Overview
In a unanimous opinion, the US Supreme Court agreed with the government in Polselli v. Internal Revenue Service that the Internal Revenue Service (IRS) can issue a summons to obtain information from a third-party, such as a bank, without providing notice to a person who has a legal interest in the account, such as the account holder, as long as the summons aids in the collection of another person's delinquent taxes.1
The case centers around IRS assessments against Remo Polselli for more than $2 million in unpaid taxes and penalties. The IRS believed Polselli may have been hiding assets that could be used to pay his assessed tax liability. The IRS issued several summonses, including a summons for information on accounts belonging to Polselli's wife, Hanna Karcho Polselli, as well as for accounts owned by a company the IRS believed Polselli may have had control over. Further, the IRS issued a summons to a law firm where Polselli had been a client. The IRS then issued several additional summonses to Wells Fargo to request the financial records of Polselli's wife and to JP Morgan Chase and Bank of America for bank statements relating to accounts controlled by his lawyer and law firm. When issuing the summonses, the IRS did not provide notice to the third parties named in the summonses. After receiving notification of the summonses from their banks, Polselli's wife, his lawyer, and law firm filed motions to quash the summonses. The law firm, however, no longer had any responsive records, so issues of attorney-client privilege did not come to the fore.
Congress has granted broad power to the IRS to issue summons to collect unpaid taxes. Under section 7609(a), the IRS must provide notice to an individual whose records have been summoned from a third-party and the IRS must send a copy of the summons to any person who is entitled to notice.2Under section 7609(b), any person entitled to notice then has a right to challenge the validity of the summons and file a motion to quash such summons within 20 days of receiving the notice. However, section 7609(c) includes specific exceptions that exempt the IRS from providing notice to the person identified in the summons if the summons is "issued in aid of the collection of an assessment or judgment rendered against the person with respect to whose liability the summons is issued.” As the Supreme Court succinctly described, the IRS may issue a summons both to determine whether a taxpayer owes money and later to collect an outstanding liability.3 When the IRS conducts an investigation for the purposes of determining tax liability, it must provide notice.4 Once the IRS has reached the stage of collecting a tax liability, section 7609 may exempt the IRS from providing such notice.5
Both the Eastern District Court of Michigan6 and the Sixth Circuit Court of Appeals7held that the summonses to the third-parties fell within the notice exception under section 7609 and Polselli's wife and lawyer did not have jurisdiction to quash the notice. When challenging the summonses, Poleselli's wife and lawyer relied on a decision from the Ninth Circuit Court of Appeals that held that a taxpayer must have a legal interest or title in the object of the summons for the notice exception under section 7609 to apply.8 However, the Sixth Circuit rejected this argument.9
To resolve this circuit split, the Supreme Court considered whether the IRS can avoid providing notice under section 7609 only if the delinquent taxpayer has a legal interest in the summonsed accounts or records, or if it applies to anyone’s summonsed accounts or records, no matter who owns the account, as long as it relates to the collection of the delinquent taxpayer's liability.10
To fit within the notice exception under section 7609, the Supreme Court held that the summons (1) must be issued in aid of collection; (2) must aid in the collection of an assessment or judgment rendered; and (3) must aid the collection of assessments or judgments again the person with respect to whose liability the summons is issued.11In his opinion affirming the Sixth Circuit’s opinion, Chief Justice Roberts relied on a "straightforward reading of the statutory text" to reject the argument that a taxpayer must maintain a legal interest in the requested records for the summons notice exception under section 7609 to apply.12
In a concurring opinion, Justice Jackson stated that Congress recognized, by providing exceptions to section 7609's notice requirement, that providing notice in certain instances could frustrate the IRS's ability to collect taxes.13However, Justice Jackson noted that "Congress did not give the IRS a blank check" in tax collection matters and section 7609 does not give the IRS "boundless authority."14Justice Jackson stated the determination will often be fact-specific and that courts and the IRS "must be ever vigilant when determining when notice is not required."15
Privacy advocates, such as the American Civil Liberties Union (ACLU) and the Center for Taxpayer Rights, raised concerns about the IRS's power to issue a summons to collect these records, which could contain sensitive or personal information, from a third-party without notice. In an amicus brief filed in support of the petitioners, the Center for Taxpayer Rights and ACLU argued that the notice requirements under section 7609 "were enacted as a guard against IRS overreach" and the Supreme Court should not interpret the statute "to eviscerate this important check on the IRS's authority."16Chief Justice Roberts addressed these concerns noting that even the government concedes that "the phrase ‘in aid of collection' is not limitless."17
The government proposed a test turning on reasonableness that "[s]o long as a summons is reasonably calculated to assisting in collection, it can fairly be characterized as being issued in aid of that collection."18The Court declined to define the precise bounds of the phrase "in aid of collection" as the parties did not argue it and the Sixth Circuit did not address it.
Lawyers and other tax practitioners should also be aware that third-parties, without receiving the benefit of IRS notice, may be unaware of the scope of information that the IRS is collecting and could lose the opportunity to assert fundamental privileges and protections, such as attorney-client privilege and other similar protections. Such third-parties may, of course, choose to provide such notice, but it is unclear what recourse taxpayers will have under such circumstances. Lawyers faced with such a third-party summons would be wise to notify their clients of the summons and would be required to assert any applicable privilege on behalf of their clients, as the privilege belongs to the client, as opposed to the attorney. The attorneys would presumably be compelled to move to quash the summons where privilege could be vitiated. A summons under such circumstances would challenge the realm of reasonable limits and warrant a motion to quash by the taxpayer as well.
The ambiguity around the language "in aid of collection" is likely to invite further litigation to test the reasonable scope of IRS authority to satisfy the notice exceptions in section 7609(c).
Endnotes
1 Polselli v. Internal Revenue Serv., No. 21-1599, 2023 WL 3511532 (U.S. May 18, 2023).
2In this article, all references to "section" are to the Internal Revenue Code of 1986, as amended.
3See Polselli v. Internal Revenue Serv., No. 21-1599, 2023 WL 3511532, *2.
4Id.
5Id.
6Polselli v. United States, 2020 WL 12688176, *4 (E.D. Mich. Nov. 16, 2020).
7Polselli v. Dep’t of Treasury-IRS, 23 F.4th 616, 623 (6th Cir. 2022).
8See Ip v. United States, 205 F.3d 1168, 1176. (9th Cir. 2000).
9See Polselli, 23 F.4th at 625.
10 See Polselli, No. 21-1599, 2023 WL 3511532, *3-4.
11 Id. at *4.
12 Id.
13 Id. at *8 (Jackson, J., concurring).
14 Id.
15 Id. at *9
16 Brief for the Center for Taxpayer Rights et. al. as Amicus Curiae Supporting Petitioners at 2-3, Polselli v. Internal Revenue Serv., No. 21-1599 (U.S. May 18, 2023).
17 Polselli, No. 21-1599, 2023 WL 3511532, *7 (citing Tr. of Oral Arg. 33).
18 Id. at *7 (internal citations omitted).
