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United States v. Matkari

United States District Court, D. Colorado

March 19, 2019

USA, Petitioner,


          Kristen L. Mix United States Magistrate Judge

         This matter is before the Court on Petitioner's Petition to Enforce IRS Summons [#1][1] (the “Petition”). Respondent filed a Response [#14] in opposition to the Petition and Petitioner filed a Reply [#15]. The Petition has been referred to the undersigned pursuant to 28 U.S.C. § 636(b)(1)(A) and D.C.COLO.LCivR 72.1(c)(3). See [#4]. The Court has reviewed the Petition, the Response, the Reply, the entire case file, and the applicable law and is sufficiently advised in the premises. For the reasons set forth below, the Court RECOMMENDS that the Petition [#1] be GRANTED.[2]

         I. Background

         Respondent resides in the State of Colorado. Petition [#1] ¶ 2. Petitioner is the Internal Revenue Service (“IRS”), which is attempting to exercise its civil audit power to conduct an investigation for the purpose of determining Respondent's federal income tax liabilities for 2011 through 2014, and whether Petitioner should assess penalties for Respondent's failure to properly report his interest in foreign bank accounts. Id. ¶ 4. The administrative summons (the “Summons”) was issued to Respondent directing him to appear on March 12, 2018, at 9:00 a.m. to testify and produce for examination certain books, papers, records, or other data as described in the summons. Id. ¶ 5.

         Specifically, the Summons demands “any and all records required to be maintained pursuant to 31 C.F.R. § 1010.420 (§103.32 prior to March 1, 2011) relating to foreign financial accounts that you had/have a financial interest in….” Summons [#1-1] at 6. That regulation, 31 C.F.R. § 1010.420, is promulgated under the Currency and Foreign Transaction Reporting Act of 1970, 31 U.S.C. § 1051 et seq., generally referred to as the Bank Secrecy Act (“BSA”). The regulation requires each person having “a financial interest in or signature or other authority over” a foreign financial account to maintain records of that account for five years and to keep those records available “at all times . . . for inspection as authorized by law.” 31 C.F.R. § 1010.420. The records must “contain the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during the reporting period.” Id.

         Respondent failed to appear on March 12, 2018, and has failed to comply with the Summons. Petition [#1] ¶ 8. Therefore, Petitioner initiated this action on March 23, 2018, by filing the Petition [#1] in which it seeks to enforce the Summons against Respondent. On April 30, 2018, the Court ordered Respondent to show cause as to why he should not comply with and obey the Summons. Order to Show Cause [#6]. After the Court granted Respondent two extensions of time to respond to the Order to Show Cause [#6], see Minute Orders [#9, #13], Respondent filed his Response [#14] on August 13, 2018, in which he asserts his Fifth Amendment act of production privilege as grounds for not complying with the Summons.

         II. Legal Standard

         A. IRS Authority to Enforce Summons

          The IRS has broad authority to issue summonses to determine a taxpayer's tax liabilities. United States v. Clarke, 573 U.S. 248, 249 (2014). The Internal Revenue Code authorizes the Secretary of the Treasury to issue administrative summonses to “examine any books, papers, records, or other data” for the purpose of determining tax liability or collecting the tax liability of a taxpayer. 26 U.S.C. § 7602(a). The statute grants to the IRS “expansive information-gathering authority.” United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). When a taxpayer fails to obey an IRS summons, the United States may petition the court to enforce the summons. See 26 U.S.C. §§ 7402(b), 7604.

         In United States v. Powell, the Supreme Court held that the IRS must establish a prima facie case to enforce a summons by demonstrating the following: (1) “[t]he investigation must be conducted for a legitimate purpose;” (2) “the summons must be relevant to that purpose;” (3) “the IRS must not already have the information sought;” and (4) “the IRS must have followed the administrative steps required by the Internal Revenue Code.” Jewell v. United States, 749 F.3d 1295, 1297 (10th Cir. 2014) (citing United States v. Powell, 379 U.S. 48, 57-58 (1964)) (internal quotation marks and brackets omitted). The government's burden to make a prima facie case “is a slight one because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted.” United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1443 (10th Cir. 1985); see Becker v. Kroll, 494 F.3d 904, 916 (10th Cir. 2007) (“an investigatory or administrative subpoena is not subject to the same probable cause requirements as a search warrant”). The IRS can meet its burden by producing an affidavit of the agent who issued the summons. Clarke, 573 U.S. at 254; Rader v. United States, No. 08-cv-00568-WDM-MEH, 2008 WL 4949168, at *6 (D. Colo. Nov. 17, 2008).

         Once the IRS has made a prima facie case, the summons should be enforced unless the taxpayer can show that the IRS is attempting to abuse the Court's process. Rader, 2008 WL 4949168, at *6. “Such an abuse would take place if the summons had been 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. “The [taxpayer's] burden is a heavy one.” United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1444 (10th Cir. 1985). Indeed, “[e]nforcement of a summons is generally a summary proceeding to which a taxpayer has few defenses.” United States v. Derr, 968 F.2d 943, 945 (9th Cir. 1992).

