We covered in Tax Returns & 5th Amendment Privilege? - Part I - The Fifth Amendment and the Filing of Tax Returns. In this post we are coverings a discussion of Invoking the Fifth Amendment for an IRS Document Request and Obligations of Tax Professionals: Weighing a Prompt Resolution with Protecting Taxpayer Privilege (See Michael J. DeBlis III & Agostino & Associates).
If a taxpayer receives a summons but believes that any part of it is incorrect, unwise, or otherwise a poor idea, he can refuse to comply with any part of the summons. At this point, it’s up to the IRS to bring a court order to attempt to secure the data not willingly provided. To do this, the IRS will have to prove to a court that a court order is necessary to conduct an investigation, that the investigation will be conducted properly, and that the information is not currently in the hands of the IRS.
However, attempting to use the Fifth Amendment for this reason gets a little murky according to case law, with several applicable principles to consider. First, there is no naturally assumed privilege for pre-existing, voluntarily created documents, like personal bookkeeping records, because these weren’t created on behest of the IRS. Second, the act of procuring requested documents may incriminate a summoned person by admitting that the documents exist, that they are in the taxpayer’s possession, and that they are presumably required by the summons, making the Fifth Amendment privilege largely available on a case-by-case basis. Third, an “act of production” immunity is not an option for required records, like foreign bank account records, under the required records doctrine as these records are required to be maintained by law and the government is given the right to inspect these documents as a condition of voluntary participation in one of the covered regulated activities. Fourth and finally, it’s not possible for the IRS to use its powers to force a taxpayer to waive his Fifth Amendment rights by requiring the preparation of documents that, under the right circumstances, may be covered by privilege.
Sound confusing? It is. But that’s the nature of using the Fifth Amendment as a defense.
However, the role of the Fifth Amendment does put many tax professionals lucky enough to stumble upon an applicable case between a rock and a hard place. While it’s in their best interest to help the taxpayer, they are also obligated to help the IRS uphold its responsibilities, which means both protecting privilege while simultaneously ensuring expedited proceedings. This essentially means that representatives are expected to fully understand the potential role of the Fifth Amendment and, more importantly, whether or not it is appropriate. After all, if every taxpayer pled the Fifth whenever the IRS came knocking, the cost of performing audits would skyrocket, putting even more burden on an already-stretched agency.
In spite of the IRS’ need for adherence to guidelines and prompt cases, the current guidance provided by the IRS does address how to navigate these conflicts of interest, and the priority is often with protecting the taxpayer. For example, Circular 230 indicates that tax professionals are obligated to promptly inform their clients of non-compliance, error, or omission, and must also explain the potential consequences of any mistakes made. Circular 230 then goes on to explain that all records must be submitted in a timely manner “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” In essence, practitioners must thoughtfully and carefully weigh their obligations to their clients and their obligations to the IRS while giving proper regard to each.
This does, however, become more challenging in what is known as an eggshell audit, or an audit in which the taxpayer and his representative are aware of erroneous entries in prior tax years, but the IRS auditor is not. In this case, a tax professional must somehow balance providing the IRS with the information it needs without misstating any facts or otherwise misleading the course of the audit while still safeguarding the taxpayer’s best interest. However, this can get into murky territory regarding Misprision of Felony in the United States Code, which effectively states that concealment of a felony by anyone who knows about a felony and fails to report it to the proper authority can result in a fine or three years in prison. However, this statute implies active concealment, which means that a tax representative doesn’t necessarily have to speak up when not asked, but should be honest if the issue arises.
Invoking the Fifth Amendment for an IRS Document Request
Under code section 7602, the IRS has the broad authority to summons books, papers, files, or any other data that may be relevant to an IRS investigation. While not a formal legal proceeding, it is possible to invoke the Fifth under these circumstances, but it’s not common, and doing so requires a thorough understanding of section 7602, the act of production doctrine, and the required records doctrine.If a taxpayer receives a summons but believes that any part of it is incorrect, unwise, or otherwise a poor idea, he can refuse to comply with any part of the summons. At this point, it’s up to the IRS to bring a court order to attempt to secure the data not willingly provided. To do this, the IRS will have to prove to a court that a court order is necessary to conduct an investigation, that the investigation will be conducted properly, and that the information is not currently in the hands of the IRS.
However, attempting to use the Fifth Amendment for this reason gets a little murky according to case law, with several applicable principles to consider. First, there is no naturally assumed privilege for pre-existing, voluntarily created documents, like personal bookkeeping records, because these weren’t created on behest of the IRS. Second, the act of procuring requested documents may incriminate a summoned person by admitting that the documents exist, that they are in the taxpayer’s possession, and that they are presumably required by the summons, making the Fifth Amendment privilege largely available on a case-by-case basis. Third, an “act of production” immunity is not an option for required records, like foreign bank account records, under the required records doctrine as these records are required to be maintained by law and the government is given the right to inspect these documents as a condition of voluntary participation in one of the covered regulated activities. Fourth and finally, it’s not possible for the IRS to use its powers to force a taxpayer to waive his Fifth Amendment rights by requiring the preparation of documents that, under the right circumstances, may be covered by privilege.
Sound confusing? It is. But that’s the nature of using the Fifth Amendment as a defense.
Obligations of Tax Professionals: Weighing a Prompt Resolution with Protecting Taxpayer Privilege
The tax system is built on the voluntary compliance of taxpayers. To facilitate this, the Treasury Department maintains numerous rules and regulations that govern the practice of tax professionals, like tax attorneys and IRS Enrolled Agents. These individuals are meant to serve as pillars of the taxation system, not as a backdoor around the IRS’ stated intentions. In layman’s terms? Cooperation is expected, even in challenging circumstances.However, the role of the Fifth Amendment does put many tax professionals lucky enough to stumble upon an applicable case between a rock and a hard place. While it’s in their best interest to help the taxpayer, they are also obligated to help the IRS uphold its responsibilities, which means both protecting privilege while simultaneously ensuring expedited proceedings. This essentially means that representatives are expected to fully understand the potential role of the Fifth Amendment and, more importantly, whether or not it is appropriate. After all, if every taxpayer pled the Fifth whenever the IRS came knocking, the cost of performing audits would skyrocket, putting even more burden on an already-stretched agency.
In spite of the IRS’ need for adherence to guidelines and prompt cases, the current guidance provided by the IRS does address how to navigate these conflicts of interest, and the priority is often with protecting the taxpayer. For example, Circular 230 indicates that tax professionals are obligated to promptly inform their clients of non-compliance, error, or omission, and must also explain the potential consequences of any mistakes made. Circular 230 then goes on to explain that all records must be submitted in a timely manner “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” In essence, practitioners must thoughtfully and carefully weigh their obligations to their clients and their obligations to the IRS while giving proper regard to each.
This does, however, become more challenging in what is known as an eggshell audit, or an audit in which the taxpayer and his representative are aware of erroneous entries in prior tax years, but the IRS auditor is not. In this case, a tax professional must somehow balance providing the IRS with the information it needs without misstating any facts or otherwise misleading the course of the audit while still safeguarding the taxpayer’s best interest. However, this can get into murky territory regarding Misprision of Felony in the United States Code, which effectively states that concealment of a felony by anyone who knows about a felony and fails to report it to the proper authority can result in a fine or three years in prison. However, this statute implies active concealment, which means that a tax representative doesn’t necessarily have to speak up when not asked, but should be honest if the issue arises.
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