U.S. Supreme Court Excuses Secret IRS Summons, Sometimes
Do you have the right to notice when the IRS demands production of your financial information? If the IRS reaches too far, do you have the right to take the government to court and limit that reach? The recent unanimous United States Supreme Court decision in Polselli v IRS allows for secret IRS summons for records in certain cases, specifically when trying to collect on a previous tax assessment.
IRS Secretly Summonsed Bank Records for Taxpayer’s Wife, Attorneys
Between 2005 and 2017, Remo Polselli underpaid his federal taxes. Following an audit, the IRS assessed more than $2 million in unpaid taxes and penalties against the taxpayer. When the case went to collections, the IRS issued several summons for account records to several banks in an attempt to collect information about where Mr. Polselli may have assets that could be seized.
These accounts didn’t just belong to Mr. Polselli. There were also IRS summonses related to his wife’s accounts, accounts owned by a hotel management company Mr. Polselli had used to make past tax payments, and a law firm where Mr. Polselli had been a client. The IRS didn’t provide notice to these third parties, but the banks did. The law firm and Mrs. Polselli then sued to quash the summons and protect their banking information.
When are You Entitled to Notice that the IRS is Reviewing Your Bank Records
The IRS has the authority to issue summonses and gather information related to delinquent taxpayers. To protect privacy, the general rule says that IRS summons must be sent with notice to anyone named in those summons. This means that, as a general rule, you are entitled to know when the IRS is reviewing your bank records or other information. The Tax Code allows anyone who receives such a notice to file a complaint in federal court to quash the summons and protect their information.
However, there are exceptions to that rule. If taxpayers were always entitled to notice when the IRS summonsed information about their finances, there would be nothing to stop the taxpayer from withdrawing their funds from banks receiving the summons and hiding their assets elsewhere. To prevent this, Congress included exceptions to the default-notice standard designed to protect the IRS’s ability to collect delinquent taxes.
For example, the IRS is allowed to issue secret summons to “aid in the collection of—
(i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or
(ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).”
These exceptions have been interpreted differently by circuit courts in the past. The Ninth Circuit said the first exception would only apply where the delinquent taxpayer had a legal interest in the accounts or records being disclosed. However, the Sixth, Seventh, and Tenth Circuits applied the exception to third parties’ accounts as well.
The difference matters because, without receiving a notice, those third parties would not have the standing – legal authority – to contest the summonses in court. So the U.S. Supreme Court granted certiorari in the Polselli case to decide whether the exception to the notice requirement applied where the delinquent taxpayer had no legal interest in the account or records subject to the IRS’s secret summons.
U.S. Supreme Court Says No Taxpayer Interest is Required for Secret IRS Summons
The U.S. Supreme Court analyzed Section 7609 of the Internal Revenue Code. In a unanimous decision, the Court determined that the plain language of the exception did not require the delinquent taxpayer to have any interest in the accounts or records disclosed to excuse notice. Instead, only three conditions had to be met: the summons must be (1) “issued in aid of … collection” of (2) “an assessment made or judgment rendered” (3) “against the person with respect to whose liability the summons is issued.” In other words, the delinquent taxpayer against whom the judgment or assessment is issued must also be the taxpayer against whom collections are sought. The Court said:
“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.”
In other sections of the Code – including the very next section – Congress had placed requirements that the taxpayer maintain a “proprietary interest” in summonsed records. The Court said the absence of that language here required a broader interpretation.
In making this decision, the Court distinguished summons issued as part of the IRS’s investigation into a taxpayer’s liability and collections efforts after the assessment had been issued. The first requires notice, except where subsection (ii) applies to transferees or fiduciaries of the taxpayer. However, once the assessment is issued, subsection (i) excuses notice even if the taxpayer has no interest in the account, the Court said. This is because the summons in question may not directly lead to collections, but may be one step in the process leading to assets the IRS could collect to satisfy the unpaid tax debt.
Supreme Court Dismisses Privacy Concerns
The petitioners in the case – Mr. Polselli’s wife and attorneys – and several amicus briefs had raised concerns related to the account holders’ privacy and constitutional rights. The Supreme Court addressed the privacy concerns, simply saying that Congress was aware of these concerns when it created Section 7609, and it could have drawn the exception more narrowly, had it desired to do so.
The Court also stated that the phrase “in aid of the collection” is not “limitless.” Justices Jackson and Gorsuch issued a concurring opinion explaining that the default rule remained that notice was required. However, neither the unanimous majority opinion, nor the concurrence chose to “decide the contours of that phrase.” The majority opinion simply limited its finding to whether the taxpayer needed to have an interest in the account – he did not. The concurrence went slightly further, advising that courts would need to find the balance between the IRS’s investigation and the privacy interests of the petitioners on a case-to-case basis “depending on the scope and nature of the information the IRS seeks.” Such a decision does not provide much guidance to the IRS or future courts in deciding when notice is, or is not required, and assures further litigation on this issue in the years to come.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about IRS summonses or collections efforts, contact Joe Viola to schedule a consultation.