         B. Fifth Amendment Act of Production Privilege

          The Fifth Amendment provides that “[n]o person . . . shall be [c]ompelled in any criminal case to be a [w]itness against himself.” U.S. Const. Amend. V. The privilege against self-incrimination is not absolute: “the Fifth Amendment does not independently proscribe the compelled production of every sort of incriminating evidence but applies only when the accused is compelled to make a [t]estimonial [c]ommunication that is incriminating.” Fisher v. United States, 425 U.S. 391, 408 (1976).

         The Supreme Court has recognized that “[t]he act of producing evidence in response to a subpoena [ ] has communicative aspects of its own, wholly aside from the contents of the papers produced.” Id. at 410; see also United States v. Doe, 465 U.S. 605, 612 (1984) (“A government subpoena compels the holder of the document to perform an act that may have testimonial aspects and an incriminating effect.”). Document production can communicate that (1) “documents responsive to a given subpoena exist;” (2) “they are in the possession or control of the subpoenaed party;” (3) “the documents provided in response to the subpoena are authentic;” and (4) “the responding party believes that the documents produced are those described in the subpoena.” United States v. Hubbell, 167 F.3d 552, 567-68 (D.C. Cir. 1999), aff'd, 530 U.S. 27 (2000); see also In re Foster, 188 F.3d 1259, 1269-70 (10th Cir. 1999) (the act of production inquiry is “focused on proof of the document's existence, possession, and authenticity[.]” (citing Fisher, 425 U.S. at 410)). Accordingly, the production of documents in response to a summons or subpoena may be privileged where it is “the equivalent of forced testimony as to the existence, unlawful possession, and/or authenticity of the documents, as well as a belief that the produced documents matched those requested by the subpoena.” In re Three Grand Jury Subpoenas Duces Tecum Dated January 29, 1999, 191 F.3d 173, 176 (2d Cir. 1999) (citing Fisher, 425 U.S. at 410).

         C. The Required Records Exception

         One exception to the act of production privilege is the required records exception which is also referred to as the “Required Records Doctrine.” Under the required records exception, the act of production privilege cannot be invoked to resist “the production of records whose creation and maintenance is required as a condition of voluntarily engaging in a highly regulated activity.” United States v. Chen, 815 F.3d 72, 78 (1st Cir. 2016) (citing Baltimore City Dep't of Soc. Servs. v. Bouknight, 493 U.S. 549, 556 (1990)); see also In re Doe, 711 F.2d 1187, 1191 (2d Cir. 1983) (Under the required records exception, “a person whose records are required to be kept by law has no Fifth Amendment protection against self-incrimination when these records are directed to be produced.”).

         The exception derives from Shapiro v. United States, 335 U.S. 1 (1948), which concerned a wholesaler of fruit and produce who was required to keep and “preserve for examination” various business records pursuant to a regulation promulgated under the Emergency Price Control Act. 335 U.S. at 4. The wholesaler was subsequently served with an administrative subpoena which directed him to produce certain of these records before the Office of Price Administration. Id. The wholesaler complied but asserted his constitutional privilege against self-incrimination. Id. at 4-5. The Supreme Court rejected the wholesaler's claim of privilege, reasoning that he had voluntarily assumed a duty to maintain records when he chose to engage in the regulated activity. Id. at 17. The Court stated that “the privilege which exists as to private papers cannot be maintained in relation to ‘records required by law to be kept in order that there may be suitable information of transactions which are the appropriate subjects of governmental regulation, and the enforcement of restrictions validly established.'” Id. at 33 (quoting Davis v. United States, 328 U.S. 582, 589, 590 (1946)). The Court further stated that “it cannot be doubted” that the business records in question had “public aspects, ” and thus held that the wholesaler, as the records' custodian, could not properly assert a privilege as to them. Id. at 34.

         The Seventh Circuit has succinctly explained the rationale behind the required records exception as follows:

One of the rationales, if not the main rationale, behind the Required Records Doctrine is that the government or a regulatory agency should have the means, over an assertion of the Fifth Amendment Privilege, to inspect the records it requires an individual to keep as a condition of voluntarily participating in that regulated activity. That goal would be easily frustrated if the Required Records Doctrine were inapplicable whenever the act of production privilege was invoked.
The voluntary choice to engage in an activity that imposes record-keeping requirements under a valid civil regulatory scheme carries consequences, perhaps the most significant of which, is the possibility that those records might have to be turned over upon demand, notwithstanding any Fifth Amendment privilege. That is true whether the privilege arises by virtue of the contents of the documents or the by act of producing them.

In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, 691 F.3d 903, 908-09 (7th Cir. 2012) (internal citations omitted); accord, United States v. Chabot, 793 F.3d 338, 349 (3d Cir. 2015); In re Grand Jury Proceedings, No. 4-10, 707 F.3d 1262, 1274 (11th Cir. 2013); In re Grand Jury Subpoena, 696 F.3d 428, 433 (5th Cir. 2012); see also In re Grand Jury Proceedings, 601 F.2d 162, 168 (5th Cir. 1979) (The exception “has been explained on the basis that the public interest in obtaining such information outweighs the private interest opposing disclosure . . . and the further rationale that such records become tantamount to public records.” (internal citations omitted)).

         In Grosso v. United States, 390 U.S. 62 (1968), the Supreme Court formulated the following standard for the ...

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