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Part 4. Examining Process

Chapter 61. LMSB International Program Audit Guidelines

Section 4. Information Gathering

4.61.4  Information Gathering

4.61.4.1  (05-01-2006)
Summons and Related Issues in IRC section 482 and Other Cases

  1. This chapter provides guidance primarily for IRC section 482 cases. These policies and procedures could apply equally to other issues.

4.61.4.2  (05-01-2006)
Obtaining Information in General

  1. Securing usable data for IRC section 482 examinations, or other complex international issues, may be difficult. Difficulties arise when:

    1. The information is not in the hands of the tax department or tax manager

    2. The information is regarded as sensitive by the taxpayer or third parties possessing the information

  2. To be effective in securing data, the IE should:

    1. Stress timely compliance with IDRs at the opening conference

    2. Explain fully the document procurement process, where appropriate, including the right to issue a summons

    3. Issue IDRs that are clear and precise. lDRs should not create an undue production burden

    4. Issue lDRs that clearly identify records requested or persons to be questioned

    5. Issue a written IDR even to follow up an oral request

    6. Maintain a log of information requested and include from whom, date requested, and extent of compliance

    7. Work to maintain a spirit of cooperation with the taxpayer for the voluntary production of information

4.61.4.3  (05-01-2006)
Obtaining Information Specific to IRC section 482 Issues

  1. The successful development of a 482 issue may require testimony with documentation. These are gathered from both the taxpayer and unrelated third parties. The four situations requiring IDRs for documentation and/or testimony (including a summons) are:

    1. Controlled Entity Within the Meaning of IRC section 482: Issue lDRs; No response—consider presummons and summons procedures; Some cases may require a Formal Document Request (FDR) or IRC section 6503(k) Designated Summons

    2. Uncontrolled Entity Having Business Transactions with the Taxpayer and/or any Controlled Entity: Issue IDR to the taxpayer; If the taxpayer cannot provide the information, use presummons procedures for an uncontrolled entity (notification of the taxpayer is not required for these summonses); Exhibit 2–1 should be reviewed

    3. Third Party Record Keeper: If the taxpayer cannot provide the information, use presummons procedures for an uncontrolled entity; Service is required to notify the taxpayer of any summons; A taxpayer has the right to proceed to quash the summons

    4. Comparable Uncontrolled Entity Having No Business Transactions with the Taxpayer: Contact tax director of an uncontrolled entity by phone to ascertain willingness to provide information; If willing, issue IDR including why information is needed (subject to disclosure restrictions); If a presummons letter and/or summons is necessary coordinate with Counsel. The procedures of IRM 4.2 sub-section 1.6.12, Third party Contacts, must be followed prior to any third party contacts.

4.61.4.4  (05-01-2006)
Taxpayer’s Books and Records

  1. Taxpayers are required to keep such permanent books of account or records as are sufficient to determine whether the taxpayer is liable for tax under Subtitle A of the Code.

    1. An Area Director may require a taxpayer to keep specific records for future years. Notice is served in accordance with Reg. 1.6001-1(d).

    2. The Service can request an appropriate officer, or other representative, of the taxpayer to provide information.

    3. If the corporate officer, or representative, refuses to provide requested information, the Service can issue a summons (See IRM 4.5 of this handbook).

4.61.4.4.1  (05-01-2006)
Production of Taxpayer’s Books and Records

  1. The Service can require a taxpayer to produce all of its books and records. This includes:

    1. Controlled foreign affiliates as defined by IRC section 6038

    2. A foreign corporation doing business in the United States

    3. Records in the possession, custody, or control of a foreign person related to a 25 percent foreign-owned U.S. corporation (engaged in transactions with that U.S. corporation) may be obtained under IRC sections 7602, 7603, 7604, and 6038A

  2. The Service can compel a taxpayer to disclose correspondence or communication with foreign affiliates if:

    1. They are in the taxpayer’s possession in the United States, or

    2. They are relevant and material to the examination.

  3. Correspondence and written communications requested should be:

    • Related to certain subjects and transactions under examination

    • Described with reasonable accuracy

      Note:

      Consult Counsel when drafting the request.

