The IRS wasn’t required to notify third parties about collection summonses sent to three banks, according to a unanimous opinion issued on May 18, 2023. The Court rejected the third parties’ argument that the notice exception in Code Sec. 7609 only applies when the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. (Polselli (SCt 5/18/2023) 131 AFTR 2d ¶2023-654)
Background.
The IRS may issue summonses to help it find assets it can use to collect unpaid federal taxes. Generally, when the IRS issues a summons, it must notify any person identified in the summons. Anyone entitled to such notice may then try to quash the summons.
However, there is an exception to this notice rule when the IRS issues a collection summons. When the IRS issues a collection summons, no notice is required.
Note. A collection summons is a summons “in aid of the collection of … an assessment made … against the person with respect to whose liability the summons is issued.”
History.
The IRS had recorded assessments against Remo Polselli for more than $2 million in unpaid taxes and penalties. Then, the IRS issued summonses to three banks seeking the financial records of several third parties, including Remo’s wife and two law firms, who then moved to quash the summonses.
Note. The third parties could move to quash the summonses only if they were entitled to notice.
During the quash proceedings, the third parties argued that the notice exception in Code Sec. 7609 only applied if the delinquent taxpayer had a legal interest in the summoned records. The district court rejected that argument holding that the IRS wasn’t required to give the third parties notice of the summons because the notice exception in Code Sec. 7609(c)(2)(D)(i) applied even though the taxpayer didn’t have a legal interest in the summoned records. See Polselli, (DC MI) 129 AFTR 2d 2022-323.
The Sixth Circuit affirmed, finding that the summonses fell squarely within the exception to the general notice requirement in Code Sec. 7609(c)(2)(D)(i). See Polselli, (CA6) 129 AFTR 2d 2022-313.
Note. The Ninth Circuit previously held that the IRS was required to give third parties notice of a summons unless the delinquent taxpayer had a legal interest in the summoned records. See Ip (CA9) 85 AFTR 2d 2000-1095
Decision.
The Supreme Court, affirming the Sixth Circuit’s opinion, rejected the third parties’ argument that the exception to the notice requirement in Code Sec. 7609(c)(2)(D)(i) only applies if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.
Note. The question presented to the Court focused only on whether Code Sec. 7609(c)(2)(D)(i) requires that a taxpayer maintain a legal interest in records summoned by the IRS. The Supreme Court’s answer was no.
The Court noted Code Sec. 7609(c)(2)(D)(i) doesn’t say that a delinquent taxpayer must have a legal interest in the information summoned for the notice exception to apply. In fact, “legal interest” isn’t mentioned at all. The statute says that the IRS doesn’t have to provide notice to third parties when (1) the summons is issued to “aid in collection;” (2) of an assessment made or judgment rendered; and (3) against the person with respect to whose liability the summons is issued. Thus, the Court said, a summons is “in aid of collection” if it will help the IRS find assets that can be collected to pay a delinquent taxpayer’s taxes.
For more information about statutory exceptions to the special procedures for third-party summonses, see Checkpoint’s Federal Tax Coordinator ¶T-1255.
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