What’s in a Name? Sometimes Quite a Lot

To enforce the Internal Revenue Code, the IRS has been given broad powers to investigate:

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 the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized-
(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and
(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

I.R.C. § 7602(a). Enforcement proceedings (if necessary) then occur in district court. I.R.C. § 7604.

The taxpayer is not the only one that the IRS can seek information from; the Code permits the service of a summons on anyone who has relevant information concerning a particular taxpayer, provided that the taxpayer whose information is at issue is provided with notice. I.R.C. § 7609(a). The taxpayer can then move to quash the summons. I.R.C. § 7609(b). The government can also request that notice be excused where “there is reasonable cause to believe the giving of notice may lead to attempts to conceal, destroy, or alter records relevant to the examination, to prevent the communication of information from other persons through intimidation, bribery, or collusion, or to flee to avoid prosecution, testifying, or production of records.” I.R.C. § 7609(g).

Successful challenges to an IRS summons are rare, as there is no probable cause requirement imposed upon the government. Instead, the IRS must simply demonstrate “that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner’s possession, and that the administrative steps required by the Code have been followed.” United States v. Powell, 379 U.S. 48, 57-58, (1964). Once those factors (known as the Powell factors) are established, the government has made out its prima facie case that the summons should be enforced. The burden then shifts to the taxpayer, who is left to show some compelling reason why the summons should not be enforced, as where a summons is “issued for an improper purpose, such as to harass the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation.” Powell, 379 U.S. at 58. Given the relevant standards, enforcement is almost automatic, absent a claim of privilege.

In addition to its general summons powers under section 7602 of the Code, the IRS can also issue a “John Doe” summons that does not identity a particular taxpayer. To do so, the IRS must establish that

(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,
(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
(3) the information sought to be obtained from the examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

I.R.C. § 7609(f).

A recent summons enforcement case from Texas illustrates how the process works and raises an interesting privilege issue. After it caught one taxpayer who had used foreign accounts, foreign trusts and foreign corporations in an effort to avoid paying approximately $2 million in taxes, the IRS sought to learn the identity of other clients of the taxpayer’s estate planning firm. Taylor Lohmeyer Law Firm PLLC v. United States, Civil Action No. SA-18-CV-1161-XR, 2019 U.S. Dist. LEXIS 81809 (W.D. Tex. May 15, 2019).

To do so, the IRS requested that a district court authorize a John Doe summons directed at the Taylor Lohmeyer Law Firm, compelling it to provide “names of and other information related to the Firm’s clients between 1995-2017 to investigate the tax liability of those who used the Firm to ‘create and maintain foreign bank accounts and foreign entities that may have been used to conceal taxable income in foreign countries.’” Id. at *2-*3. Following an ex parte proceeding, the district court authorized the issuance of the summons to the law firm, which responded by filing a motion to quash. Id. at *3.

The district court commenced its analysis with a review of the Powell factors; based upon an affidavit from an IRS revenue agent, the district court held that the government had satisfied them. Id. at *6-*7. In response, the law firm sought to challenge the sufficiency of the revenue agent’s affidavit, and it also asserted that the attorney-client privilege excused it from providing the identity of its clients.

The district court treated the challenge to the agent’s affidavit as an argument that its process was abused, a contention that it quickly rejected. The court first observed that all the IRS had to do was demonstrate that there was a reasonable basis to believe that the firm had provided similar advice to other clients. Id. at *7-*8. It certainly did not help the law firm’s case that the revenue agent was able to cite statements made by a former partner in an interview that she conducted: The former partner indicated that he had established offshore structures for tax purposes for 20-30 clients “between the 1990s and early 2000s.” Id. at *10.

The more interesting issue was presented by the claim of privilege. As the district court observed, courts have generally recognized attorney-client privilege as a basis to deny enforcement of a summons. The problem, however, is that the identity of a client is rarely privileged: “In the absence of unusual circumstances, the fact of a retainer, the identity of the client, the conditions of employment and the amount of the fee do not come within the privilege of the attorney-client relationship.” In re Semel, 411 F.2d 195, 197 (3d Cir. 1969). Despite that general rule, the district court in Taylor Lohmeyer did recognize that an exception existed “when the disclosure of the client’s identity by his attorney would have supplied the last link in an existing chain of incriminating evidence likely to lead to the client’s indictment.” 2019 U.S. Dist. LEXIS 81809, *13 (quoting In re Grand Jury Proceedings, 680 F.2d 1026, 1027 (5th Cir. 1982)).

The law firm argued that it fit into the exception “because the summons seeks the identities based on the advice and services sought from the firm.” Id. As support, the law firm relied upon United States v. Liebman, 742 F.2d 807 (3d Cir. 1984), where the Third Circuit held that the identities of tax clients of a law firm were privileged when the affidavit in support of the summons “not only identifie[d] the subject matter of the attorney-client communications, but also describe[d] its substance.” Liebman, 742 F.2d at 809. For its part, the government sought to distinguish Liebman by noting that the clients of the law firm were not identified by the type of advice that they sought, but by the services they had received. 2019 U.S. Dist. LEXIS 81809 at *14. From this premise the government argued that to establish that the privilege applied, the law firm had to show that all of the relevant clients received the same privileged communications as the taxpayer that the IRS had already caught. Id. at *14-*15.

The distinction drawn by the government does not seem particularly compelling. The IRS had a pretty clear picture of the advice the firm supplied, as it had interviewed a former partner, and its summons was premised on the assumption that other clients of the firm received the same advice as the taxpayer it had already caught.

The district court, however, was persuaded by the government’s argument particularly in view of the law firm’s failure to offer a privilege log: “Here, the Firm’s attorney-client privilege arguments do not meet its burden to rebut a Powell showing, in large part because the Firm makes a blanket assertion and does not produce a privilege log or similar device.” Id. at *16 (citations omitted). The firm had offered a declaration from a firm partner in an effort to bring the case within Liebman, but the district court was unpersuaded: “[T]he new Lohmeyer declaration provides only generalities that do not show the IRS already knows so much that disclosure of client identities falls in the narrow exception to the general rule that identities are not privileged.” Id. at *17.

The court did, however, leave the door open for the firm to establish that particular documents and information responsive to the summons was privileged. Perhaps if the issues surrounding client identities are examined in the context of a fuller record, the outcome will be different. It appears, however, that the law firm has an uphill battle on its hands.

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