Protecting the Family Jewells: The Case for Strict Enforcement of Taxpayer 23-Day Notice for IRS Administrative Summonses

Protecting the Family Jewell s: The Case for Strict Enforcement of Taxpayer 23-Day Notice for IRS Administrative Summonses Jeremy E. Carroll * ABSTRACT: Congress has granted the Internal Revenue Service (“IRS”) a broad administrative summons power that it can use with almost unlimited discretion to produce records and testimony to investigate taxpayers for incorrect tax returns. While these investigations are intended to be civil in nature, evidence uncovered during the investigation can lead to criminal prosecution. However, section 7609 of the Internal Revenue Code (“IRC”) provides taxpayers some protection by requiring the IRS to give taxpayers 23-days’ notice before they can enforce a summons on third-party records pertaining to the taxpayer. This gives the taxpayer under investigation an opportunity to quash the summons if the taxpayer can convince a judge that the IRS is using their administrative summons for an improper purpose (for example, attempting to uncover criminal tax fraud but claiming that the investigation is civil in nature, or simply using the administrative summons as a form of harassment). Yet when the IRS has failed to give a taxpayer the full 23-day notice, circuit courts have found various methods of excusing the lack of notice, thereby depriving the taxpayer of the protection set forth by Congress. This changed in 2014 with the Tenth Circuit’s decision in Jewell v. United States . In Jewell , the Tenth Circuit created a circuit split by finding that if the IRS gives a taxpayer less than 23-days’ notice and the taxpayer files a motion to quash the summons, the motion must be granted. This Note argues that the Tenth Circuit is the only court to have thus far come to the correct legal interpretation of IRC § 7609. It explores the legal justification of the Tenth Circuit’s holding as well as substantial public policy reasons for requiring strict enforcement of the 23-day notice requirement. I. INTRODUCTION ........................................................................... 1300 * J.D. Candidate, The University of Iowa College of Law, 2017. I would like to thank Eric Hartmann, Jon Woodruff, and the editorial staff and student writers of the Iowa Law Review for their help in publishing this Note. 1300 IOWA LAW REVIEW [Vol. 102:1299 II. CREATION OF THE 23-DAY NOTICE REQUIREMENT AND THE JUDICIAL HANDLING OF IRS NONCOMPLIANCE .......................... 1302 A. C REATION OF THE 23-D AY N OTICE R EQUIREMENT .................. 1303 B. D ECISIONS L EADING TO THE C IRCUIT S PLIT ............................ 1305 1. The Powell Factors...................................................... 1305 2. The Circuit Courts’ Application of Powell ............... 1306 C. T HE T ENTH C IRCUIT ’ S R ULING IN JEWELL V. UNITED STATES ................................................... 1309 III. THE POWER OF THE ADMINISTRATIVE SUMMONS AND THE POTENTIAL FOR ABUSE ............................................................... 1310 A. P RIVACY R IGHTS ................................................................... 1312 B. C RIMINAL I NVESTIGATIONS .................................................... 1313 1. Donaldson and LaSalle ................................................ 1314 2. Concerns after Donaldson and LaSalle ...................... 1316 IV. BRINGING J EWELL FURTHER ........................................................ 1318 A. E XPANDING ON THE T ENTH C IRCUIT ’ S R EASONING IN JEWELL . 1318 1. The 23-Day Notice Is Mandatory ............................. 1319 2. The 23-Day Notice is an Administrative Step .......... 1322 B. P UBLIC P OLICY ...................................................................... 1325 1. Institutional Trust ..................................................... 1326 2. Practicality .................................................................. 1329 3. The Result of Strict Enforcement ............................ 1331 V. CONCLUSION .............................................................................. 1333 I. INTRODUCTION The relationship between the Internal Revenue Service (“IRS”) and the American public is perhaps one of the strangest relationships between an administrative agency and the public it serves. While the agency is essential for ensuring that the government has the resources needed to provide critical services to the nation (i.e., provide for a national defense) the common public sentiment towards the IRS is somewhere between begrudging acceptance and downright contempt. But why? Certainly part of this dislike lies in the IRS being the public face that takes away part of citizens’ paychecks. However, when looked at deeper, many fear that the IRS is an abusive, power hungry, even tyrannical organization. 1 Whether such abuses are real or imagined, it is undeniable that the IRS has been granted certain wide sweeping powers to effectuate its job of collecting accurate taxes and replenishing the nation’s coffers. One of the 1. See infra note 161 (detailing articles aiming to paint the IRS as “evil”). 