Handbook 109.1
Summons Handboook
Chapter 6
Summonses on Third-Party Witnesses
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Contents
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This chapter contains the following sections:
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General
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Definitions
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Statutory Requirements for Third-Party Summons
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Exceptions to Notice Requirements
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Procedures for Notice, Petition to Quash the Summons, and Compliance or
Enforcement
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Banks
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Summonses for Foreign Records of Corporate Slush Funds
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Records of Foreign Companies
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Software Trade Secret Protection under IRC 7612
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Prior to the changes enacted in the Restructuring and Reform Act of 1998
(RRA), IRC 7609 required the Service to follow certain notification and waiting
period procedures for summonses served on third-party recordkeepers (i.e.,
banks, attorneys, accountants and specified others) which did not apply to
summonses served on other third-party witnesses. Specifically, the Service
was required to notify the taxpayer and any other person identified in the
description of the records that the summons had been served. Thereafter,
the Service was required to wait at least 24 days before it could receive
the summoned documents or initiate enforcement procedures. Significantly,
the Service was not required to follow these procedures for any other summoned
third-party, i.e., it was not necessary to notify other persons of service,
nor was it necessary to delay receipt of the summoned documents. (Although
the Service could not require a summoned third-party (not a third-party
recordkeeper) to produce documents sooner than 10 days from the date of service,
the Service could receive them if they were voluntarily provided.) The RRA
significantly enlarged the group of third-party summonses for which the Service
is required to notify other persons of service and to wait 24 days before
receiving documents or initiating enforcement procedures. Specifically, the
Service must now follow the notice and waiting period requirements described
below for all third-party summonses (except for five particular types described
in IRC 7609(c)(2)(B)-(F) and discussed at subsection 6.5 of this handbook):
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The Service must give notice to the taxpayer and any other person identified
summons.
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The date for compliance of the summoned party is no sooner than 24 days after
the date notice is given to the taxpayer and any other person entitled to
notice.
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The summoned party cannot comply at an earlier time. The records cannot be
accepted until the 24th day after the date of notice and only if no person
entitled to notice brought a timely proceeding to quash.
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A third-party need only produce a summoned document if it is in his or her
possession, custody, or care and if the summons complies with all legal
requirements. The witness may claim his or her individual right against
self-incrimination. Persons summoned who conceal records and falsely state
that they have been stolen may be prosecuted under 18 USC 1001 (false statements)
and 18 USC 1503 (obstructing justice).
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If the summons was served on a third-party witness, the taxpayer and any
other person entitled to notice can bring a proceeding to quash the summons
(subject to the exceptions discussed in this chapter). In that proceeding,
the taxpayer (or other noticee) can attack the validity of the summons or
assert privileges against disclosure.
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The 10 day waiting period provided by IRC 7605(a) still applies to those
narrow categories of third-party summonses (described in subsection 6.5)
that are excepted from the notice requirements and 24 day waiting period
required by IRC 7609(a)(1). The 10 day waiting period is for the benefit
of the person to whom the summons is directed. The taxpayer has no standing
to object to a waiver of this provision.
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The following definitions pertain to summonses served on third-party witnesses.
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[109.1]
6.3.1 (04-30-1999)
Summons Subject to IRC 7609 Third-Party Notice and Waiting Period
Requirements
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Summons Subject to IRC 7609 third-party requirements:
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is an administrative summons issued under IRC 7602 or under 6420(e)(2),
6421(g)(2), 6427(j)(2), and 7612,
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that requires testimony on or relating to the taxpayer or other noticee,
or
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the production of any portion of records made or kept on or relating to any
person who is identified in the summons (other than the summoned third-party),
or
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the production of any computer software source code with respect to the taxpayer
or other noticee (defined in IRC 7612(d)(2)).
