The IRS Summons to a Third Party: Rights, Duties, & Defenses

The IRS Summons to a Third Party

When the IRS seeks information from a third-party, they (sometimes) have the authority issue a summons in order to obtain the information necessary to build their case – even to third parties. But, there are certain requirements that the IRS must follow in order to pursue a summons to a third-party, because essentially what is happening is that the Internal Revenue Service agents are seeking information from a person who is not the direct target of the investigation in order to obtain information about the person who is the target of the investigation. Therefore, it is so important for tax purposes stay aware of the fact that they do not have an attorney-client privilege with their CPA, EA or other Non-Legal Tax Professional. Let’s go through the basics of the IRS summons to a third party, focusing on the rights, duties and defenses.

Section 7609 – Special Procedures For Third-Party Summonses

(a) Notice

(1) In general

• • • If any summons to which this section applies requires the giving of testimony on or relating to, the production of any portion of records made or kept on or relating to, or the production of any computer software source code (as defined in 7612(d)(2)) with respect to, any person (other than the person summoned) who is identified in the summons, then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain an explanation of the right under subsection (b)(2) to bring a proceeding to quash the summons.

(2) Sufficiency of notice

• • •  Such notice shall be sufficient if, on or before such third day, such notice is served in the manner provided in section 7603 (relating to service of summons) upon the person entitled to notice, or is mailed by certified or registered mail to the last known address of such person, or, in the absence of a last known address, is left with the person summoned. If such notice is mailed, it shall be sufficient if mailed to the last known address of the person entitled to notice or, in the case of notice to the Secretary under section 6903 of the existence of a fiduciary relationship, to the last known address of the fiduciary of such person, even if such person or fiduciary is then deceased, under a legal disability, or no longer in existence.

(3) Nature of summons

• • • Any summons to which this subsection applies (and any summons in aid of collection described in subsection (c)(2)(D)) shall identify the taxpayer to whom the summons relates or the other person to whom the records pertain and shall provide such other information as will enable the person summoned to locate the records required under the summons.

What does this Mean?

It means that the Internal Revenue Service does have the right and opportunity to seek a summons against individuals who are not the target of the investigation. In order to pursue a third-party summons, the taxpayer also receive a copy of the notice of summons to a third-party end the taxpayer has the opportunity to intervene and try to prevent the third-party from providing information – but the ability to do so is somewhat limited and there are some exceptions to a notice is actually required.

(2) Proceeding to quash

(A) In general

• • • Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection

      • (a) shall have the right to begin a proceeding to quash such summons not later than the 20th day after the day such notice is given in the manner provided in subsection (a)(2). In any such proceeding, the Secretary may seek to compel compliance with the summons. (

(B) Requirement of notice to person summoned and to Secretary

• • • If any person begins a proceeding under subparagraph (A) with respect to any summons, not later than the close of the 20-day period referred to in subparagraph (A) such person shall mail by registered or certified mail a copy of the petition to the person summoned and to such office as the Secretary may direct in the notice referred to in subsection (a)(1).

(C) Intervention; etc.

• • • Notwithstanding any other law or rule of law, the person summoned shall have the right to intervene in any proceeding under subparagraph (A). Such person shall be bound by the decision in such proceeding (whether or not the person intervenes in such proceeding).

What does the Internal Revenue Manual Provide?

Let’s take a brief look at what the IRM (Internal Revenue Manual) provides:

25.5.6.3.1 – Summons Subject to IRC 7609 Third-Party Notice and Waiting Period Requirements Summons

• • • A summons subject to IRC 7609 third-party requirements is an administrative summons issued under IRC 7602(a)(2) , IRC 6420(e)(2) , IRC 6421(g)(2) , IRC 6427(j)(2) or, IRC 7612 , which is not described in any of the exceptions found in IRC 7609(c)(2) -(3) and that requires: testimony on or relating to the taxpayer or other noticee, or the production of any portion of records made or kept on or relating to any person who is identified in the summons (other than the summoned third party), or the production of any computer software source code with respect to the taxpayer or other noticee (defined in IRC 7612(d)(2).)

