How Fourth Amendment Can be Utilized to Challenge an IRS Summons

An individual who is the subject of a criminal tax case has the same rights as any other criminal defendant against unreasonable search and seizure in a criminal tax case. The Fourth Amendment constitutional right against unreasonable searches and seizure typically comes into play in criminal tax cases principally in warrantless searches of a taxpayer’s books and records. The usual Fourth Amendment question arises in a criminal tax case as follows: An individual consents to the examination of his books and records during an Internal Revenue Service (“IRS”) criminal investigation believing the examination concerns only civil tax liability; he believes it is only a civil audit because the special agent has not advised him of the function of a special agent or of his constitutional rights. The individual therefore contends 1) that a search of his “papers” has taken place; 2) no search warrant was issued authorizing the agent to search the records; and 3) no “consent” was given to the search by the individual because the consent was only for a civil examination. The typical facts of each case varies, but usually the variations relate to the question of “consent” and the conduct of the agent. For example, an IRS Agent delays a fraud referral to the Criminal Investigation Division until he completes his examination, or a special agent is working behind the scenes while the individual permits a revenue agent to examine his records, or the special agent misleads the taxpayer into believing the information supplied will not be used for criminal purposes.

The Fourth Amendment and Its Application to an IRS Summons

The Fourth Amendment to the United States Constitution provides “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue but upon probable cause, supported by oath or affirmation, and particularly described the place to be searched, and the persons or things to be seized.” The Fourth Amendment to the United States Constitution prohibits the federal government or one of its agencies such as the IRS from conducting unreasonable searches and seizures.” Thus, the IRS cannot search a person or records without a valid search warrant.

Although Fourth Amendment protections apply to IRS investigations, the IRS has the ability to obtain a significant amount of records and information to build a criminal case through the issuance of summonses rather than search warrants. An IRS summons is an official order to provide information or testimony. An IRS summons is not legally a search warrant. Consequently, any potential Fourth Amendment challenges must take into account that no actual search and seizure occurs when the IRS issues a summons. Despite the apparent lack of an actual search and seizure, Fourth Amendment principles do apply when the IRS issues a summons. The following factors must be taken into consideration by anyone considering raising a Fourth Amendment challenge to an IRS summons:

1. Whether the individual has standing to bring a Fourth Amendment challenge to an IRS summons;
2. Whether the IRS summons is so broad, indefinite, or burdensome as to constitute an unreasonable search or invasion of privacy;
3. Whether the information sought by the IRS summons are protected by the individual’s zone of privacy?
4. Whether the individual claiming Fourth Amendment protection has consented to the search?

Standing

To claim a violation of Fourth Amendment rights as the basis for suppressing relevant evidence, courts have long required that the claimant must prove that they were the victim of an invasion of privacy to have a valid standing. This means that in the context of an IRS investigation, taxpayer A has no standing to challenge government conduct that may violate the constitutional rights of taxpayer B. However, an individual who owns financial records has standing to contest their seizure even if the individual transfers them to a third party. But, a reasonable expectation of privacy does not exist where the records are of commercial transactions. Consequently, an individual can assert his Fourth Amendment rights for records sought by an IRS summons if he or she transferred records to a third party to hold them for a period of time. On the other hand, an individual will not likely be able to bring a successful challenge on Fourth Amendment grounds for records of commercial transactions to financial institutions, car dealers, or a cryptocurrency exchange.

Reasonable and Breadth

An investigation conducted by the IRS must meet the standards of reasonableness which derived from the Fourth Amendment. Although it is not a search warrant, a summons must contain a “specification of the documentation to be produced adequate, but not excessive, for the purpose of the relevant inquiry.” See Oklahoma Press Publishing Co. v. Walling, 327 US 186, 209 (1946). Any summons issued by the IRS that is indefinite or broad may be so onerous as to constitute an unreasonable search under the Fourth Amendment.

Protected Interests

The law has established that the protections offered by the Fourth Amendment have more to do with reasonable and legitimate expectation of privacy than with property concepts. In IRS summons cases, an individual has no legitimate expectation of privacy in records that he or she does not own or possesses. In addition, the Fourth Amendment does not protect an individual’s records provided to a tax accountant used to prepare his or her income tax returns. See Couch v. United States, 409 US 322 (1973). However, where an individual forwards records to his or her attorney for purposes of obtaining legal advice, the attorney-client privilege creates an expectation of privacy and therefore a summons served on a lawyer can potentially be challenged on Fourth Amendment grounds.