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Third-party recordkeeper The term means:
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any mutual savings bank, cooperative bank, domestic building and loan
association, or other savings institution chartered and supervised as a savings
and loan or similar association under Federal or State law, any bank (as
defined in IRC 581), or any credit union (within the meaning of section
501(c)(14)(A));
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consumer reporting agency (as defined under section 603(f) of the Fair Credit
Reporting Act (15 U.S.C. 1681a(F)));
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any person extending credit through the use of credit cards or similar devices;
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any broker (as defined in section 3(a)(4) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)(4)));
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any accountant;
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any attorney;
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any barter exchange (as defined in IRC 6045(c)(3));
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regulated investment company (as defined in IRC 851) and any agent of such
regulated investment company when acting as an agent thereof,
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any enrolled agent, and
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any owner or developer of a computer software source code (as defined in
IRS 7612(d)(2)), but only if the summons requires the production of the source
code or the program and data described in IRC 7612(b)(1)(A)(ii) to which
the source code relates.
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NOTE:
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Prior to the changes enacted in the RRA of 1998, the definition of a third-party
recordkeeper signified a unique class of summonses for which the Service
followed special notice and waiting period requirements. As stated throughout
this chapter, the RRA of 1998 requires the Service to follow these procedures
with all third-party summonses, except for those enumerated in IRC 7609(c)(2).
Now, the third-party recordkeeper definition signifies a unique class of
summonses that may be served by certified or registered mail. It also identifies
the only group of third-party summonses for which a Special Agent must observe
the notice and waiting period requirements.
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As stated above, third-party recordkeepers can now receive service of the
summons by registered or certified mail pursuant to IRC 7603(b), as well
as by delivery in hand and the other traditional methods of service permitted
by IRC 7603(a) and discussed in Chapter 3 of this Handbook.
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NOTE:
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When serving a third-party recordkeeper by certified or registered mail and
when using Form 2039, as revised on 4-97, make the following pen and ink
change to the certificate of service, in the section identified by the words:
How Summons Was Served:
I sent an attested copy of the summons by certified or registered mail to
the last known address of the person to whom it was directed, that person
being a third-party recordkeeper within the meaning of I.R.C. Section 7603(b).
The address is ____________________.
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If it is unclear as to whether a summoned party falls within the definition
of third-party recordkeeper , seek the advice of District Counsel.
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Records This term includes books, papers, or other data. The concept
of records has been broadly construed to include an executable copy of a
commercial tax software program used to prepare returns. However, a summons
for a computer software source code cannot be issued unless certain conditions
set forth in IRC 7612 are satisfied.
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Examples of third-party records are:
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employer records;
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corporate records;
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hospital records, excluding nature of illness;
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telegraph records;
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partnership records; and
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records of an unincorporated labor union concerning transactions of its officers.
The dissolution of a corporation will not relieve its officers of the duty
of producing its existing records within their control.
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John Doe Summons This is any summons that does not identify the person
with respect to whose liability the summons is issued.
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Numbered bank account An account with a bank or similar financial
institution through which a person may authorize transactions solely through
the use of a number, symbol, code name or similar arrangement not involving
disclosure of the account owner's identity.
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Proceeding to quash A civil action commenced in the appropriate U.S.
District Court for the purpose of preventing compliance by a summoned third-party
witness.
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Intervention The act of a person, who is not originally a party to
a summons proceeding, becoming a party in order to protect his or her interests.
Under IRC 7609(b)(1), any person who is entitled to notice of a third-party
summons (i.e. a noticee) may intervene in any proceeding brought by the
Government to enforce that summons. Also, under IRC 7609(b)(2)(C), the summoned
third-party has the right to intervene in any proceeding brought by a noticee
to quash the summons.
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Noticee Any person (other than the summoned third-party) who is identified
in a summons served on a third-party witness for the production of records
or testimony relating to the person so identified. The taxpayer identified
in the caption of the summons is always a noticee, even though his name may
not appear in the description of summoned records. A noticee has the right
to be given notice of the summons, has the right to intervene in a summons
enforcement proceeding, and has the right to bring a proceeding to quash
the summons.
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NOTE:
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Where a summons is served on a bank for account records and the agent or
officer knows prior to service of the summons that an account is styled in
the names of more than one person, then each person should be named in the
body of the summons and should receive notice. For example, if the agent
or officer knows that bank accounts are listed in the joint names of husband
and wife, then both the husband and wife should be identified in the description
of the records sought and both should be given separate notice, even if they
reside at the same address. In the instance where records of a partnership
are requested in the body of the summons, notice to one general partner is
sufficient.
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Date of service of notice The date on which the notice is placed in
the mail or delivered personally.