4.61.4.5  (05-01-2006)
Summonsing Officers and employees for Questioning

  1. A summons may be issued to key officers and employees actually engaged in setting prices, fees, and charges in controlled transactions being examined. The examining official must reasonably believe:

    1. Important information is available from such key officer or employee.

    2. They will not voluntarily disclose it.

    3. The tax manager or holder of the taxpayer's power of attorney cannot or will not provide such information, or is clearly not fully divulging essential facts.

    Note:

    If the summons is for the testimony of non-U.S. citizens working in a foreign country, Counsel must be consulted. An IRC section 6038A Summons requires approval from the Associate Chief Counsel (International). See the International Procedures at IRM 4.60

  2. Having summoned a corporate officer or key employee under (1) above, the Service may question him or her with respect to all aspects of his or her knowledge regarding intercompany activities that may be relevant and material.

4.61.4.6  (05-01-2006)
Obtaining Records of a Domestic Member of the Controlled Group

  1. Determine who has custody or possession of relevant and material information.

    1. Ask the taxpayer to secure the information from the controlled domestic entity.

    2. If the taxpayer refuses or is unable to produce the requested information, an administrative summons may be served upon the appropriate officers of the controlled corporation.

4.61.4.7  (05-01-2006)
Obtaining Records from a Foreign Member of the Controlled Group

  1. U.S. Parent—Foreign Subsidiary. When information is in the possession, custody, or control of a foreign subsidiary, or other foreign member of the domestic taxpayers’ controlled group:

    1. Issue an IDR requesting the taxpayer to obtain the necessary information

    2. If the documentation is not provided, issue a Formal Document Request under IRC section 982 and a summons

    Note:

    IRC section 982 generally prohibits the introduction into civil proceedings by the taxpayer of any foreign-based documentation requested by the Service through an FDR and not provided to the service by the taxpayer. Guidelines are provided in Exhibit 4–1. IRC section 982 is limited to documentation.

    Caution:

    A summons should be issued simultaneously to cover testimony. Also, the taxpayer may establish reasonable cause for noncompliance with respect to the FDR.

  2. Foreign Parent—U.S. Subsidiary. If the books and records are in the possession, custody, or control of a foreign parent, the examiner should:

    1. Issue an IDR requesting the taxpayer to obtain the information

    2. Apply the requirements of IRC 6038A if a foreign shareholder owns 25 percent or greater of the U.S. subsidiary

    Note:

    IRC section 6038A requires the foreign parent authorize an agent to provide requested records. Refer to the International Procedures Handbook for specific procedures.

4.61.4.8  (05-01-2006)
Information from and Disclosure to Unrelated Third Parties

  1. IRC section 482 issues require unrelated third party data for comparability. Documentary evidence, such as price, profit margins, pricing arrangements, distribution costs, credit terms, royalty rates on intangibles, etc. is reasonably self-explanatory. The unrelated party may request summonses for the production of testimony and/or documents. The service of a summons must be coordinated with Counsel.

  2. Unrelated third parties will be requested to:

    1. Furnish information about their transactions

    2. Provide expert testimony as to comparability of the uncontrolled transaction with the controlled transaction

    Reminder:

    To serve as evidence in court, comparability must be established. If physical properties and circumstances of the controlled and uncontrolled transactions are demonstrably identical, expert opinion on comparability is not required. The nature and extent of disclosure are determined by the role of the unrelated third party.

    Example A - Unrelated Third Party Taxpayer Summons
    If an unrelated third party is requested to furnish information about its transactions, the examiner may disclose:

    1. The identity of a taxpayer under audit

    2. The questioned transaction(s) and method of operation of the taxpayer under audit, to enable the third party to understand what comparable transaction data he may provide

    The examiner should not disclose:

    1. Any more information regarding the questioned transaction(s) and method of operation of the taxpayer than is absolutely necessary to enable the third party to understand what comparable transaction data it may provide;

    2. Information that may reasonably be considered "trade secrets" or information vital to the competitive position of the taxpayer under audit.

    Note:

    If disclosure of such information is deemed absolutely essential, it must be approved in advance by the International Territory Manager.

    Example B - Unrelated Third Party Taxpayer Retained as Expert
    Where the unrelated third party, as an expert, is to render an opinion on comparability the examiner may disclose:

    1. The identity of the taxpayer under audit

    2. Confidential information regarding the controlled and uncontrolled transactions

    3. Any information necessary for the third party taxpayer to prepare as an expert witness

    Note:

    Generally this person would sign a statement agreeing to disclosure rules of the Service. This person must be able to testify in the event of trial. This must be discussed with Counsel prior to disclosure of taxpayer information.

