Frost Law
Following the Sixth Circuit’s early 2022 ruling in Polselli v. IRS,1 a significant split exists among the circuits as to whether or not the IRS must give notice when it issues a summons “in aid of the collection” of tax assessments. In Polselli, the Sixth Circuit affirmed the lower court’s ruling and held that the IRS may issue a summons to a third-party recordkeeper without providing notice to the person identified in the summons, so long as the IRS: (1) assessed or entered a judgment against the delinquent taxpayer, and (2) issued the summons “in aid of collection” of that same delinquency.2 This decision diverged from the Ninth Circuit’s 2000 ruling in Ip v. United States,3 wherein the court concluded that notice is required when the IRS summons a third-party recordkeeper if the delinquent taxpayer has no recognizable legal interest in the summonsed records.4
Almost a year after the Sixth Circuit’s decision, the US Supreme Court granted a writ of certiorari in Polselli to consider the matter.5 Clarification of the notice requirement’s role in IRS summons practice is crucial. Ultimately, unless a party is entitled to notice, the government’s sovereign immunity is not waived, and it precludes a party’s challenge in court unless the party was entitled to notice. While we wait for the Supreme Court to clarify the proper IRS summons practice let’s review the Polselli case and why it matters.
The facts in Poselli are relatively straightforward. Taxpayer underpaid his federal taxes for over a decade, incurring more than $2 million in unpaid tax liabilities. A Revenue Officer (RO) was assigned to the matter and began investigating the location of Taxpayer’s assets which could be used to satisfy the liabilities.
During the RO’s investigation, he learned that Taxpayer had used entities to shield assets from collection. For instance, the RO discovered that Taxpayer had previously paid the IRS a large sum of money from an LLC’s bank account. Ultimately, the RO began to suspect that Taxpayer was concealing assets in his wife’s bank accounts and via his attorneys’ law firm.
To uncover the funds, the RO served summonses on the banks used by both Taxpayer’s wife and the law firm. The RO did not provide notice to either the wife or the law firm about these summonses. Subsequently, the banks notified the respective parties of the summonses. Taxpayer’s wife and the law firm (Petitioners) petitioned to quash the summonses, alleging that the IRS failed to properly notify them under Internal Revenue Code (IRC) §7609.
The United States District Court for the Eastern District of Michigan, Southern Division, held that “Petitioners are not entitled to notice under the circumstances, and as a consequence have no right to bring a petition to quash.”6 The United States Court of Appeals for the Sixth Circuit affirmed the district court decision.
The Sixth Circuit affirmed the decision of the District Court ruling that third-party recordkeepers account holders are not entitled to notice if a summons is issued “in aid of the collection” of delinquent tax liabilities. The court began its analysis by noting that the IRS has sovereign immunity as a government agency, which means that it is immune from suit unless a statute explicitly waives that immunity. In the case of the IRS, the court explained that IRC §7609 operates to define the scope of sovereign immunity.
Under IRC §7609(b)(2), “any person who is entitled to notice of a summons . . . shall have the right to begin a proceeding to quash such summons.” The court clarified that:
We have thus held that §7609(b)(2) waives the Government's sovereign immunity for a "narrow class of taxpayers" petitioning to quash an IRS summons seeking materials from a third-party recordkeeper.7
In other words, the ‘narrow class of taxpayers’ are those taxpayers who are entitled to notice. As a result, stated the court, district courts have jurisdiction over petitions to quash summonses so long as the petition is filed by a party that entitled to notice under IRC §7609.
However, cautioned the court, sovereign immunity persists if a statutory exception applies; in that case, a court would lack jurisdiction over petitions to quash summonses. Thus, the court maintained that it could only determine whether the district court had jurisdiction over the matter at hand after first determining whether the petitioners were entitled to notice of the summonses.
The court proceeded to review the “broad authority” granted to the IRS to use to collect information related to potential liabilities.8 This review led the court to point out that this broad authority includes issuing summonses to third-party recordkeepers (like banks or other financial institutions). Generally, the court noted, the IRS is required to notify any person identified in the summons directed to a third-party recordkeeper.9 However, the Court highlighted an exception to this general rule found under IRC §7609(c)(2)(D)(i), claiming that the section:
unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency.10
Thus, according to the Sixth Circuit in Polselli, if that exception applies, sovereign immunity is preserved and no right to petition to quash will arise.
The court then noted that the parties didn’t dispute that $2 million of assessments were issued against taxpayer.11 The Court also stated that the parties didn’t dispute the sole purpose of the summons was to locate taxpayer assets to satisfy a federal tax liability. Moreover, the Court declined to adopt the Ip rule, opining that it was inconsistent with the literal statutory language and legislative intent.
Again, in the end, the Court found that third-party recordkeepers' account holders are not entitled to notice if a summons is issued “in aid of the collection” of unpaid tax liabilities so long as the IRS: (1) assessed or entered a judgment against the delinquent taxpayer, and (2) issued the summons “in aid of collection” of that same delinquency.12
Many believe that the Sixth Circuit’s holding defeats the general purpose for the rule of notice and opens the door to a realm where the IRS could operate nearly unrestrained in its ability to seek records without notice. Unfortunately for innocent persons forced to hand over records, this would preclude them from any real opportunity to maintain privacy of their own information. If you need any guidance on this topic contact our team today at (410) 497-5947 or you can schedule a confidential consultation.