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[109.1]
6.4 (04-30-1999)
Statutory Requirements for Third-Party Summonses
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In general, IRC 7609 provides that:
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a taxpayer or other person identified in the summons must be notified if
a summons has been served on a third-party, subject to the exceptions listed
in 7609(c)(2).
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any person who has the right to notice must file a petition to quash the
summons in the appropriate U.S. District Court if he or she wishes to prevent
the summoned third-party witness from complying with the summons;
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notice is not required where the Service first obtains a court order based
on allegations that reasonable cause exists to believe notice may lead to
material interference with the investigation or examination;
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the filing of a petition to quash the summons by the taxpayer or his or her
agent suspends the running of the statute of limitations for civil and criminal
purposes during the period when a court proceeding and appeals related thereto
are pending;
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a dispute between a summoned third-party and the IRS which is not resolved
within 6 months after the service of a summons suspends all statutes of
limitation until the issue is resolved; and
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a John Doe summons can only be served pursuant to a court order.
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There is no IRC 7609 notice requirement in the following instances:
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service of "John Doe" summons;
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the summoned witness is the taxpayer, officer or employee of the taxpayer;
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the person entitled to notice gives up this right by executing a waiver;
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the summons is served to determine whether records of the business transactions
or affairs of an identified person have been made or kept;
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issued in aid of the collection of an assessment made or judgment rendered
against the person regarding whose liability the summons is issued, or the
liability at law or in equity of any transferee or fiduciary of the taxpayer;
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NOTE:
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Taxpayer notification is required for third-party summonses issued for Taxpayer
Delinquency Investigations (TDIs) for records to establish the trust fund
recovery penalty, or any other investigation where no liability has been
assessed. Notification is not required for third-party summons issued for
taxpayer delinquency accounts (TDAs) or any other investigation where an
assessed liability exists.
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summonses issued by a criminal investigator to a third-party who is not a
third-party recordkeeper.
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Summonses issued pursuant to a court order:
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Notice shall not be required if, upon petition by the Service, the district
court determines reasonable cause exists to believe the giving of notice
may lead to attempts to conceal, destroy, or alter records relevant to the
examination, to prevent the communication of information from other persons
through intimidation, bribery, or collusion, or to flee to avoid prosecution,
testifying, or production of records. The petition must be filed, prior to
the issuance of the summons, in the United States district court for the
district within which the person summoned resides or is found.
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In the hearings required under (a) above, as well as those referred to in
this Handbook regarding John Doe Summonses, the determination shall be made
ex parte based solely upon the petition and supporting affidavits.
An order denying the petition is deemed a final order which may be appealed.
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Forward requests for court orders, to District Counsel for processing. Include
in the memorandum a request that the person(s) to be summoned refrain from
notifying the taxpayer, or other person to whom the records or testimony
pertain, of the service of the summons.
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Advise the summoned third-party that, pursuant to a court order, no notification
will be given of the summons and, if appropriate, that notification could
subject the person summoned to a contempt citation.
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[109.1]
6.6 (04-30-1999)
Procedures for Notice, Petition to Quash the Summons, and Compliance or
Enforcement
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This section covers the following:
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Period in Which Service is Required to Give Notice
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Right to File Petition to Quash Summons
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Compliance or Enforcement of Summons
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When summoning a third-party for records or testimony relating to the taxpayer
or other person identified in the summons, serve notice on the taxpayer within
3 days of service of the summons on the third-party, but not less than 23
full days before the day fixed in the summons as the day upon which the records
are to be examined.
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No examination of the summoned records is allowed before the close of the
23rd day after notice is given to the taxpayer. Therefore, set the date for
appearance:
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no sooner than the close of the 23rd day after service of notice to the taxpayer
to ensure sufficient time for the noticee to receive notice and, if desired,
file a petition to quash, and
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on a workday.
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A noticee who wishes to prevent summons compliance by the third-party must
begin a civil action in U.S. district court to quash the summons not later
than the 20th day after the day notice of the summons is given. When the
last day to file a petition to quash falls on a Saturday, Sunday, or legal
holiday, the petition to quash may be timely filed on the next business day.
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A noticee who initiates a proceeding to quash the summons must mail (registered
or certified) copies of the petition to the summoned third-party and a copy
to the IRS employee who issued the summons within the 20-day period.
