Chief Counsel Advice 201111001
In Chief Counsel Advice (CCA), IRS has concluded that the running of the statute of limitations for assessment was suspended under Code Sec. 7609(e)(2) when a summoned third party failed to attend a scheduled summons interview to give testimony, and his failure to do so continued beyond six months after the summons' service. This result wasn't altered by the examiner's failure comply with the Internal Revenue Manual (IRM) and timely send a Form Letter 4432 to the third party and taxpayers stating that the production was insufficient and describing what information should be produced to comply with the summons.
Background. Under Code Sec. 7609(e)(2), if the third-party recipient of a summons fails to comply with the summons for six months after service, then the periods of limitations under Code Sec. 6501 (relating to the assessment or collection of tax) and Code Sec. 6531 (relating to criminal prosecutions) are suspended for any person for whose liability the summons was issued. The period of suspension begins six months after the summons is served and ends when the dispute is resolved. This suspension provision applies to third-party summonses that are subject to the notice requirements of Code Sec. 7609(a) (which generally provides that notice is required to be given to anyone identified in a summons if a summons is directed to a third party) or to a John Doe summons under Code Sec. 7609(f).
If the summoned third person's production doesn't comply fully with the summons, IRM 18.104.22.168.3.4(3) directs an examiner to promptly contact the summoned person in writing, using a Form Letter 4432, which states the production is insufficient and describes the information that the summoned person should produce to comply with the summons. A copy of this letter should be mailed to the taxpayer on the same date on which it is mailed to the summoned person.
There is a final resolution of a summoned party's response to a third-party summons or any order enforcing any part of a third-party summons when IRS determines that the summoned person has fully complied with that summons or any order enforcing any part of the summons, and when all appeals are disposed of for the period in which an appeal may be taken or a request for further review may be made has expired. (Code Sec. 7609(e)(2)(B), Reg. §301.7609-5(e)(3))
Before deciding to rely upon the suspension provision under Code Sec. 7609(e)(2), an examiner should obtain written approval from the examiner's group manager or a higher level manager. (IRM 22.214.171.124.3.2(3))
Facts. On Date 1, IRS properly hand-delivered a copy of a third-party summons to Nigel, a third-party witness, within the U.S. Nigel is a U.S. citizen who, after receipt of the summons, moved to and currently resides in a foreign country. IRS believes that Nigel has information that would be useful in determining the income tax liabilities of taxpayers who are relatives of Nigel and who are currently under examination. IRS believes the taxpayers are “United States shareholders” of controlled foreign corporations who have failed to report income.
Nigel failed to attend the summons interview scheduled for Date 2 in the U.S. He mailed a letter on Date 3 to IRS stating that he did not have any information relevant to IRS's investigation of the taxpayers' tax liabilities, that compliance with the summons would be overly burdensome, and that he would not attend.
On Date 4, the Office of Chief Counsel sent Nigel a “last chance” letter requesting his attendance at a meeting with the revenue agent on Date 5. Nigel also failed to appear on that date.
On Date 6, IRS filed a petition to enforce its summonses in the appropriate U.S. district court. On Date 7, the court entered an amended order to show cause as to why the witness should not be compelled to obey the summons.
The limitations period for assessment for the taxpayers' income tax return hasn't yet expired, in part due to the tolling of the period after the taxpayers filed multiple petitions to quash other third-party summonses.
Assessment period was suspended. The CCA concluded that the assessment period was suspended under Code Sec. 7609(e)(2) when Nigel, the summoned third party, failed to attend the scheduled summons interview to give testimony, and his failure to testify continued beyond six months after service of the summons. Because the summons was within the purview of Code Sec. 7609(e)(2), the limitations period for assessment for the taxpayers was properly suspended, with the suspension period beginning on Date 8 and continuing until final resolution of the witness' response.
The third-party summons was properly served and noticed more than six months ago. Nigel's move to a foreign country after the summons was served didn't excuse him from complying with the summons. His failure to appear, IRS's prompt “last chance” letter to Nigel, and IRS's petition to enforce the summons clearly showed that IRS did not believe that Nigel had fully complied with the summons.
The CCA concluded that the close familial relationship between Nigel and the taxpayers, plus the petition to enforce, further suggested that the taxpayers were aware of Nigel's failure to comply with the summons, even though the agent had not sent a Form Letter 4432 to the witness or the taxpayers before the suspension period began on Date 8. On Date 4, well within the first six months after the summons was properly served on the witness, the Office of Chief Counsel sent the witness a “last chance” letter explaining that the witness didn't have valid grounds for failing to appear in response to the summons. The CCA determined that IRS's failure to use a Form Letter 4432 to convey this information to the witness and to the taxpayers was a harmless error under the circumstances. Further, taxpayers did not have standing to challenge IRS's failure to comply with IRM procedures.
The CCA also advised that IRS examiners should be sure to comply with the contemporaneous document provisions going forward until the suspension terminates. In addition, examiners are told to adhere to the procedure for issuing Form Letter 4432 if the scheduled production by the witness doesn't fully comply with the summons. Form Letter 4432 should state that the production is insufficient and describe the information that must be produced to comply with the summons. The letter should also be sent to the taxpayers.
References: For third-party summonses, see FTC 2d/FIN ¶T-1252; United States Tax Reporter ¶76,094; TaxDesk ¶822,013; TG ¶70055.