Challenging an IRS Summons
Under the plain language of the statute that allows for the issuance of an IRS summons, such summons power is limited to information that is “relevant and material” to the legitimate purpose for which the summons was issued. In the Coinbase summons, the IRS is effectively seeking all of Coinbase’s information regarding all of its U.S. customers. While the relevant and material standard has been broadly construed to allow for very broad summonses, in the context of a third-party summons, courts look more carefully at whether a summons does in fact seek relevant and material information. The summons in Coinbase is intended to elicit information regarding users who have not complied with the Internal Revenue Laws, not allCoinbase users (potentially millions of users), which is what the Summons arguably seeks. In addition, because of the wide scope of the summons, it is not clear if the summons actually relates to a legitimate investigation of a taxpayer or group of taxpayers. The information sought is potentially so voluminous that its sheer size may make it unusable. These aspects of the summons and the related argument that it is overbroad may be avenues of challenge.
A summons can also be challenged if it is issued for an improper purpose or in bad faith. For example, a taxpayer may contend that a summons was issued for the purpose of gaining leverage against the taxpayer in a different, unrelated matter. Where the taxpayer can point to specific facts or circumstances that raise the possibility that the IRS is acting with such bad faith, the taxpayer can seek a hearing in advance of complying with the summons to determine if such bad faith rises to a level that would require the court to quash the summons.
An offshoot of the improper purpose doctrine, which has since been made part of the summons statute, prevents the IRS from improperly using the summons process to gather information after it has already referred a case to the Department of Justice (DOJ) for criminal prosecution. This restriction, however, is limited, as each taxable period is treated separately. Thus, even if a taxpayer has been referred to the DOJ for criminal prosecution with respect to one tax year, the IRS can use its summons power with respect to other years.
More generally, a taxpayer can challenge a summons to the extent it seeks privileged documents or information. Records or information that are covered by attorney-client privilege or Fifth Amendment privilege are protected from disclosure, even in the face of an IRS summons. While it is well known that an individual cannot be compelled to give incriminating testimony against himself, the production of documents can also, in certain instances, be testimonial in nature and may be protected under the Fifth Amendment. This is referred to as the “act of production privilege.”
In the past, taxpayers who received summonses seeking records related to undisclosed foreign bank accounts sought to challenge enforcement of the summonses on the grounds that producing such records would be equivalent to giving incriminating testimony. The IRS has up to now successfully asserted the “required records” exception to the act of production privilege, which provides that the act of production privilege does not apply with respect to documents that an individual is specifically required to maintain by law or regulation, because such a requirement imbues a public element into such documents, making them unprivileged. Because holders of foreign bank accounts are required to maintain such records as part of the FBAR requirements, the courts have sided with the IRS and ruled that no Fifth Amendment act of production privilege applies.