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In instances where a summons is served on a third-party for records or testimony
relating to a person other than the taxpayer, notice will be given to such
person. This person has the right to file a petition to quash the summons.
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No examination of the summoned records is allowed before the close of the
23rd day after notice is given, or if a proceeding to quash is begun until
the court so orders, or the noticee, who has instituted the proceeding, consents.
Pattern Letter 1728(P) may be used to document the noticee's consent. (Exhibit
109.1.6-1)
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Service employees who receive a petition to quash will notify District Counsel
by telephone on the same day. Within 6 workdays, the district will forward
to District Counsel a memorandum report or Form 4443, Summons Referral, to
include the following:
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the name, full address, and taxpayer identification number of the taxpayer
under investigation;
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a summary of the facts in the case, including whether it involves, or is
related to, the Special Enforcement Program;
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an explanation of the relevancy of the records;
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all information supporting the validity or nonvalidity of each assertion
in the petition to quash;
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a recommendation for or against defense of the petition to quash the summons;
and
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the original of the summons and a copy of the petition to quash the summons.
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NOTE:
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Timely observance of this procedure is extremely important since the matter
must be reviewed by IRS Counsel, DOJ, and the U.S. Attorney.
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Tolling of the statute of limitations when the taxpayer intervenes or brings
a proceeding to quash, or when a third-party fails to produce the summoned
records for six months:
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if the taxpayer (or the taxpayer's agent, nominee, or other person acting
under the taxpayer's direction or control) intervenes in a summons enforcement
suit or brings a proceeding to quash, then all periods of limitation under
IRC 6501 (for assessing and collecting the taxpayer's liability for the periods
listed in the summons) and all periods of limitation under IRC 6531 (for
criminally prosecuting the taxpayer for the periods listed in the summons)
are tolled. The periods are tolled during the time the proceeding is pending
or appealed; and
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if the taxpayer does not intervene in a summons enforcement suit or bring
a proceeding to quash, and the summoned third-party fails to comply with
the summons for six months after being served, then the period of limitations
under IRC 6501 and 6531 (pertaining to the taxpayer's liability) shall be
suspended beginning six months after the summons was served and ending when
the dispute is resolved.
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Intervention by a person other than the taxpayer or his or her agent will
not suspend the running of the statutes of limitation.
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The Service and the person summoned must be sent (by certified or registered
mail) a copy of the noticee's petition to quash not later than the close
of the 20-day period. If a petition to quash is not mailed timely, immediately
begin compliance with the summons enforcement.
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Collection personnel who receive a petition to quash will notify Special
Procedures function (SPf) by telephone on the day of receipt. SPf will notify
District Counsel immediately.
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Within 6 workdays of receipt of a petition to quash, prepare a memorandum
and forward it to SPf. SPf will send the memorandum to District Counsel.
Include in the memorandum the items listed above.
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[109.1]
6.6.4 (04-30-1999)
Notice and Instructions to Noticee, Third-Party Summons
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Form 2039 includes a notice concerning the noticee's right to contest the
administrative summons (Form 2039-D). Serve on the noticee together with
a copy of the summons (Form 2039-C), by certified or registered mail to the
last known address of the noticee. Use registered mail when the notice is
mailed to persons in foreign countries. The law also permits service of notice
by delivering both documents in hand to the noticee, or leaving them at the
noticee's residence, or in the absence of a last known address, leaving them
with the person summoned.
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If the Service has been advised under IRC 6903 of the existence of a fiduciary
relationship, mail notice of the service of the summons to the last known
address of the fiduciary of the person entitled to notice, even if such a
person or fiduciary is now deceased, under a legal disability, or no longer
in existence. The filing of a power of attorney or tax information authorization
does not qualify as the creation of a fiduciary relationship under this
provision.
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Complete certification of serving the summons and of giving notice on the
reverse side of the original summons.
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NOTE:
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If serving a third-party (who is not a third-party recordkeeper) with a summons,
Form 2039, having a revision date of (4-97), the employee serving the summons
must make the following pen and ink changes to the certificate of service:
Cross out the phrase"... applies only to summonses served on third-party
recordkeepers and not to summonses served on other third-parties or..." .
