (TAS) - an independent organization that assists taxpayers and "operates behind enemy lines" within the IRS itself - the number of legal disputes arising from administrative summonses reached 132 in 2011, up 300 percent from forty-four in 2005, just six years earlier. This made the challenges to a summons the most litigated issue the IRS encountered last year.
Briefly stated, an IRS administrative summons identifies the party whose tax liability is being investigated, and it requires that party to provide testimony or produce documents, records, or other data relevant to the investigation. The IRS doesn't even have to answer to a higher authority when it wants to issue a summons. It simply fills out the form and delivers it to the appropriate party.
Typically, the IRS will try to ferret out information by first issuing an information document request. If a taxpayer refuses to comply or dawdles, the agency may rely on an administrative summons. And, if the taxpayer continues to stonewall the request, the IRS can petition the Justice Department for a court order enforcing the summons. Uncooperative taxpayers may be assessed sanctions for criminal or civil contempt.
Increasingly, IRS agents have shown a willingness to fire off a summons in the early stages of an investigation, especially when huge sums of money are at stake. Like practically every other entity, the federal government is starved for revenue to fill its coffers, so the more it can bring in, the faster the better. Furthermore, the IRS now has the ability to demand more types of documents relating to potentially abusive tax practices.
The IRS hasn't released any figures on the number of summonses it has issued nor has it revealed the number of times its agents have threatened to issue summonses without actually doing so. Our nation's tax collection agency is essentially keeping its attack plan under wraps. But IRS officials have said publicly that they will be giving agents refresher courses on using a summons if taxpayers don't meet deadlines for document requests.
Taxpayers can counterattack by asserting attorney-client privilege or by otherwise challenging the summons in court. But the odds certainly aren't in their favor. The IRS only needs to show that it has issued a legitimate request and that it's following proper procedures. The TAS repots that the IRS triumphed in more than 90 percent of the summons litigation cases last year.