How an Auditor Prepares for an Office or Field Audit, Part 2
If the revenue agent is not satisfied with what you have provided—by oral request during the audit interview with you or your representative or through an IDR—the IRS may issue something called a summons.
Internal Revenue Code §§ 7602(a) and 7604(b).
What is an IRS Summons
An IRS summons is a legally enforceable order. It orders you to appear before the auditor to answer questions and/or to bring specified items. The summons is issued by the IRS itself, not by a court.
A summons is not to be taken lightly. If you don’t comply, the IRS can force you to appear before a federal court judge in a summons enforcement proceeding. The judge can order you to provide the information requested or produce the documents listed. If you don’t show up or cooperate, you might be fined or jailed.
If you get a summons and have questions about what might happen to you if you do or don’t comply, contact a tax lawyer.
In rare cases, you may successfully oppose the summons on legal grounds, such as:
- self-incrimination—your constitutional right to withhold something from the government if it would subject you to criminal prosecution for any type of offense, not just a tax offense
- the summons is vague, overbroad, or unduly burdensome—for example, you’ve been asked to produce an overwhelming amount of documents, or
- the items are protected by a legal privilege—such as the attorney client privilege.
Despite the power of a summons, the IRS rarely hauls an uncooperative taxpayer into federal court for failing to comply. Instead, the IRS is likely to do one of the following if you don’t give the auditor information that they requested.
- Drop it – You’d be surprised how many auditors back off or forget. Keep in mind that an auditor has a fairly large caseload. If the agent has most of the needed information, he or she may let it slide.
- Go further without your cooperation – Auditors can summons third parties, such as your bank, for the records you refuse to hand over. This is a fairly common practice and is perfectly legal.
- Issue an Examination Report – The auditor can issue an examination report based on the information he or she does have, by estimating missing income and disallowing unverified expenses. Receiving an unfavorable audit report is the most likely consequence of your not cooperating.
Auditors have two ways to get data about you from third parties:
- Informally request the information
- Order the information by way of a summons
Most auditors avoid issuing a summons unless informal requests for information fail.
An auditor can contact third parties who have dealt with you by letter or telephone, and may very well do so to confirm information in your tax return.
If you claimed to make regular office supply purchases at a neighborhood stationery store, the auditor might call the store to see if the clerks know you.
In most situations, you have no grounds for objecting to these contacts. Your only legitimate complaint is if the auditor reveals personal or financial information about you or your spouse to another person.
It’s perfectly fine for the IRS to tell the third party that you are under investigation, but it’s not fine for the IRS to say more.
If the auditor has revealed sensitive information about you, contact your local IRS district director and complain that your right to privacy has been violated.
If an auditor doesn’t want to rely on an informal request—or it goes unanswered—the IRS can issue a summons for data from banks, employers, business associates, and any other third party who has information about you.
The auditor is most likely to do this if you (or the third party) don’t voluntarily provide the information or the auditor wants to verify information you do provide.
You will be sent a copy of the IRS summons so that you know the IRS is taking this action. You can rarely stop a third-party summons, but if you want to try, see a tax pro.
Never tell someone not to comply with an IRS summons. It’s illegal if they follow your advice and could get both you and the person who received the summons into trouble. Federal judges do not think highly of taxpayers who attempt to disrupt the work of an IRS agent.
The auditor will have in your file the actual tax return you filed and a summary of the IRS’s income records (W-2 and 1099 forms) for the audit year. The auditor is very unlikely to have other tax returns, audit reports, or tax account history. This information is scattered throughout the IRS’s various computer systems.
Much of this data is not easily accessible to the auditor, who might first ask you for your copies of other returns or audit reports.
If you don’t turn them over, the auditor can request that the documents be taken out of storage. Auditors don’t go to this trouble unless they feel the taxpayer is not being truthful. Or, if a problem with the tax return for the year under audit is so severe that it permeates other returns and could lead to a big audit bill.
Other Government and Private Records
All federal and state agencies share data with each other, to some extent.
An IRS auditor can access the Treasury Enforcement Communication Systems (TECS) computer for data on you, such as your criminal record. The auditor can also search Social Security Administration, Passport Office, and Postal Service records.
These records show your previous addresses, trips abroad, and income history from previous jobs.
Auditors can also search local and state government records for ownership of vehicles, boats, airplanes, real estate, and business entities.
Auditors also tap into private databases and credit reporting agency files (Equifax, Experian, and TransUnion) if they are looking for personal data on a taxpayer. All kinds of information are in these files— credit card accounts, mortgage loans, and previous addresses—that could provide clues about your property and resources.
Office auditors seldom request information from other government or private agencies, but field agents often do.
For part one of this article, click here.