Replace that phrase with "...does not apply to summonses served on..." .
The clause will then read: "This certificate does not apply to summonses
served on any officer or employee of the person to whose liability the summons
relates nor to summonses in aid of collection,..." .
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A noticee who institutes a proceeding to quash the summons must mail (registered
or certified) copies of the petition to the summoned third-party and to the
Service employee. If a summons enforcement action is instituted against the
third-party, the noticee has the right to intervene in the action. DOJ will
serve the third-party with process and will notify the noticee of the action
via certified or registered mail.
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A copy of the back of the original summons, which certifies the service of
the summons and notice, will be given to the third-party upon request for
proof of notice.
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If the third-party requests it, furnish a copy of the back of the original
summons which certifies that the period for beginning a proceeding to quash
the summons has expired and that no such proceeding was instituted within
such period, or that the noticee consents to the examination.
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[109.1]
6.6.5 (04-30-1999)
Waiver of Right to Notice and To Petition to Quash the Summons
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A person who is entitled to notice, and to file a petition to quash when
a summons is issued may waive such rights via a general waiver form. Letter
1728(P) is suggested for waiver purposes. All third-parties involved in the
waiver should be given a copy of the letter for their records. Prepare the
waiver in triplicate. Retain the original; give one copy to the summoned
party and one copy to the noticee.
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If all persons entitled to notice waive their rights, the time and place
of examination must not be less than 10 days from the date of service. The
witness may voluntarily comply at an earlier time.
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Payments for mileage, witness fees, and expenses may be made to the third-party
if a summons is issued.
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The third-party:
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has the right to intervene in the proceeding to quash the summons,
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is bound by any decision in the proceeding, even if he or she does not intervene.
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The law provides the third-party will, upon receipt of the summons:
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proceed to assemble the summoned records (or such portion as the Service
employee indicates), and
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be prepared to produce the records on the day on which the records are to
be examined whether or not a noticee files a petition to quash a summons.
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A third-party is not liable to any customer or other person for such disclosure
if the disclosure of records was made in good-faith reliance that:
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the period for beginning to quash a summons has expired, and
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that no such proceeding began within such period, or
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that the taxpayer consented to the examination, or
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that a district court ordered the production of the records without providing
notice to persons otherwise entitled to it.
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[109.1]
6.6.7 (04-30-1999)
Coordination of Summons Issuance and Enforcement Actions
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Attempt to coordinate the service of summonses pertaining to the same person
at or near the same time, if possible. Likewise, make requests to the court
for the exemption from the requirement of notice relative to the same person
at the same time.
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Use the following codes:
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Statute of Limitations alpha Code LL to update AIMS to identify these cases
on the monthly AIMS tables 4.0 or 4.1.
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AIMS Data base should be updated by an examiner, to reflect the correct statute
date.
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When closing the case, use Form 3198 (Special Handling Notice) and Form 895
(Notice of Statute Expiration) to indicate that the new statute date has
been determined under IRC 7609 as a result of third-party summons.
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Banks are one of the major groups on which continuous demands for information
are made. A depositor at a bank has no proprietary interest in the bank's
books and records. The bank cannot refuse production of its records because
some of the entries relate to transactions of persons other than the designated
taxpayer. On the other hand, a bank will not be required to produce all its
records so that the Service can determine whether any of them contain information
relating to a return under investigation.
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The Right to Financial Privacy Act (RFPA) provides account owners with the
right to be given notice when banks release account information to government
authorities. However, section 3413(c) of that Act allows the Service to obtain
a taxpayer's financial records without providing notice as long as the records
are obtained pursuant a procedure authorized by the IRC. The Service interprets
IRC 7602 as providing the procedure for its employees to request and receive
taxpayer account information without issuing a summons. Consequently, the
Service routinely requests and accepts a financial institution's voluntary
production of a taxpayer's records of account, except in situations governed
by the Tenth Circuit's precedents. (Refer in this Handbook to 1.4.1(3) for
a list of these situations). The Tenth Circuit does not interpret IRC 7602
as providing the procedure required by section 3413(c) of the RFPA. Instead,
the circuit court interpreted IRC 7609 as such a procedure. Therefore, that
circuit court has ruled that a bank's voluntary disclosure of a customer's
financial records to the Service, without prior notice to the customer, violates
the RFPA. Accordingly, in situations governed by the Tenth Circuit's precedents,
the Service may only obtain account records from a bank by serving a summons
and providing notice consistent with IRC 7609.