2017] PROTECTING THE FAMILY JEWELL S 1301 powers granted to the IRS is the administrative summons. Simply put, the administrative summons grants the IRS the ability to issue summons to taxpayers or third parties in order to investigate taxpayer returns or tax fraud, often without the need to show probable cause. 2 In order to protect taxpayers from potential abuse of this power, Congress enacted section 7609 of the Internal Revenue Code (“I.R.C.”), which requires the IRS to notify a taxpayer after the IRS has issued an administrative summons to a third party about taxpayer records. This notice must be given at least 23 days before the IRS schedules the records examination. 3 This allows the taxpayer to file a motion to quash and seek judicial review if the summons is being issued for an inappropriate reason. However, circuit courts have been highly reluctant to actually require the IRS to comply fully with the 23-day notice requirement. 4 When the IRS has given taxpayers less than 23-days’ notice, the courts have used a variety of legal justifications to enforce the summons and forgive the IRS’S error. 5 Until 2014, no circuit court was willing to hold the IRS accountable with strict compliance of the 23-day notice. As a result, the IRS has been given wide latitude to circumvent one of the very few procedural safeguards put in place by Congress to protect the American public from potential abuse of an already sweeping power. 6 This changed in 2014, when the Tenth Circuit held that the IRS had to strictly comply with the 23-day notice, and that failure to comply would allow the taxpayer under investigation to successfully quash the summons. 7 The Jewell decision represented a substantial departure from 23-day notice jurisprudence, and created a circuit split, opening the door for the Supreme Court to potentially rule on the issue. This Note argues that the Tenth Circuit’s strict enforcement of the 23-day notice requirement in Jewell is a better legal standard—for public policy reasons not explored in the Jewell decision—than decisions of other circuits, which fail to force the IRS to strictly comply with the 23-day notice requirement. Part II explores the history of the creation of the 23-day notice, the circuit court decisions leading up to Jewell , and explores the Tenth 2. See infra Part III. 3. See 26 U.S.C. § 7609(a)(1) (2012). Hereinafter, title 26 of the United States Code is referred to as the Internal Revenue Code (“I.R.C.”). 4. See infra Part II.B. 5. See infra Part II.B. 6. To be fair, more often than not it does appear that failure to comply with the strict requirements set forth in I.R.C. § 7609 are the result of mistakes. A good example of this is Azis v. IRS . In Azis , the IRS agent failed to send the entire notice to the taxpayer and was then out of town for training for nearly a week, resulting in the full notice being sent four days later than required. Azis v. IRS, 522 F. App’x. 770, 776–77 (11th Cir. 2013). As this Note will argue, however, that the failure to comply with the 23-day notice is often due to mistakes and not malice does not change the harm to plaintiffs or the potential for abuse. 7. Jewell v. United States, 749 F.3d 1295, 1301 (10th Cir. 2014). 1302 IOWA LAW REVIEW [Vol. 102:1299 Circuit’s holding in Jewell . Part III explores the reasons that safeguards for administrative summonses, such as the 23-day notice requirement, are important. Specifically, Part III.A explores the privacy concerns related to administrative summons and Part III.B explores the ways in which the administrative summons can circumvent warrants for criminal investigation, calling into question the safeguards put forth by the Fourth Amendment. Part IV.A explores the legal reasoning employed by the Tenth Circuit in its Jewell decision, but attempts to analyze the issue with greater depth than the Tenth Circuit. Part IV.B explores public policy reasons for why courts should find that the IRS must strictly comply with the 23-day notice requirement. II. CREATION OF THE 23-DAY NOTICE REQUIREMENT AND THE JUDICIAL HANDLING OF IRS NONCOMPLIANCE Section 7602 of the I.R.C. gives the IRS broad powers to issue summons “[t]o examine any books, papers, records, or other data which may be relevant” 8 to ascertain the veracity of a tax return, the reasons for a taxpayer not making a return, or to generally investigate “the liability of any person for any internal revenue tax.” 9 This power further allows the IRS to summon any third person who possesses books or materials relating to the business of the taxpayer 10 being investigated, or any third person whom the Secretary 11 “may deem proper,” to produce requested materials and testify under oath. 12 This power is often referred to simply as an administrative summons. 13 8. I.R.C. § 7602(a)(1). 9. Id . § 7602(a). 10. It is worth noting that any person is entitled to the protection of I.R.C. § 7609...