Unconstitutional Objections to Summons Regarding Materiality and Relevancy

Internal Revenue Code Section 7602 permits the use of a summons “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 collecting any tax.” The documents or testimony sought by the summons must be “relevant or material to such inquiry.” See IRC Section 7602(1)(2) and (3). Under the relevancy and materiality requirement, taxpayers have challenged a demand for records that were not used in the preparation of the returns being audited. Under the relevancy and materiality requirement, individuals and businesses that have been issued summons have challenged a demand for records that were not used in the preparation of the returns being audited. One court has held that internal budgets prepared by a corporation that were not used in preparing its tax returns were not subject to production. Another court has refused to order a corporation to supply its minute books, correspondence files, paid bills, invoices, and other records unless such items were in categories which reflected the receipt and disbursement of money or related to financial or proprietary transactions of the corporation or its president. The test employed for determining relevancy is not one of probable cause to believe that the records are relevant, but that they will throw “light upon the correctness of the …return.”

There is an obvious and major problem in determining the relevancy of particular items, i.e., how can relevancy be determined without the production of the records in question? If an individual or business can make a case that the records summoned were not used in preparing the tax return under investigation or in preparing information used in preparing the return under investigation and that they do not relate to financial transactions of the person summoned or the person or entity under investigation, the IRS may have difficulty demonstrating the relevancy of the information summoned. If it appears that the IRS is demanding records that are not relevant, a tax attorney should produce the records for an in camera inspection by a district court, with a memorandum outlining the purpose of a Section 7206 summons and a statement to the district court explaining why the records are not relevant in the particular case.

Consent

In Fourth Amendment cases, a voluntary consent to search and seizure of evidence is a waiver of a person’s rights under this amendment. There are two requirements for a consent search to be valid. First, the consent must be voluntarily given. The Fourth Amendment requires that the consent must not be coerced, by explicit or implied means, by threat or covert force. In making this determination, courts will look at the “totality of the circumstances” surrounding the giving of the consent, because “it is only by analyzing all the circumstances of an individual consent that it can be ascertained whether a fact was voluntary or coerced. Factors to consider in making this determination include, but are not limited to, the age, education, and intelligence of the individual; the individual’s knowledge of his or her right to refuse to give consent; whether the individual cooperated in the search; whether the suspect was in custody at the time consent was given; the suspect’s belief that no incriminating evidence will be found; the presence of coercive police procedures, such as displaying weapons or using force; and the suspect’s experience in dealing with law enforcement officers.

In a tax audit situation, an individual may not consent to a search and search of his records were going to be utilized against him in a criminal tax case. If the consent to turn over an individual’s incriminating records by an IRS auditor was done by deceit, treachery, or misrepresentation, the IRS auditor’s fraud and deceit may vitiate a valid consent.

Manner of Objecting to an IRS Summons

The summons itself typically provides a very limited time period ten to appear before a designated IRS agent. If an individual wants to object to an IRS summons on constitutional or other grounds, he or she should appear before the designated IRS agent with counsel and state his objections if he intends not to comply. The IRS may then seek enforcement of the summons by filing an ex parte petition with the local district court, which will enter an order directing the person summoned to show cause why the summons should not be enforced and causing the petition and the order to be served upon him. The “show cause” proceeding is a civil and adversarial hearing to which the Federal Rules of Civil Procedure apply, including rights of discovery. See Reisman v. Caplin, 375 U.S. 440 (1964). However, the best practice to object to an IRS summons is to file a motion to quash an IRS summons before a United States district court that has proper venue. The proceeding to quash a summons must be filed no later than the 20th day after the day proper notice is given.

Objecting to Third Party Summons

Sometimes individual taxpayers have reason to object to summons issued to third parties. There are three ways in which individuals or businesses can obtain a hearing on the validity of a summons issued to a third party: 1) he or she can request the third party refuse compliance before the hearing officer and enter objections to the enforcement of the summons in the district court on his own behalf; 2) he or she can request the third party to refuse compliance before the hearing officer and, when the enforcement proceeding is commenced, the individual can seek to intervene in the proceeding under Rule 24(a)(2) of the Federal Rules of Civil Procedure; or 3) if the third party refuses to cooperate, the individual can seek an injunction against compliance and seek to intervene under Rule 24(a)(2) at the enforcement proceeding.