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NOTE:
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In RRA 1998, Congress enacted IRC 7609(j), which provides that nothing in
IRC 7609 shall be construed to limit the Service's ability to obtain information,
other than by summons, through formal or informal procedures authorized by
IRC 7601 and 7602. This section indicates that the Service's ability to
informally seek the voluntary exchange of records, i.e., without a summons,
constitutes a procedure authorized by the Code. Nevertheless, the Service
will follow the Tenth Circuit's ruling in situations described in 1.4.1(3).
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A summons on a domestic bank to produce records of one of its foreign branches
may be enforceable even if compliance would constitute a violation of the
laws of the foreign country. The basis for compelling production of records
is that a bank, like any other corporation, is presumed to be in possession
and control of its own books and records. "Courts have reasoned that any
officer or agent of the corporation, who has power to cause the branch records
to be sent from a branch to the home office for any corporate purpose, has
sufficient control to cause them to be sent when summoned pursuant to IRC
7602."
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In determining whether to enforce a summons where the laws of the country
in which the information is located bar such production, the courts balance
the interests of the foreign country in blocking production of the records
against the importance of the records to the United States. The courts have
used the following 5-part test to determine whether a foreign blocking law
should be recognized:
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the importance to the Government's investigation or litigation of the documents
or other information requested;
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the degree of specificity of the request;
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whether the information originated in the United States;
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the availability of alternative means of securing the information;
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the extent to which noncompliance with the request would undermine important
interests of the United States, or of the state where the information is
located.
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Special concerns exist with respect to a summons for information located
in a country with which the United States has a treaty or tax information
exchange agreement. In these cases, a treaty request through the Assistant
Commissioner (International) must be made prior to service of a summons;
and enforcement proceedings will generally not be made until the treaty or
tax information exchange agreement partner has advised that it cannot obtain
the information or further delay in enforcement of the summons will prejudice
the IRS' case. These cases must be coordinated through the Assistant Commissioner
(International) or the Associate Chief Counsel (International), Branch 1.
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The United States courts have jurisdiction over a domestic branch of a foreign
corporation and over its records located in this country.
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A domestic branch that sends its records to a foreign bank for storage may
have relinquished control over such records. The question of whether a summons
for such records served on the domestic branch of the foreign bank could
be enforced depends on whether the foreign bank or a corporation resides
in or can be found in this country for the service of a summons and judicial
process and on whether the domestic branch has sufficient control over the
records to be able to produce them in response to a summons.
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A summons for records located in a country with which the United States has
a tax treaty or tax information exchange agreement must be coordinated with
the Assistant Commissioner (International) or the Associate Chief Counsel
(International), Branch 1, as explained in section 6.7.1.
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[109.1]
6.8 (04-30-1999)
Summonses for Foreign Records of Corporate Slush Funds
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The Examination Division has established the following procedures when summoning
records located outside the country, which relate to corporate slush funds:
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The Chief, Examination forwards a copy of the proposed summons for records
relating to corporate slush funds and improper payments to District Counsel.
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District Counsel coordinates the review of this summons with Associate Chief
Counsel (International).
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Associate Chief Counsel coordinates the matter with the appropriate National
Office function.
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Include with the proposed summons a statement describing:
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The circumstances and efforts made to secure the records and data from the
taxpayer or other witness.
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The reasons provided by the taxpayer or other witness for lack of cooperation.
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The Chief, Examination, may obtain advice from District Counsel by telephone
in emergency situations.
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See IRC 162(c) and 952(a)(4)-(5).
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Whether a foreign corporation must produce its records for inspection by
the Service and other federal agencies depends, in general, on whether it
is found to be doing business in this country or has an agent doing business
here.
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A foreign corporation has been required to comply with a grand jury subpoena
(the summons power of the IRS is comparable to the subpoena power of a federal
grand jury or summons) in instances where:
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The foreign corporation had a bank account and salaried employees in the
U.S. and shipped newsprint into this country.