4.61.4.9  (05-01-2006)
Authority for Disclosure to Expert

  1. It is the position of the Service that the statutory authority of the Commissioner under IRC sections 7602, 7801, and 7802 to make investigations, determine correct tax liability, and administer and enforce the internal revenue laws implies authority to disclose tax information of a confidential nature to the expert. The party described in Example A as the supplier of documentary evidence could also be used as the expert witness. Since this would require extensive disclosure of the taxpayer’s transactions prior to litigation, this factor with any other pertinent facts should be considered in deciding whether to use them as an expert.

4.61.4.10  (05-01-2006)
Authority to Summon Unrelated Third Parties

  1. IRC section 7602 authorizes the Commissioner to examine any "relevant or material" books and records and summon any person deemed proper to produce records or testify as to matters that "may be relevant or material to such inquiry."

  2. There are occasions where summonsing information from an unrelated third party may be possible. This summons MUST be coordinated with Counsel.

4.61.4.11  (05-01-2006)
Wording a Summons

  1. IRC section 7603 requires the records sought be described with reasonable certainty.

    1. The summons should be as specific and detailed as possible.

    2. The summoned party must be able to reasonably identify the particular records required to be produced.

    3. Assistance from Counsel should be obtained.

  2. The administrative summons (Form 2039) includes the names of the taxpayer even if the summons is to an unrelated third party.

  3. The burden of complying with a summons is ordinarily not a proper defense (relevancy and other prerequisites must be met). See United States v. Abraham, 905 F.2d 1276 (9th Cir. 1990) and Tax Liabilities of John Does v. United States, 866 F.2d 1015 (8th Cir. 1989).

  4. To ensure enforceability, the unrelated third party summons should not be unreasonably onerous or oppressive. See First National Bank of Mobile v. United States, 160 F.2d 532 (5th Cir. 1947).

  5. If an unrelated third party summons is used to obtain comparable information a court may be more stringent in examining.

    • The relevancy of the documents sought

    • The specificity of description

    • The reasonableness of the request

Exhibit 4.61.4-1  (05-01-2006)
Formal Document Request IRC section 982

Introduction
IRC section 982 prohibits the taxpayer from introducing foreign-based documentation (any document which is outside the United States and may be relevant or material to the tax treatment of an examined item, IRC section 982(d)(1)) into civil proceedings if the Service requested the documentation using a Formal Document Request (FDR) unless the taxpayer does the following:
 • Complies substantially with the FDR
 • Establishes reasonable cause for failure to comply
IRC section 982 is effective after September 3,1982.
 
