The U.S. Supreme Court has handed a victory to the Internal Revenue Service regarding its authority to issue summonses, deciding unanimously to split in circuit court decisions on when the agency must give notice to third-party recordkeepers.
The IRS issued administrative summonses to the banks of Hanna Karcho Polselli, the wife of taxpayer Remo Polselli, and of his lawyers, in pursuit of over $2 million in unpaid tax liabilities. The IRS did not notify Hanna or the lawyers of the summonses.
Code Section 7609(c)(2)(D)(i) authorizes the IRS to summon the "person liable for tax," any officer or employee of such person, or any other person it "may deem proper" to produce records that may be relevant to a tax inquiry.
The section outlines special procedures for summonses when those third parties are recordkeepers, often banks or financial institutions maintaining records of financial transactions of interest to the IRS. The service must generally give notice to any person identified in the summons within three days of issuing it to the third-party recordkeeper, who then has at least 23 days to comply. The IRS may not examine the records prior to that time.
At issue in the case was one of the exceptions in the statute to the general notice requirements: The IRS is not required to notify the person or entity identified in a third-party recordkeeper summons when the summons is issued in aid of the collection of an assessment or judgment "against the person with respect to whose liability the summons is issued."
Remo Polselli underpaid his federal taxes for over a decade. While investigating the location of assets to satisfy those liabilities, an IRS revenue officer learned that Polselli used entities to shield his assets from collection. The revenue officer's investigation revealed that Polselli may have had access to and use of bank accounts held by his wife, Hanna. Based on this information, the officer served a summons on Wells Fargo, seeking the account and financial records of Hanna and Dolce Hotel Management LLC concerning Polselli.
The officer also learned that Polselli was a long-time client of law firm Abraham & Rose. Since the law firm's financial records might reveal the source of Polselli's funds, bank accounts associated with him and entities that he owned or controlled, or bank accounts associated with those entities, the officer served the law firm with a summons.
In response, the law firm sent a letter asserting attorney-client privilege and represented that the firm did not retain any of the documents that the IRS requested. The officer then issued identical summonses against JPMorgan Chase and Bank of America, seeking the financial records of Abraham & Rose and a related law firm. The officer did not notify Hanna or the law firms of the summons. Hanna was alerted by Wells Fargo, and the law firms were notified by JPMorgan Chase and Bank of America of the summons. They petitioned to quash the summons.
After a series of procedural motions, the district court and eventually the Sixth Circuit Court of Appeals decided in favor of the IRS. The decision of the Sixth Circuit aligned with similar decisions in the Seventh Circuit and the Tenth Circuit, while a Ninth Circuit decision held to the contrary, creating a split in the circuits on the issue.
The Supreme Court rejected Polselli's argument that the exception to the notice requirement applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.
"The findings by the courts in Polselli, which the Supreme Court upheld, make it clear that the IRS does not need to provide notice of a summons that is issued in the aid of the collection of taxes that meet the conditions under the exception in Section 7609(c)(2)(D)(i)," said Robbin Caruso, an equity member at Top 100 Firm Prager Metis CPAs.
"These findings are a real wakeup call as to the importance of reading all notices and communications from the IRS, addressing notices timely, obtaining advice from an experienced tax controversy professional, and making certain to avail themselves of all their rights related to tax assessments and judgments," she said. "Most notices have a statutory time limit for response before a taxpayer loses certain rights. For instance, taxpayers generally have 30 days from certain notice dates to file a [collection due process] hearing. If a taxpayer disagrees with an assessment, is seeking the reduction of penalties against them or a collection alternative, they need to take strategic action to protect their rights and mitigate their liabilities as they are working to resolve their tax matters with the IRS."
