United States of America and Jimmy Chan, Revenue Agent v. Cheng C. Kao and Susan L. Kao, United States of America v. Chin Wu and Su-Chin Kao

The Kaos are taxpayers who are being civilly investigated by the Internal Revenue Service (“IRS”). They appeal a consolidated district court order enforcing four summons served by the IRS and compelling the Kaos to execute consent directives. We conclude that 26 U.S.C. § 7602 does not authorize the IRS to compel taxpayers to sign consent directives which would enable the IRS to obtain records from third parties through means other than those established in 26 U.S.C. § 7609 . Therefore, we reverse the district court’s order.

In December, 1991, agent Jimmy Chan began conducting a tax investigation of Kolyn Enterprises Corporation (Kolyn), shareholder Dr. Cheng Kao, arid his wife Susan Kao. Agent Chan was attempting to determine the Kaos’ tax liability for the years 1988 through 1990, along with any violations of the internal revenue laws.

Chan’s investigation allegedly revealed that Kolyn’s net bank deposits exceeded the gross income reported on its tax returns by a total of $6,777,319 for the years 1988-Í991. Most of the deposits were overseas wire transfers from offshore banks, recorded in the Kolyn account as loans and capital contributions from shareholders. The audit…