Drug Traffickers Program--Impact of the
Administrative Summons Provisions of

H.R. 10612 (Section 1205),

H.R. 10612 contains a provision imposing substantial limitations on the ability of the Internal Revenue Service to use an administrative summons to obtain information concerning the tax liability of any person. This provision (section 1205 of the bill) has the support of both houses of Congress. In general, this provision will apply whenever IRS serves a summons upon a bank or other financial institution, a broker, a consumer credit reporting agency, a person engaged in the business of giving credit via credit cards or other devices, an attorney, or an accountant, to obtain records pertaining to the business transactions or affairs of a third person (usually the taxpayer in respect of whose tax liability the summons was issued).

Within three days after service of such a summons, IRS will be required to send a notice to such third person (with a copy of the surmons attached), notifying him that the summons has been served and instructing him that he has 14 days to object to the summoned party complying with the summons. During that 14-day period, IRS may not examine the summoned records. If the third party objects, he may stay compliance with the summons by sending a notice of stay to the summoned party and to IRS. If the Internal Revenue Service then wishes to enforce the summons, it will have to commence an action in court, in which action the third party may intervene and raise any objections he has to enforcement of the summons.

The procedure does not apply to a "John Doe" summons, but section 1205 does provide that a "John Doe" summons may not be issued except with the permission of a court upon a showing that there are reasonable grounds to believe that some person or group of persons is not in compliance with the internal revenue laws and the identity of such person or persons is not readily available from other sources.

There are several exceptions to, all of the above. For example, none of it applies to a summons which merely seeks to ascertain whether the summoned party has certain records with respect to the taxpayer (as opposed to examining what is in those records). Also, the provisions do not apply if the summons merely seeks to identify the person maintaining a numbered account with the bank or financial institution. Finally, if the Service has reasonable cause to believe that the giving of the required notice will lead to destruction of records, collusion with or intimidation of witnesses, or flight, it can apply to a court for an order dispensing with the need to give the taxpayer notice of the summons.

Section 1205 will undoubtedly cause delay in obtaining information relevant to a tax investigation from those third parties described above. For one thing, although section 1205 does not preclude a bank, for example, from voluntarily disclosing information to IRS, the mere presence of section 1205 will no doubt prompt many banks to request the service of the summons in situations in which they had not required a summons heretofore. Second,

in those cases in which the taxpayer under investigation will be prone to seize upon any opportunity for a delay, he will no doubt take advantage of section 1205 to stay compliance by the summoned party with the summons, put the Internal Revenue Service to the necessity of commencing a summons enforcement action, and then intervene in that action to raise whatever defenses or objections he feels the court will listen to. He may also appeal a decision in that summons enforcement action which is adverse to him. Unless the District Court, and the Court of Appeals, refuses to grant a stay pending that appeal, IRS will not have access to the third party's records until final disposition of that appeal.

It is too early to tell how narrowly, or broadly, courts will ingerpret that provision which permits a court to relieve IRS of the necessity of giving notice upon a showing of reasonable cause to believe that the notice will lead to material interference with the investigation. A delay in obtaining information under the first summons will, of course, de lay the discovery of leads to the second source of information, and since an investigation may require checking records of a number of different third parties affected by this legislation, years may be consumed before substantial progress is made via this route. It should be noted, however, that section 1205 does provide for a tolling of the statute of limitations on criminal and civil tax liability whenever the taxpayer takes action under the section to stay compliance with the summons.

It is difficult to judge the impact of section 1205 on Service investigations concerning the tax liability of drug traffickers. The potential for delay, extended investigations, (and in the meantime the disappearance of witnesses, leads, and other records) is obvious to the extent the investigations depend upon information or leads to be obtained from the classes of third parties described above, i.e., financial institutions, brokers, etc. The extent to which this potential will become a reality will, of course, depend upon the extent to which the subject of the tax investigation responds to the notices of summons and comes into court, via lawyer, to oppose the summons. Even if he does not, the requirement of a notice each time a summons is served will provide the taxpayer with leads as to the third party sources from which we are trying to obtain information, and thus will enable him to some extent to follow the investigation.

