Specific Types of Representation · Representing a Taxpayer in Audits/Examinations

IRS authority to investigate

The examination power is broad by design and bounded in four specific places. IRC § 7602 grants it; § 7605 limits when, where and how often; § 7602(c) requires advance notice before the IRS talks to anyone else; and § 7602(d) shuts the summons power off entirely once the case has gone to the Justice Department. The boundaries are where the questions live.

The rule

The grant (IRC § 7602(a)). For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person — or of a transferee or fiduciary — for any internal revenue tax, or collecting any such liability, the Secretary is authorised to:

1. examine any books, papers, records, or other data which may be relevant or material to the inquiry;
2. summon the person liable, any officer or employee of that person, any person having possession, custody or care of books of account containing entries relating to that person’s business, or any other person the Secretary may deem proper, to appear at a time and place named in the summons, to produce records, and to give testimony under oath; and
3. take testimony of the person concerned, under oath.

Note how far limb (2) reaches: it is not confined to the taxpayer, and its residual category — “any other person the Secretary may deem proper” — is deliberately open.

Criminal purpose is included (IRC § 7602(b)). The purposes for which the Secretary may act under § 7602(a) include inquiring into any offense connected with the administration or enforcement of the internal revenue laws. A civil examination does not become improper merely because it may surface a criminal offense.

Time and place (IRC § 7605(a)). The time and place of examination shall be such as may be fixed by the Secretary and as are reasonable under the circumstances. Where a § 7602(a)(2) summons is used, the date fixed for appearance shall not be less than 10 days from the date of the summons.

The one-inspection rule (IRC § 7605(b)). “No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year” — unless the taxpayer requests otherwise, or the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

Third-party contact notice (IRC § 7602(c)(1)). An IRS officer or employee may not contact any person other than the taxpayer with respect to the determination or collection of that taxpayer’s liability unless the contact occurs during a period, not greater than one year, specified in a notice which (A) informs the taxpayer that contacts with others are intended during that period, and (B) is provided to the taxpayer not later than 45 days before the beginning of that period.

Three qualifications sit in the same paragraph. Successive notices for the same taxpayer and same liability may in the aggregate exceed one year. A notice may not be issued unless there is an intent at the time of issue to make third-party contacts in the period — an intent tested on the assumption that the information will not be obtained by other means first. And § 7602(c)(2) requires the Secretary to periodically provide the taxpayer a record of persons contacted.

The Justice Department referral bar (IRC § 7602(d)). No summons may be issued, and the Secretary may not begin a § 7604 enforcement action, with respect to any person while a Justice Department referral is in effect for that person. A referral is in effect where the Secretary has recommended to the Attorney General a grand jury investigation or criminal prosecution of that person for an offense connected with the internal revenue laws, or where a § 6103(h)(3)(B) request has been made for disclosure of returns or return information relating to that person.

Two further limits. Under § 7602(e) the Secretary shall not use financial status or economic reality examination techniques to determine the existence of unreported income unless there is a reasonable indication of a likelihood of such income. Under § 7602(f), § 7602 material may not go to a § 6103(n) contractor except where that person requires it for the sole purpose of expert evaluation and assistance, and no person other than an IRS officer or employee, or the Office of Chief Counsel, may question a witness under oath on the Secretary’s behalf.

Churches. Section 7605(c) cross-references § 7611, which restricts church tax inquiries and examinations.

Current figures

How it works in practice

Read the purposes in § 7602(a) as the outer frame. The power attaches to ascertaining correctness, making a return where none has been made, determining liability — including a transferee’s or fiduciary’s — and collecting. That last matters: the same summons authority that supports an examination supports collection, which is why a revenue officer may summon records to locate assets.

The relevance standard is low. Section 7602(a)(1) reaches anything that may be relevant or material, so a representative resisting on relevance is arguing against a permissive standard. The productive objections are usually privilege, the one-inspection rule, or the reasonableness of time and place.

The one-inspection rule is narrower than it sounds. Section 7605(b) restricts inspection of books of account, not every contact, and yields to two things: the taxpayer’s own request, and a written notice from the Secretary, after investigation, that a further inspection is necessary. An oral statement that the IRS needs another look does not satisfy it.

Third-party contact notice is the most reliably tested boundary, with three moving parts: a notice, given at least the number of days in the figures table before the period begins; a period, capped at one year per notice though successive notices may total more; and an intent requirement at issue. Note the relief the last sentence gives the IRS — intent is tested assuming the information will not be obtained by other means first, so the IRS need not wait to see whether the taxpayer supplies it.