Objections to Summons Issued to Third Party Privileged Communications- Attorney-Client

In certain cases, individuals being investigated by the IRS can prevent their attorney from turning over records summoned by the IRS. However, in order to object to a summons based on the attorney-client privilege, an attorney-client relationship must be established. The requirements of the attorney-client privilege are often codified by statute but can generally be described as: 1) where legal advice of any kind is sought; 2) from a professional legal advisor in his capacity as such; 3) the communication relating to that purpose; 4) made in confidence; 5) by the client; 6) are at his instance permanently protected; 7) from disclosure by himself or by his legal advisor; 8) except the protected by waived.

The privilege has probably been challenged more often in tax fraud or tax evasion cases than in any other area of the criminal law, and with some success. The principal attacks have related to issues such as whether legal as opposed to business or accounting advice was sought, whether the testimony or documents relate to communications made in confidence, and whether the privilege was waived by the communication of the privileged item to a third party who was not an agent of the attorney or essential for the rendering of legal services.

If an individual hires an accountant to prepare his income tax returns, communications between the taxpayer and the accountant will not be privileged merely because the accountant is also a lawyer. The generally stated view of the courts is that the taxpayer, in such instances, is seeking accounting, not legal advice. Some courts have recognized that the privilege can exist between a client and an attorney in the process of preparing a tax return, but it must be clear that legal advice was sought and that confidentiality was both expected and required for the communication to be made. One major difficulty an attorney will encounter in preparing the return, either by himself or through an employee, is the fact that the tax return will be filed. Thus, the work papers of an accountant employed by an attorney that otherwise would have been covered by the attorney-client privilege will be lost. Sometimes, transactions between a client and an attorney will become involved in a tax fraud or tax evasion investigation. Dates and amounts of legal fees paid, invoices, correspondences, ledgers, etc., relating to the payment of legal fees, do not constitute confidential communications. Neither does the privilege apply if the attorney is a conduit for handling funds, or the transaction involves a simple transfer of title to real estate, without consultation for legal advice.

There is no Accountant-Client Privilege

There is no privilege between an accountant and his client that is recognized under federal law. In fact, in most tax fraud or tax evasion cases, the accused’s accountant is an important witness for the prosecution.

Husband-Wife Privilege

Sometimes the husband-wife privilege is raised by defendants in a criminal tax case. The federal courts have recognized that confidential communication made between a husband and wife may be privileged communications. The privilege may be claimed by the husband or wife, in or out of court, and it may be waived. In order to prevent a spouse from turning over recorders summoned, it must establish that the records summoned can be characterized as communications made during the marriage relationship, not before marriage or after divorce; it must also have been intended as confidential and not made in the presence of others.

Complying With a Summons

A summons is made of words and the summoner is required to do or to produce only what the words command. The exact language of the summons must be carefully examined before efforts to comply are undertaken, and then the documents demanded are in fact produced. Most business books and records are not set up for compliance with summonses. For example, the summons may demand “all invoices” respecting certain transactions, but a check of the invoice file may indicate that correspondence, memoranda, copies of checks, etc. are also included. If only the invoices are demanded, only the invoices and not the file should be produced.

In determining what is and is not covered by the summons, gray areas will be found where the determination is difficult: It is not helpful to indicate the problem to the agent or the hearing officer, because it will then promptly be cured by the issuance of a new summons. The best position to adopt is a reasonable one, not an overly technical one. A qualified tax attorney can deliver the material with a written statement of exactly what is covered in the submittal and what counsel understands to be the requirements of the summons.

Conclusion

Winning or losing a criminal tax case depends to a large extent on the actual facts of the case. Nevertheless, this is one of the few areas of the criminal law where the most vital and damaging facts are consistently developed from the defendant, because he or she can make statements or deliver records or offer early and weak defenses. The value of a qualified tax attorney is inestimable in IRS investigations.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony advises clients on tax compliance issues, including criminal tax investigations, sensitive civil audits, and voluntary disclosures. He has represented numerous clients worldwide in matters arising from the IRS and Justice Department’s crackdown on unreported assets and income. Anthony has also tried a significant number of civil and criminal cases.

Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or [email protected]. This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.