ADMINISTRATIVE SUMMONS

Summary of Provision

When the Service issues a third-party summons to obtain records or testimony pertaining to a taxpayer, the taxpayer must be notified within 3 days and has 14 days from the date of the notice to apprise the person Summoned not to comply. The Service cannot examine the records until 14 days have elapsed. If the taxpayer stays compliance with the summons, the Service may seek enforcement in a Federal Court. The taxpayer has the right to intervene. During the period of court action, the civil and criminal statutes of limitation are suspended. Where a summons is issued solely to determine whether records exist or serve as an aid in the collection of an assessed tax liability, the taxpayer notice, and rights to intervene and stay compliance, would not apply. Also, if the court determines that there is reasonable cause to believe the giving of notice may result in a material interference in an investigation, the taxpayer notice and rights to intervene and stay compliance do not apply.

where the taxpayer

Before the Service can issue a John Doe summons, is not identified, the Service must first establish reasonable cause for requesting such summons in a court proceeding.

There is also a provision for payment of third-party witness fees and costs incurred to produce summoned information.

These provisions will also apply to the investigative activities performed by the Internal Security Division.

These provisions will apply to summonses issued after December 31, 1976; however, an amendment to H. R. 1142, a minor bill now in the Senate, would extend the effective date to February 28, 1977.

Impact on the Service

These provisions require that administrative procedures be established to provide for:

(1) internal clearance and approval prior to issuing summons;

(2) taxpayer notification within 3 days after the summons is
issued;

(3) control of notices from taxpayers exercising their right
to stay compliance with the summons;

(4) suspending the statutes of limitation where court action is
sought to enforce a summons, and

(5) payment of witness fees and costs in accordance with regulations to be issued.

We can expect

(1) delays in completing examinations and investigations;

(2) additional staff-time to assure that notices are accompanied by a copy of the summons and directions to the taxpayer on how to stay compliance with the summons; that information has been properly prepared for court action to enforce a summons, to request a John Doe summons, or to by-pass the notice requirements; that notices from taxpayers exercising their right to stay compliance are associated with the appropriate file or that the examiner has been notified of the stay; and that any suspension of the statute of limitation has been coordinated with service centers; and

(3) significant costs for payments of witness fees and costs to

produce summoned records, etc.

JEOPARDY AND TERMINATION ASSESSMENTS

Summary of Provision

New provisions relating to jeopardy and termination assessments provide for expedited administrative and judicial review. Under the new procedure, within five days after the date on which a jeopardy or termination assessment is made, the Service is required to give the taxpayer a written statement of the information upon which the Service relies in making the assessment. Upon request of the taxpayer and within 30 days after the statement is furnished, the Service is required to conduct an administrative review in order to determine whether the making of the jeopardy and termination assessment is reasonable under the circumstances and whether the amount assessed is appropriate under the circumstances. If not satisfied with the decision of the Service, the taxpayer may within 30 days after the Service makes a determination on his request (or, if earlier, within 30 days after the 16th day after the request for administrative review was made) bring an action in the U. S. District Court in which he resides. Within 20 days, the Court must make a decision on whether the jeopardy or termination assessment is reasonable and whether the amount is appropriate (but not the ultimate tax liability which may still be determined in a separate proceeding). The 20-day period may be extended by not more than 40 additional days at the request of the taxpayer (but not the Treasury Department or the court). There is no appeal of District Court findings. The Service bears the burden of proof in showing that the jeopardy or termination assessment is reasonable. On issues involving whether the amount assessed is reasonable, the burden of proof is on the taxpayer. Property seized pursuant to a jeopardy or termination assessment may not be sold prior to the applicable final determination and without the taxpayer's consent, unless that property is perishable or requires costly maintenance.

The amendment overrules one holding in Laing v. United States, et al., 423 U.S. 161 (1976), by specifically not requiring the Service to give a terminated taxpayer a notice of deficiency within 60 days of a termination assessment. Rather, the amendment provides that within 60 days after the later of the due date of the taxpayer's return for the full taxable year or the date on which the return is actually filed, if a deficiency exists, the Service must send the taxpayer a statutory notice. This notice of deficiency may be for an amount more or less than the amount assessed under the termination proceedings. Upon receipt of this notice, a taxpayer, who has been subjected to a termination assessment, is allowed to contest his tax liability in the Tax Court.

These provisons apply to jeopardy and termination assessments where the notice and demand takes place after December 31, 1976; however, an amendment to H. R. 1142, a minor bill now in the Senate, would extend the effective date to February 28, 1977.