The referral bar is absolute while it lasts. Once a Justice Department referral is in effect, the summons power is gone — not merely constrained. Both triggers are worth remembering: a recommendation to the Attorney General for grand jury investigation or criminal prosecution, and a § 6103(h)(3)(B) disclosure request. A representative who learns of either has learned something that changes what the IRS can compel.

Section 7602(e) is the taxpayer-protective provision most often forgotten. Financial status or economic reality techniques — indirect methods reconstructing income from lifestyle and assets — may not establish the existence of unreported income without a reasonable indication it is likely. The IRS may not go looking on a hunch.

And § 7602(f) polices who may act. Only an IRS officer or employee, or the Office of Chief Counsel, may question a witness under oath; a contractor may receive § 7602 material only for expert evaluation and assistance. Worth checking where a summons interview is conducted by someone whose role is unclear.

How this has changed

Section 7602(c) was rewritten by the Taxpayer First Act of 2019, and that is the most examinable point of currency here. Before it, the IRS gave a general notice — typically in Publication 1 at the start of an examination — that third-party contacts might be made, with no advance period and no time limit. The statute now requires a specific notice, given at least 45 days before the contact period begins, specifying a period of no more than one year. Material treating a general Publication 1 notice as sufficient is describing pre-2019 law.

Sections 7602(e) and (f) came from the IRS Restructuring and Reform Act of 1998, part of the same set of taxpayer protections, and both remain unchanged.

Section 7605(b) is original 1954 text. Its language — “books of account,” “one inspection” — reflects an era of paper ledgers, and its application to electronic records has been worked out by the courts. The statutory words are what an exam question tests.

One structural point on § 7609: a third-party summons carries its own notice and intervention machinery, including the taxpayer’s right to notice and to petition to quash. That is a separate regime from the § 7602(c) third-party contact notice, and the two are easily confused — one governs talking to third parties, the other summonsing them.

Exam focus

Know the four purposes in IRC § 7602(a): ascertaining correctness, making a return where none was made, determining liability including a transferee’s or fiduciary’s, and collecting.

Know that the summons power reaches any other person the Secretary may deem proper, and that the relevance standard is “may be relevant or material.”

Know the one-inspection rule and both of its exceptions — the taxpayer’s request, and a written notice after investigation.

Know the third-party contact notice: at least 45 days before a period of no more than one year, with successive notices permitted to aggregate beyond a year, and an intent requirement at issue.

Know that a Justice Department referral bars both issuing a summons and enforcing one, and that the two triggers are a recommendation to the Attorney General and a § 6103(h)(3)(B) request.

Check yourself

1. How many inspections of a taxpayer’s books of account may the IRS make for one taxable year? (A) As many as necessary (B) One, unless the taxpayer requests otherwise or the Secretary notifies the taxpayer in writing after investigation that another is necessary (C) Two (D) One, with no exceptions Answer: B. IRC § 7605(b). An oral statement that another look is needed does not satisfy the written-notice exception.

2. When must a third-party contact notice be provided? (A) At the same time as the first contact (B) At least 30 days before the contact (C) At least 45 days before the beginning of the specified period (D) Within one year of the contact Answer: C. IRC § 7602(c)(1)(B), and the period specified may not exceed one year — though successive notices may aggregate to more.

3. A case is recommended to the Attorney General for criminal prosecution. What happens to the summons power? (A) It continues with supervisory approval (B) It is limited to the taxpayer (C) No summons may be issued and no § 7604 enforcement action begun with respect to that person (D) It continues for civil purposes only Answer: C. IRC § 7602(d)(1). A § 6103(h)(3)(B) disclosure request is the other trigger.

4. A summons under IRC § 7602(a)(2) is issued on 1 June. What is the earliest date it may fix for appearance? (A) 6 June (B) 11 June (C) 16 June (D) Any date the Secretary considers reasonable Answer: B. IRC § 7605(a) requires the date fixed to be not less than 10 days from the date of the summons.

5. When may the IRS use financial status or economic reality examination techniques to determine the existence of unreported income? (A) At any time during an examination (B) Only with the taxpayer’s consent (C) Only where there is a reasonable indication of a likelihood of unreported income (D) Only in a criminal investigation Answer: C. IRC § 7602(e), added by the IRS Restructuring and Reform Act of 1998.