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The foreign corporation was found to be doing business through wholly owned
subsidiaries, in this country.
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The corporate president, who was served with a subpoena, conducted all of
the business of a Mexican mining corporation, except the actual operation
of its mines, from his home in Arizona. The corporate records were in Mexico,
but the court pointed out that if the Mexican law forbade their removal to
this country, the SEC could inspect them at the Mexican office or have
authenticated copies made and submitted.
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To determine the accuracy of a return, the Service may need to examine a
computer software source code.
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Source code is the computer programming language that tells the computer
how to manipulate the data.
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Source code comes in numerous languages including C, C+, C++, COBAL, and
Fortran.
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The computer software industry has resisted the Service's efforts to obtain
the relevant source code because sensitive trade secrets bound up in the
source code may be lost if the information turned over pursuant to a summons
is not treated with heightened sensitivity.
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Congress determined that the intellectual property rights of the developers
and owners of computer software programs should be respected. Congress is
concerned that the examination of computer programs and source code by the
Service could lead to the diminution of intellectual property rights through
the inadvertent disclosure of trade secrets and the special protection against
inadvertent disclosure should be established. As a result of these concerns,
Congress enacted IRC 7612, which addresses summonses issued to obtain computer
software source codes.
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IRC 7612:
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generally prohibits the Service from issuing a summons or enforcing a summons
to produce or analyze any tax related computer software source code (unless
conditions below are satisfied),
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establishes a number of protections against the disclosure and improper use
of trade secrets and confidential information that the Service acquires in
the course of any examination with respect to any taxpayer, and
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requires the Service to demonstrate three things before issuing summons for
a computer software source code.
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Service must be unable to reasonably ascertain the correctness of an item
on a return
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from the taxpayer's books, papers, records or other data, OR
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by using the executable code and associated data to which the source code
relates.
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Service must identify with reasonable specificity the portion, item, or component
of the source code it needs to verify the correctness of such item on the
return, and
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Service must determine that the need for the portion, item, or component
of such source code outweighs the risks of unauthorized disclosure of trade
secrets.
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This determination must be made by a management official not lower that the
group/case manager.
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The group/case manager should contact District Counsel regarding how this
determination should be made.
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Exceptions:
The general prohibition does not apply to:
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criminal tax investigations,
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tax-related computer software source code acquired or developed by the taxpayer
or a related person primarily for internal use,
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communications between the owner of the tax-related computer software source
code and the taxpayer or related persons, and
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tax-related computer software source code which is required to be provided
or made available under another Code provision.
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Cooperation Required: If the taxpayer fails to turn over the executable code
and the associated data, and the owner fails to turn over the executable
code within 180 days, the Service does not have to demonstrate that it is
unable to otherwise reasonably ascertain the correctness of any item on a
return from the taxpayer's books, papers, records, or other data, or from
the executable code and any associated data, and the Service does not have
to identify the portion, item, or component of the source code needed to
verify the correctness of such item on the return before a summons for the
computer software source code may be issued.
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NOTE:
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Actions required by the Service to trigger the 180-day period under section
7612(b)(3) are as follows. A group manager or higher level management official
must make a determination that it is not feasible to determine the correctness
of an item without access to the executable code and associated data. A group
manager or higher level management official must also make a determination
that the need for the computer software source code or any portion thereof
outweighs the risk of unauthorized disclosure of trade secrets. See 6.10.1(3)
above. An initial Information Document Request (IDR) must be issued to the
taxpayer for the executable code and associated data. The IDR shall recommend
that the taxpayer advise the software owner of the request for the executable
code. Since the Service must wait 180 days after making a formal request
before issuing a summons for the source code, the Service may require a limited
time response period for the initial IDR. If the taxpayer fails to turn over
the executable code and associated data in response to the IDR, correspondence
requesting the executable code and associated data will be issued to the
taxpayer, and correspondence requesting the executable code will be issued
to the software owner advising the taxpayer and the software owner that the
requests are being made pursuant to IRC 7612(b)(3)(B). The 180-day period
starts with the issuance of the formal requests. Summonses for the executable
code and associated data may be issued with the formal requests but must
be coordinated with district counsel.