Update: On May 18, 2023, the Supreme Court decided this case, rejecting the argument that IRC §7609(c)(2)(D)(i)'s notice requirement exception applies only if the delinquent taxpayer has a legal interest in the targeted accounts or information summoned by the IRS. Significantly, this was a narrow ruling and the decision did not create a limitless power, nor did it answer the much larger question: "what is the scope of the IRS’s authority to issue summons?"
Following the Sixth Circuit’s early 2022 ruling in Polselli v. IRS,1 a significant split exists among the circuits as to whether or not the IRS must give notice when it issues a summons “in aid of the collection” of tax assessments. In Polselli, the Sixth Circuit affirmed the lower court’s ruling and held that the IRS may issue a summons to a third-party recordkeeper without providing notice to the person identified in the summons, so long as the IRS: (1) assessed or entered a judgment against the delinquent taxpayer, and (2) issued the summons “in aid of collection” of that same delinquency.2 This decision diverged from the Ninth Circuit’s 2000 ruling in Ip v. United States,3 wherein the court concluded that notice is required when the IRS summons a third-party recordkeeper if the delinquent taxpayer has no recognizable legal interest in the summonsed records.4
Almost a year after the Sixth Circuit’s decision, the US Supreme Court granted a writ of certiorari in Polselli to consider the matter.5 Clarification of the notice requirement’s role in IRS summons practice is crucial. Ultimately, unless a party is entitled to notice, the government’s sovereign immunity is not waived, and it precludes a party’s challenge in court unless the party was entitled to notice. While we wait for the Supreme Court to clarify the proper IRS summons practice let’s review the Polselli case and why it matters.
The facts in Poselli are relatively straightforward. Taxpayer underpaid his federal taxes for over a decade, incurring more than $2 million in unpaid tax liabilities. A Revenue Officer (RO) was assigned to the matter and began investigating the location of Taxpayer’s assets which could be used to satisfy the liabilities.
During the RO’s investigation, he learned that Taxpayer had used entities to shield assets from collection. For instance, the RO discovered that Taxpayer had previously paid the IRS a large sum of money from an LLC’s bank account. Ultimately, the RO began to suspect that Taxpayer was concealing assets in his wife’s bank accounts and via his attorneys’ law firm.
To uncover the funds, the RO served summonses on the banks used by both Taxpayer’s wife and the law firm. The RO did not provide notice to either the wife or the law firm about these summonses. Subsequently, the banks notified the respective parties of the summonses. Taxpayer’s wife and the law firm (Petitioners) petitioned to quash the summonses, alleging that the IRS failed to properly notify them under Internal Revenue Code (IRC) §7609.
The United States District Court for the Eastern District of Michigan, Southern Division, held that “Petitioners are not entitled to notice under the circumstances, and as a consequence have no right to bring a petition to quash.”6 The United States Court of Appeals for the Sixth Circuit affirmed the district court decision.
The Sixth Circuit affirmed the decision of the District Court ruling that third-party recordkeepers account holders are not entitled to notice if a summons is issued “in aid of the collection” of delinquent tax liabilities. The court began its analysis by noting that the IRS has sovereign immunity as a government agency, which means that it is immune from suit unless a statute explicitly waives that immunity. In the case of the IRS, the court explained that IRC §7609 operates to define the scope of sovereign immunity.
Under IRC §7609(b)(2), “any person who is entitled to notice of a summons . . . shall have the right to begin a proceeding to quash such summons.” The court clarified that:
We have thus held that §7609(b)(2) waives the Government's sovereign immunity for a "narrow class of taxpayers" petitioning to quash an IRS summons seeking materials from a third-party recordkeeper.7
In other words, the ‘narrow class of taxpayers’ are those taxpayers who are entitled to notice. As a result, stated the court, district courts have jurisdiction over petitions to quash summonses so long as the petition is filed by a party that entitled to notice under IRC §7609.
However, cautioned the court, sovereign immunity persists if a statutory exception applies; in that case, a court would lack jurisdiction over petitions to quash summonses. Thus, the court maintained that it could only determine whether the district court had jurisdiction over the matter at hand after first determining whether the petitioners were entitled to notice of the summonses.
The court proceeded to review the “broad authority” granted to the IRS to use to collect information related to potential liabilities.8 This review led the court to point out that this broad authority includes issuing summonses to third-party recordkeepers (like banks or other financial institutions). Generally, the court noted, the IRS is required to notify any person identified in the summons directed to a third-party recordkeeper.9 However, the Court highlighted an exception to this general rule found under IRC §7609(c)(2)(D)(i), claiming that the section:
unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency.10
Thus, according to the Sixth Circuit in Polselli, if that exception applies, sovereign immunity is preserved and no right to petition to quash will arise.
The court then noted that the parties didn’t dispute that $2 million of assessments were issued against taxpayer.11 The Court also stated that the parties didn’t dispute the sole purpose of the summons was to locate taxpayer assets to satisfy a federal tax liability. Moreover, the Court declined to adopt the Ip rule, opining that it was inconsistent with the literal statutory language and legislative intent.
Again, in the end, the Court found that third-party recordkeepers' account holders are not entitled to notice if a summons is issued “in aid of the collection” of unpaid tax liabilities so long as the IRS: (1) assessed or entered a judgment against the delinquent taxpayer, and (2) issued the summons “in aid of collection” of that same delinquency.12
Many believe that the Sixth Circuit’s holding defeats the general purpose for the rule of notice and opens the door to a realm where the IRS could operate nearly unrestrained in its ability to seek records without notice. Unfortunately for innocent persons forced to hand over records, this would preclude them from any real opportunity to maintain privacy of their own information. If you need any guidance on this topic contact our team today at (410) 497-5947 or you can schedule a confidential consultation.
