Under IRC 7602, the IRS may issue a summons in order to gather more information about a taxpayer’s federal tax liability. That authority, however, is not without its limits.
A taxpayer may challenge a summons on procedural or substantive grounds, including:
Administrative requirements of summons not met
A summons must meet all of the Powell requirements – that is, the summons must be issued for a legitimate purpose, be relevant to that purpose, the information may not already be in the IRS’ possession, and all required administrative steps must have been followed. Although rare, there have been cases where the administrative requirements of a summons were not met (e.g., the taxpayer was not served with adequate notice, or the limitations period for the tax years under investigation had already expired). With this in mind, the taxpayer and their legal counsel should carefully review IRS actions leading up to issuance of the summons. They should also note that if a summons has been made to a third-party, the IRS has additional administrative requirements under IRC 7609(a)(1).
Person in receipt of the summons has a duty not to reveal
If the person in receipt of a summons has a duty not to reveal certain information to third parties, they may attempt to challenge an IRS summons on that basis. Note that the courts will only consider privileges that are recognized under federal law. However, even those privileges are limited where a summons is concerned:
The attorney-client privilege protects tax advice, but it does not protect materials used for the preparation of tax returns.
The tax practitioner privilege (IRC 7525) applies only to communications between taxpayers and federally-authorized tax practitioners that relate to tax advice. It covers much less than the attorney-client privilege since it is limited to confidential communications on matters related to federal tax law which do not involve allegations of a crime or fraud (this is why as a general rule, taxpayers are advised to retain the services of a lawyer rather than an accountant for their tax troubles).
The work-product privilege (FRCP 26(b)(3)) is rarely applicable in the case of a summons. It only protects documents prepared in anticipation of litigation, not those which are prepared as part of the ordinary course of business or that would be prepared in essentially the same form irrespective of litigation.
Part II will cover summons that are overly broad and burdensome, constitutional objections and summons issued for an improper purpose.