United States District Court, D. Colorado
RECOMMENDATION OF UNITED STATES MAGISTRATE
JUDGE
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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