25.5.6.6.2 – Right to File Petition to Quash Summons

1. 1. 1. A noticee who wishes to prevent summons compliance by the third party must begin a civil action in U.S. district court to quash the summons not later than the 20th day after the day notice of the summons is given. When the last day to file a petition to quash falls on a Saturday, Sunday, or legal holiday, the petition to quash may be timely filed on the next business day.

      2. A noticee who brings a proceeding to quash the summons must mail (by registered or certified mail) copies of the petition to the summoned third party and to the IRS employee who issued the summons within the 20 day period.

      3. In instances where a summons is served on a third party for records or testimony and the description of summoned records identifies another person (other than the taxpayer or summoned witness), notice will be given to such person. This person has the right to file a petition to quash the summons. A person not entitled to notice does not have the right to file a petition to quash the summons.

      4. No examination of the summoned records is allowed before the 24th day after notice is given, or if a proceeding to quash is begun until the court so orders, or until every person that is entitled to notice consents. Form 14465, Waiver of Rights to Notice or Right to Petition to Quash,may be used to document the noticee’s consent.

IRM 25.5.6.6.3 – Compliance or Enforcement of Summons

• • • IRS employees who receive a petition to quash will notify Associate Area Counsel by telephone on the same day. Within six workdays, the employee will forward to Associate Area Counsel a memorandum report or Form 4443, Summons Referral, to include the following:

      1. The name, full address, and taxpayer identification number of the taxpayer under examination or investigation;

      2. A brief summary of the facts in the case, including whether it involves, or is related to, the Special Enforcement Program or a promoter of or participant in an abusive tax scheme (ATAT – Abusive Tax Avoidance Transactions) case;

      3. An explanation of the relevance of the summoned information to the periods under investigation;

      4. All information supporting the validity or non-validity of each assertion in the petition to quash;

      5. A recommendation for or against defense of the petition to quash the summons; and

      6. The original summons and a copy of the petition to quash the summons.

Timely observance of this procedure is extremely important since the matter must be reviewed by IRS Counsel, DOJ, and the U.S. Attorney.

1. 1. 2. Tolling of the periods of limitation on assessment and criminal prosecution occurs when the taxpayer intervenes or brings a proceeding to quash, or when a third party fails to produce the summoned records within six months of being served.

         • . If the taxpayer (or the taxpayer’s agent, nominee, or other person acting under the taxpayer’s direction or control) intervenes in a summons enforcement suit or brings a proceeding to quash, then all periods of limitation under IRC 6501 (for assessing the taxpayer’s liability for the periods listed in the summons) and all periods of limitation under IRC 6531 (for criminally prosecuting the taxpayer for the periods listed in the summons) are tolled. The periods are tolled during the time the proceeding is pending or appealed; and

      3. If the taxpayer does not intervene in a summons enforcement suit or bring a proceeding to quash, and the summoned third party fails to comply with the summons for six months after being served, then the period of limitation under IRC 6501 and IRC 6531 (pertaining to the taxpayer’s liability) shall be suspended beginning six months after the summons was served and ending when the dispute is resolved. See IRM 25.5.6.6.3.2

      4. Intervention by a person other than the taxpayer or his or her agent will not suspend the running of the statutes of limitation.

      5. The IRS and the person summoned must be sent (by certified or registered mail) a copy of the noticee’s petition to quash not later than the close of the 20 day period. If a petition to quash is not mailed to the IRS timely, the summoned person should be asked to produce the summoned information. If he or she does not, the employee should immediately forward the summons for enforcement.

IRM 25.5.6.6.6 – Duty and Rights of a Summoned Third Party

1. 1. 1. The third party:

         1. Has the right to intervene in the proceeding to quash the summons, and
         2. Is bound by any decision in the proceeding, even if he or she does not intervene.

      2. The law provides that the third party will, upon receipt of the summons:

         • . Proceed to assemble the summoned records (or such portion as the IRS employee indicates), and

1. 1. • Be prepared to produce the records on the day on which the records are to be examined whether or not a noticee files a petition to quash the summons.

• • • A third party is not liable to any customer or other person for such disclosure if the disclosure of records was made in good faith reliance on the IRS’ certification that:
      • . The period for beginning a proceeding to quash a summons has expired and no such proceeding began within such period, or
    • The taxpayer and every other person entitled to notice consented to the examination.

• • Note: A third party is also shielded from liability when disclosing records pursuant to a court order that requires the production of records or the giving of testimony.

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