Guidelines
 1. An Information Document Request (IDR) requesting specific information must precede the issuance of an FDR. The taxpayer must fail to substantially answer an IDR before an IE issues an FDR. An FDR should not be considered a routine information-gathering tool.
 2. The FDR cannot request more information than was requested in the IDR. Advice of Counsel can be sought on a case-by-case basis as to the scope and wording of IDR’s.
 3. Administrative review procedures should be established. Counsel should be included in the review process.
 4. A formal document request letter (see guideline 9) with Form 4564, Information Document Request, should be used as the FDR.
 5. The reviewer of the FDR should consider whether:
  a. The records may be relevant and material
  b. The examination is conducted pursuant to a legitimate purpose under IRC section 7602
  c. The information sought is not in our possession
  d. The administrative steps required by the Code have been followed (e.g., the second examination requirements of IRC section 7605(b), if applicable)
  e. The request is for books, records and other documentation, not testimony
  f. The books and records are available in the United States
  g. The place of production is reasonable
  h. The documents need to be translated (translation may delay production of the documents)
 6. The FDR must be mailed either by registered or certified mail.
 7. The date of mailing begins the running of a 90-day period. During the 90-day period, the taxpayer can do the following:
  a. Comply with the FDR
  b. Begin a proceeding to quash the FDR
  c. Move to extend the 90-day period
 8. Proceedings to quash:
  a. The IE should notify Counsel the day a petition to quash the FDR is received.
  b. The Service can recommend compliance with the FDR in the proceeding to quash. If desired, the recommendation should so state.
  c. The IE will forward the recommendation for defense of the petition to Counsel within six work days.
  d. If the taxpayer begins a proceeding to quash, the civil and criminal statutes of limitations are suspended during the period the proceeding to quash and related appeals are pending.
 9. Other considerations:
  • The IRC section 982 sanction prohibiting taxpayers from introducing foreign-based documentation into civil proceedings applies if the taxpayer " fails to substantially comply" with the FDR. Substantial compliance is a facts and circumstances test.
     Example:  Two items are requested and the taxpayer provides only one item; if
     the one missing item is the most significant, then the other item would
     possibly be excluded in a court proceeding.
  • The term "documentation" includes, but is not limited to, books and records.
  • Minority status in a foreign entity may or may not be reasonable cause for not producing records. The facts and circumstances of the case will determine whether minority status is reasonable cause.
  • Foreign nondisclosure law is not reasonable cause under IRC section 982. Therefore, taxpayers cannot use secrecy laws as a defense. The presence of secrecy laws do not make an FDR unreasonable.
  • If the foreign country makes it impossible to remove the original documents requested, not because of secrecy laws but because of foreign tax laws or laws as to the rights of creditors, true copies may be sufficient.
  • IRC section 982 FDRs and IRC section 7602 summonses are not mutually exclusive. Both may be issued simultaneously.
     Example:  FDRs apply only to foreign-based documentation, not to U.S-based
     documentation. If the location of the documents is unknown, then the IE
     should issue both an FDR and a summons for the same information. In
     this situation, the IE should follow the separate procedures for the
     issuance of an FDR and a summons.
 10. Formal Document Request Letter: Letter 2261(P)(3–87)
     Note:  Type on Appropriate Letterhead
 
          Delivered by
           Certified/Registered Mail
Taxpayer’s name
Taxpayer’s last known address
FORMAL DOCUMENT REQUEST
(Salutation)
 This letter, including the attachment(s), constitutes a FORMAL DOCUMENT REQUEST under Internal Revenue Code section 982, and relates to documentation necessary to determine your United States tax liability for year(s)______. We are providing you with the following information, as required by section 982:
 (1) Time and place for production of documentation:______AM; PM,
 _______19__,at (physical address); or by mail postmarked before this date and
 sent to: (mailing address).
 (2) Why previously submitted documentation is not sufficient: You did not provide the
 requested information described on Form 4564, Information Document Request, which was
 mailed to you at your above address on ______. ______. (State other
 reason if applicable.)
 (3) Description of documents requested: The documents are those shown on Form 4564,
 Information Document Request, which is attached and made a part of this request. You are
  required to provide a certified translation into English for requested documents that are in any
  language other than English.
 (4) Consequences of failure to comply: Code section 982(a) states that if a taxpayer "fails to
  substantially comply with any formal document request arising out of the examination of the tax
  treatment of any item (hereafter in this section referred to as the ‘examined item’) before the
  90th day after the date of the mailing of such request on motion by the Secretary, any
  court having jurisdiction over a civil proceeding in which the tax treatment of the examined item
  in an issue shall prohibit the introduction by the taxpayer of any foreign-based
 documentation covered by such request" (Emphasis added).
 Further, if the requested items are not received before the 90th day after the date of the mailing of this Formal Document Request (insert tax adjustments to be made). Thus, under the provisions of section 982, you will lose your opportunity to present any of the requested documents to any court having jurisdiction to adjudicate your case in a civil proceeding.
 We further advise you that Code section 982(c)(2) allows you to bring a proceeding to quash a Formal Document Request not later than the 90th day after the day such request was mailed. You may institute such a proceeding in the United States District Court for the district in which you reside or are found. Under Code section 7701(a)(39), any citizen or resident of the United States who does not reside in (and is not found in) any United States judicial district shall be treated as residing in the District of Columbia for purposes of any provision of the Internal Revenue laws relating to jurisdiction of courts or enforcement of summons. Should you institute a proceeding to quash, the running of the 90-day period for complying with this Formal Document Request shall be suspended while the proceeding is pending. In a proceeding to quash, section 982 also allows the Secretary of the Treasury to seek to compel compliance with the Formal Document Request.
 We urge you to promptly comply with this Formal Document Request.
          Sincerely,
 
 
          (Signature)
          (Title)
Attachment:
As Stated
 
 
             Letter 2261(P)(3–87)

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