United Am. v. Radchik

• Decision Date: 01 June 2017
• Docket Number: Civil Action Nos. 17-CV-1187 (KSH) (CLW)
• Parties: UNITED STATE OF AMERICA, Petitioner, v. ISANA RADCHIK, Respondent.
• Court: U.S. District Court — District of New Jersey

UNITED STATE OF AMERICA, Petitioner,
v.
ISANA RADCHIK, Respondent.

Civil Action Nos. 17-CV-1187 (KSH) (CLW)

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

June 1, 2017

NOT FOR PUBLICATION

OPINION & ORDER

WALDOR, United States Magistrate Judge

This matter comes before the Court upon a petition (ECF No. 1), by the United States of America, to compel compliance with summonses served on Respondent, Isana Radchik. On March 13, 2017 the Court issued an Order to Show Cause as to why Respondent, Isana Radchik should not be compelled to obey the Internal Revenue Service ("IRS") summonses served upon her. The Court heard oral argument on these issues at the Show Cause Hearing on May 3, 2017 and conducted an in-camera review of the disputed questions with Isana Radchik on May 25, 2017, for the reasons set forth below, the Court grants the motion to compel compliance.

I. Background

The United States of America petitioned this Court, on February 10, 2017, for an order enforcing the IRS administrative summonses served on Isana Radchik. Revenue Agent, Lillie May, is conducting an investigation to determine the correct federal tax liabilities of taxpayers Danil and Yana Bernshteyn. (Petition ¶4.) There is a question as to whether the Bernshteyns should be assessed penalties for the 2002 to 2007 tax years for failure to report a foreign bank

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account under 31 U.S.C. § 5314. (Id.) On January 12, 2017 Revenue Agent May issued IRS summonses to Radchik directing her to appear and give testimony. (Petition ¶6.) Radchik appeared before the IRS on February 29, 2017 where she answered some questions, but also invoked the tax practitioner and fifth amendment privileges. (Petition ¶8.) The Government moves before this Court to order Ms. Radchik to comply with the IRS summonses.

This Court held oral argument at a Show Cause Hearing on May 3, 2017. Petitioner maintains that neither the tax practitioner privilege nor the fifth amendment right against self-incrimination apply to the instant matter. According to the Government, the tax practitioner privilege does not apply because the questions asked of Ms. Radchik only relate to preparation of tax forms. Ms. Radchik characterized her own work with the Bernshteyns as one of tax preparation services. (Tr. at 12, 25.) It is the Government's position that legal advice would be protected but not the type of rudimentary information requested by Agent May. Additionally the Government argued that "the owner of the privilege has to claim it," meaning the Bernshteyns must invoke the privilege, and there is no evidence on the record of them doing so. (Tr. at 11.)

It is the Government's position that to assert the privilege against self-incrimination, Ms. Radchik must make a showing of a real and substantial hazard that might result by disclosing the information. (Tr. at 3.) According to the Government, no such threat exists because it is time barred from indicting Ms. Radchik and there is no current investigation of Ms. Radchik. The Government is "not delaying recommendation for a criminal investigation in order to gather more information," rather there is simply "no DOJ referral" according to Government attorney Nelson Wagner. (Tr. at 4.)

With respect to the tax practitioner privilege, Respondent "conceded that if Ms. Radchik simply took information and prepared tax returns" then that is not protected. (Tr. at 26.) But

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Respondent does not agree with the Government that the advice needs to be legal advice to be protected or that because the advice pertains to a statute it is necessarily legal advice. (Tr. at 20-21.) Respondent argues that what is protected is when a tax practitioner gives advice on the series of statutes that make up the Internal Revenue Code such as, "how those statutes operate and what is required of taxpayers and how things need to be reported and what deductions can be taken." (Tr. at 20.) Respondent emphasizes that the privilege belongs to the Bernshteyns, only they can waive it, and they do not have to affirmatively claim it, as the Government suggests. (Tr. at 19.)

With respect to the fifth amendment privilege, Respondent cites case law indicating that "a civil IRS examination is the first building block to a criminal case." (Tr. at 14.) Attorney for Respondent also reminded the Court that while there are different standards discussed with respect to the fifth amendment the unifying theme amongst the case law is "not the likelihood of prosecution . . . [but] the possibility of prosecution." (Tr. at 15, 17.) Respondent believes that there are "clearly criminal overtones with respect to the underlying tax investigation" in this case because the taxpayers "allegedly failed to report foreign assets as required under the Internal Revenue Code." (Tr. at 15.) For this reason Ms. Radchik claims she has the right to invoke the fifth amendment.

II. Applicable Law

To make a prima facie case in favor of enforcement of an IRS summons the United States must show that (1) the investigation is being conducted for a legitimate purpose, (2) the inquiry is relevant to such purpose, (3) the information sought is not already in the IRS's possession, and (4) the administrative steps required by the tax code have been followed, including that the IRS has notified the taxpayer in writing that further examination is necessary. United States v. Trenk, No. 06-1004, 2009 WL 485375, at *2 (D.N.J. Feb. 26, 2009) (citing United States v. Powell, 379 U.S.

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48 (1964)). The required showing is usually made by affidavit of the agent who made the summons and is seeking enforcement.¹ United States v. Garden State Nat'l Bank, 607 F.2d 61, 68 (3d Cir. 1979). Respondent does not dispute that a prima facie case for enforcement of the summons has been met.

Ms. Radchik refused to answer specific questions at her IRS interview on February 29, 2017 solely based on (1) the tax practitioner privilege and (2) the fifth amendment privilege against self-incrimination.

a. Tax practitioner privilege

Section 26 U.S.C. § 7525(a)(1) outlines the tax practitioner privilege, stating:

the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

The privilege only applies in noncriminal tax matters before the IRS or a noncriminal tax proceeding in federal court brought by or against the U.S. See 26 U.S.C. § 7525(a)(2). The "IRS' investigatory powers are essential to the proper functioning of the tax system, [so] courts are reluctant to restrict the IRS' summons power, absent unambiguous direction from Congress." 2121 Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th Cir.1997). The Section 7525 privilege "is no broader than the attorney-client privilege." Trenk, 2009 WL 485375, at *4. As a result, several district courts, including the District of New Jersey, have found that "[t]he privilege does not protect communications between a tax practitioner and a client simply for the preparation of a tax return." Trenk, 2009 WL 485375, at *4; United States v. KPMG LLP, 316 F. Supp. 2d 30, 35 (D.D.C. 2004); Chao v. Koresko, 2005 WL 2521886 (3d Cir. Oct. 12, 2005); see also United States

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v. Arthur Andersen, L.L.P., 273 F. Supp. 2d 955, 957-58 (N.D. Ill. 2003), amended on reconsideration sub nom. United States v. Arthur Andersen, LLP, No. 02-6790, 2003 WL 21956404 (N.D. Ill. Aug. 15, 2003) (stating "[c]onfidentiality in the tax context may be waived when the communications with the tax adviser ultimately are used to...