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[109.1]
6.10.2 (04-30-1999)
Safeguards to Ensure Protection of Trade Secrets and Other Confidential
Information
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Under IRC 7612(c), in any proceeding to enforce a summons for any portion
of software (which includes both source code and the executable code), a
court may issue a protective order to prevent the disclosure of such software.
In addition, any software that the Service obtains during the course of any
examination is subject to the safeguards listed below. However, prior to
receiving any software, whether by court order or voluntarily from the taxpayer
or the software owner, district counsel must be consulted in order to establish
the procedures that must be followed to comply with the statutory (and judicial,
where applicable) requirements for safeguarding the software. The safeguards
include:
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complying with any protective order entered by a court.
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only using the software in connection with the examination of the taxpayer's
return with regard to which it was received, and related Appeals and judicial
proceedings.
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providing, in advance, to the taxpayer and owner of the software a written
list of all individuals who will analyze or otherwise have access to the
software.
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maintaining the software in a secure area or place, and in case of computer
software source code, not removing from the owner's place of business without
the owner's consent, unless the removal is pursuant to a court order.
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copying only when necessary in connection with the analysis and numbering
any copies of the software.
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returning to the owner the software and all copies at the conclusion of the
proceedings, and deleting any working copies.
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not decompiling or disassembling the software.
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treating the software as return information for purposes of IRC section 6103.
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Responsibilities:
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In an examination controlled by the Coordinated Examination Program, the
Case Manager has the ultimate responsibility for adherence to the required
safeguards and completion of all necessary documentation. He or she will
insure that all team members are aware of and follow all of the required
provisions of this section. In a general program case, the revenue agent
conducting the examination is responsible for the safeguards and documentation.
Examiners must coordinate all source code and software summonses through
District Counsel. District Counsel will coordinate with General Litigation
and Associate Chief Counsel (International).
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The following definitions apply for purposes of IRC 7612:
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Software includes computer software source code and computer software
executable code.
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Computer software source code means
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the code written by a programmer using a programming language which is
comprehensible to appropriately trained persons and is not capable of directly
being used to give instructions to a computer,
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related programmers-notes, design documents, memoranda, and similar
documentation, and
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related customer communications.
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Computer software executable code means
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any object code, machine code, or other code readable by a computer when
loaded into its memory and used directly by such computer to execute
instructions, and
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any related user manuals.
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Owner shall, with respect to any software, include the developer of
the software.
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Related person shall be treated as related to another person if such
persons are related persons under IRC section 267 or 707(b).
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Tax-related computer software source code means the computer source
code for any computer software program intended for accounting, tax return
preparation or compliance, or tax planning.
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The new summons rules are effective for summonses issued, and software acquired,
after 7/22/98.
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The software protection rules apply to
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Software acquired by IRS after 7/22/98.
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Previously acquired software beginning 90 days after 7/22/98. (However, outside
experts do not have to sign a 2-year non-competition agreement.)
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NOTE:
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The new rules do not require the IRS to reissue any software summons.
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On some occasions, the IRS has found it helpful to employ outside experts
to assist in the analysis of a particular source code. The outside expert
used must agree in writing:
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Not to disclose the software to any person other than persons entitled to
disclosure under section 6103, and
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Not to participate for 2 years in the development of similar software.
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The Service must provide the taxpayer and the owner of any interest in the
software with a written agreement between the Service and any person who
is not an officer or employee of the United States and who will analyze or
have access to such software which contains the above agreement.
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Exhibit [109.1]
6-1 (04/30/99)
Pattern Letter 1728 (P)
WAIVER of Rights to Notice or Right to Petition to Quash To:Date:Address:Under
section 7602 of the Internal Revenue Code, the Internal Revenue Service has
the authority to examine books and records and take testimony. If a summons
is issued to a person who keeps or makes records relating to me or to a computer
software source code (as defined in IRC 7612(d)(2)), I understand that I
am entitled to be notified and have the right to petition to quash the summons
under section 7609 of the Code. Being fully aware of the authority of the
Internal Revenue Service and my rights under the law, upon issuance of a
summons, I waive my rights and request that you furnish the Service the following
records of my business transactions or affairs.AddressNameSignatureDate |
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Internal Revenue Manual
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Hndbk. 109.1 Chap. 6 Summonses on Third-Party Witnesses
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(04-30-1999)
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