On July 5, 2017, the United States District Court for the Middle District of Florida entered judgment for the IRS and ordered that a Georgia law firm’s bank must produce the law firm’s bank records. The petitioner, the Atlanta-based law firm of Lefkoff, Duncan, Grimes, McSwain & Hass, PC, had asserted a Powell claim which would have quashed the IRS summons demanding production. But the district court found that the petitioner had not satisfied all of the requirements of the Powell case in siding with the IRS.1

OVERVIEW

Powell Requirements

Generally, the IRS has broad power to issue a summons and is not required to show probable cause. However, United States v. Powell2 limits the IRS’ summons authority, requiring the service to demonstrate that: (1) the investigation is being conducted pursuant to a legitimate purpose; (2) the IRS inquiry will be relevant to that legitimate purpose; (3) the information sought by the IRS is not already in the IRS’ possession; and (4) the IRS has followed the administrative steps required by the code in issuing the summons.

PROCEDURAL HISTORY

In connection with an examination of the petitioner’s 2014 tax year, the IRS requested certain information regarding the law firm’s bills to substantiate gross receipts. While petitioners had previously provided the IRS with bank statements and its complete accounting ledger for the 2014 tax year, the IRS sent an additional summons to petitioner’s bank, seeking evidence regarding the petitioner’s financial history for 2014.   

On February 7, 2017, Petitioner filed to quash or otherwise limit the IRS summons pursuant to Section 7609(b) based on Powell. Petitioner claimed prongs three and four of the Powell test were not satisfied because the IRS already had possession of the requested information and that the records would reveal the identity of petitioner’s clients, thereby violating the attorney-client privilege. 

The motion to quash was reviewed by a magistrate judge, who decided that the IRS satisfied Powell. The district court adopted and confirmed the magistrate judge’s report and recommendation.

DISTRICT COURT OPINION

The court rejected the petitioner’s claims. The court agreed with the magistrate judge, who cited the Fifth Circuit for the proposition that, “even if the IRS already possesses some of the information, a summons should not be denied unless it constitutes an unnecessary examination or inspection.”3 Under this light, the court found the petitioner had not done enough to support its claim under either prong three or four of Powell.

According to the court opinion, the summons did not request information that was repetitive or duplicitous. Even though the IRS had already received bank statements and statements of receipts from the petitioner, the court acknowledged that receiving records directly from the bank would be helpful for the IRS to assure that these records were accurate and complete. The court did not find persuasive petitioner’s claim that “since it is not SunTrust which is under audit, the back-up information to the monthly bank statements is not required . . .”4

The court also agreed with the IRS that the petitioner failed to show that the bank’s records would violate the attorney-client privilege. The court found no evidence which would show that the records would reveal privileged communications for the purpose of securing legal advice or reveal anything more than the identity of petitioner’s clients or the receipt of fees. Petitioner relied on an Internal Revenue Manual from September 1, 2011, which states that “privileged communications cannot be obtained by issuing a summons.”5 The court does not discuss whether the Internal Revenue Manual holds weight in the Powell claim, although the magistrate judge had found that only the Code governs such a claim.

CONCLUSION

This decision adds another Powell win for the IRS, and affirms the broad power of the IRS to issue a summons. It should be noted that similar arguments of attorney-client privilege have fallen short previously, although the court did not discuss what evidence (if any) was provided by the petitioner to show the records would violate attorney-client privilege.