No Notice, No Problem
The U.S. Supreme Court has backed the IRS on a third-party notice exception to its summons power of financial records. Last week, the high Court unanimously held in Polselli v. IRS, No. 21-1599 (S. Ct. May 18, 2023), that the IRS in efforts to collect an assessed tax liability has authority to summon banking and other records under Internal Revenue Code § 7609(c)(2)(D(i) without issuing notice to third parties.
In other words, the IRS can issue a summons to gain access to sensitive third-party financial information without notice to the account holder, and yes, even when the IRS is attempting to collect an assessed tax liability for someone other than the person whose records have been summoned. Basically, the government’s power to gather information in its effort to aid in the collection of an individual’s assessed tax liability outweighs a third party’s privacy interest in their sensitive, financial information.
To hopefully quell any potential reader-uproar, however, let’s note here that the previously assessed federal tax liability component is the IRS’s ticket to notice-free land. Essentially, the Court’s holding in Polselli does not negate the IRS’s statutory notice requirement when issuing a summons as part of its effort to determine whether someone has a tax liability. Phew.
Actually, that still bites. Or maybe I mean still has a bite. Both, probably.
No Legal Interest, …(You Guessed It) No Problem
You see, § 7609(a) generally requires the IRS to notify those whose records have been summoned or who are identified in the summons, which involves receiving a copy of the summons and being informed of his or her right to bring a proceeding to quash it. As we’ve noted above, however, there are exceptions. And the exception to the notice requirement under § 7609(c)(2)(D(i) applies for an IRS summons to find assets or income even when the taxpayer in question has no legal interest in the accounts or records summoned, according to the Court. That’s what happened in Polselli.
The IRS assessed Remo Polselli for over $2 million in delinquent tax liabilities spanning several years. In its collection efforts, the IRS issued summons to Wells Fargo, Bank of America, and J.P. Morgan Chase to release the bank account records of Polselli’s wife Hanna and the law firm Abraham & Rose, PLC, where Polselli had been a longtime client. The IRS did not provide notice to Hanna Polselli or the law firm, but the banks alerted them to the summons. And as the account holders they filed motions to quash in Federal District Court.
Both the District Court and the Sixth Circuit in Polselli determined that the IRS had authority to issue such summonses without notice, rejecting petitioners’ argument that a delinquent taxpayer must have a legal interest or title in the object of the summons. In concluding the legal interest factor was irrelevant, the Sixth Circuit aligned itself with the U.S. Court of Appeals for the Seventh and Tenth Circuits, rejecting the Ninth Circuit’s 2000 adoption of a legal interest test. The Supreme Court’s May 18 decision affirming the Sixth Circuit resolved this conflict.
“A straightforward reading of the statutory text supplies a ready answer: The notice exception does not contain such a limitation,” Chief Justice Roberts wrote. “None of the three components for excusing notice in § 7609(c)(2)(D)(i) mentions a taxpayer’s legal interest in records sought by the IRS, much less requires that a taxpayer maintain such an interest for the exception to apply.”
So, what are the three components set forth in the statute, you ask? (You didn’t.)
- First, a summons must be “issued in aid of… collection.”;
- Second, it must aid the collection of “an assessment made or judgment rendered.” (Under the code, an assessment refers to the official recording of a taxpayer’s liability.); and
- Third, a summons must aid the collection of assessments or judgments “against the person with respect to whose liability the summons is issued.”
Although the third component certainly links the subject of the assessment with the subject of the collection, requiring they concern the same delinquent taxpayer, the statute simply does not require a legal interest standard. “Had Congress wanted to include a legal interest requirement, it certainly knew how to do so,” Chief Justice Roberts wrote.
Privacy Concerns and Blank Checks
As my friend Les Book wrote over at Procedurally Taxing, this is the type of case that rightfully raises privacy concerns. “When, as in Polselli, the government seeks records from the taxpayer’s wife and a law firm and can do so without telling anyone other than the summoned party it disrupts a reasonable expectation in the privacy around one’s sensitive records and information,” Book wrote. “To be sure, Polselli himself put the third parties in harm’s way by not paying his taxes, and the government is prohibited from disclosing this information to other third parties, but that is unlikely to satisfy someone whose records are released to the IRS without their knowledge.”
So, now what? Well, at the very least the Court does clarify that it is not dismissing such privacy concerns; rather, it is choosing not to read the statute too narrowly in support of them. The statute should also not be read too broadly, as Justice Jackson, with whom Justice Gorsuch joined, notes in her concurring opinion. Indeed, if read too broadly it would presumably allow the IRS to summon anyone’s records without notice, regardless of intrusiveness “so long as the agency thinks doing so would provide a clue in locating a delinquent taxpayer’s assets,” she wrote.
While Congress and the Court recognize that there are situations where providing notice could hinder the IRS’s ability to administer tax law and its collection efforts, it is not reasonable to assume that providing notice would always do so. In that vein, Congress did not give the IRS a blank check in the collection arena, according to Justice Jackson. “Thus, in my view, courts must not interpret § 7609(c)(2)(D)(i) as if that agency has been gifted with boundless authority.” Indeed, Chief Justice Roberts shared this sentiment by writing at the end of the opinion that the Court is not dismissing “any apprehension about the scope of the IRS’s authority to issue summonses.”
However, what the Court would not do is establish a test for reasonableness. While the IRS conceded the phrase “in aid of collection” is not a limitless term, it suggested its authority rest on the premise that so long as a summons is “reasonably calculated to assisting in collection,” it can then be established as issued “in aid of collection” pursuant to the statute. The Court, however, determined that Polselli was not the appropriate case to try to define the precise bounds of the phrase.
If I were a betting woman, and I am not, (though I can tell you about the tax consequences of gambling), I’d say the odds are good that this won’t be the last we hear of those four words in relation to the IRS’s summons power – be it through litigation or better yet legislation.
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