The U.S. Supreme Court held unanimously that the IRS does not have to notify third parties named in a summons when it seeks access to records held at institutions such as banks in aid of collection of an assessment.

Sec. 7609(a)(1) requires the IRS generally to provide notice to anyone named in a summons, which then gives the party an opportunity to bring a motion to quash the summons, but under Sec. 7609(c)(2)(D)(i), no notice is required if the summons is "in aid of the collection of … an assessment made … against the person with respect to whose liability the summons is issued."

In Polselli, No. 21-1599 (U.S. 5/18/23), the Court on Thursday rejected the argument that the Sec. 7609(c)(2)(D)(i) exception applies only if the delinquent taxpayer has a legal interest in the accounts or records sought by the government.

"A straightforward reading of the statutory tax supplies a ready answer: The notice exception does not contain such a limitation," Chief Justice John Roberts wrote in the decision (slip op. at 5). Justice Kentanji Brown Jackson wrote a concurring opinion, which Justice Neil Gorsuch joined.

The IRS can issue a summons both to determine whether a taxpayer owes money and also to collect that debt, the Court said. It must provide notice only in the former situation.

"But once the Service has reached the stage of 'collecting any such liability,' §7602(a) — which is a distinct activity — notice may not be required, §7609(c)(2)(D)," the Court wrote (slip op. 3).

The decision resolves a split between the Sixth and Ninth Circuits. The Supreme Court affirmed the Sixth Circuit's decision in the case (Polselli, 23 F.4th 616 (6th Cir. 2022)). The Ninth Circuit had held that the taxpayer must have "some legal interest or title in the object of the summons" for the notice exception to apply (Ip, 205 F.3d 1168, 1175 (2000)). The petitioners had used the latter argument in their case.

The IRS was trying to collect a delinquent tax bill of over $2 million from Remo Polselli, who underpaid his federal taxes for years. As its search for his financial resources widened, an IRS revenue officer issued summonses to three banks where Polselli's lawyers and his wife had accounts.

Since Sec. 7609(c)(2)(D)(i) does not require notice when a summons is issued "in aid of the collection of taxes," the IRS did not notify account owners, but their banks did, and they moved to quash the summonses.

The petitioners — Polselli's wife, Hanna Karcho Polselli, and Polselli's lawyers — argued that "in aid of the collection" only refers "to inquiries that 'directly advance' the IRS's collection," the Court wrote. "A summons will not directly ad­vance those efforts, they contend, unless it is targeted at an account containing assets that the IRS can collect to satisfy the taxpayer's liability. And, petitioners say, the only way that a summons issued to a third party will produce collect­ible assets is if the delinquent taxpayer has a legal interest in the targeted account" (slip op. at 7).

But, the Court wrote, IRS investigations are like others: "A detective might order forensic testing or speak to witnesses to help identify a culprit, even if those activities are unlikely — in and of themselves — to solve the crime. … Everyday tasks illustrate the same point: A recipe might help a chef shop for needed groceries, even though more steps are required before din­ner will be ready. By conflating activities that help advance a goal with activities sure to accomplish it, petitioners ig­nore the typical meaning of 'in aid of'" (slip op. at 8).

The Court rejected the idea that a taxpayer must have "some legal interest or title in the object of the summons" for the notice exception to apply because the statute does not mention legal interest when stating the exception. Therefore, because the summonses fell within the Sec. 7609(c)(2)(D) notice exception, the Court affirmed the Sixth Circuit decision that no notice was required and the petitioners could not bring a motion to quash.

Both the decision and the concurring opinion noted concerns about IRS overreach and abuse of authority.

The Court wrote that it does not "dismiss any apprehension about the scope of the IRS's authority to issue summonses. … Tax investigations often involve the pursuit of sensitive records. In this case, for instance, the IRS sought information from law firms concerning client accounts. And even the Government concedes that the phrase 'in aid of the collection' is not 'limitless'" (slip op. at 12).

Jackson in her concurrence wrote that she interprets the statute to mean that "the IRS is not necessarily exempt from notice obligations any time a tax-delinquency matter enters the collection phase. Ra­ther, the exception in §7609(c)(2)(D)(i) merely reflects Con­gress's determination that, in some situations, requiring the agency to provide notice in connection with its tax-col­lection efforts would undermine the balance that the stat­ute strikes with its default-notice requirement. Conse­quently, I believe that both courts and the IRS itself must be ever vigilant when determining when notice is not re­quired. Doing so properly involves a careful fact-based in­quiry that might well vary from case to case, depending on the scope and nature of the information the IRS seeks" (Jackson, J., concurring op. at 4).

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.