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U.S. Supreme Court settles circuit split, rules IRS may summons bank information without account holder notice

May 31, 2023
Reading Time: 3 mins read
U.S. Supreme Court settles circuit split, rules IRS may summons bank information without account holder notice

IRS Summons Power
Polselli, et al. v. Internal Revenue Service
Date: May 18, 2023

Issue: Under Internal Revenue Code Section 7609(c)(2)(D)(i), must the Internal Revenue Service provide notice when seeking the records of innocent third parties?

Case Summary: In a unanimous decision written by Justice John Roberts, the U.S. Supreme Court ruled that the IRS need not provide notice to innocent bank account holders when the summonses are issued to aid in the collection of a delinquent taxpayer’s tax assessment.

Under Internal Revenue Code (IRC) § 7609, IRS must give notice to third parties when issuing summonses for their records. The statute provides exceptions to that general rule, because sometimes notice would defeat the purpose of the summons by giving taxpayers a chance to move their assets out of the reach of IRS. The exception at issue in Polselli, section 7609(c)(2)(D)(i), allows IRS to withhold notice when three conditions are met. The third-party summons:  must be issued “in aid of collection”; an assessment or judgment against the delinquent taxpayer must occur; and both the assessment/judgment and the collection activity must pertain to the same taxpayer.

Hanna Polselli and two law firms (Abraham & Rose PLC and Jerry R. Abraham PC; the petitioners) sued the IRS after it seized their records without notification. IRS seized the records trying to collect Remo Polselli’s (Hanna’s husband) unpaid tax debt. IRS entered official assessments against Remo Polselli for more than $2 million in unpaid taxes and penalties. After Remo Polselli made a partial payment from his limited liability company, IRS suspected Remo hid his assets by transferring them to other entities or individuals, including his wife. The IRS issued administrative summonses to three banks seeking financial records of several third parties, including the petitioners. IRS did not notify the petitioners of the summonses. Instead, the banks notified them, and the petitioners filed motions in Michigan federal court to quash the summonses.

The district court dismissed the case, concluding IRS did not need to provide notice to petitioners. The court determined IRS was attempting to collect taxes assessed against Polselli, and thus IRC § 7609(c)(2)(D)(i) allows the IRS to bypass notification. In a 2-1 decision, a Sixth Circuit panel affirmed, ruling notice was not required because the summonses fall squarely within the exception in IRC § 7609(c)(2)(D)(i). The U.S. Supreme Court accepted the case because the Sixth Circuit’s ruling created a circuit split. In Ip v. United States (2000), the Ninth Circuit ruled the notice exception could only apply if the delinquent taxpayer had a legal interest in the targeted account, including “whether there was an employment, agency, or ownership relationship between the taxpayer and third party.” The petitioners argued the language and history of IRC § 7609 suggest the exemption to notify was only applicable in limited circumstances when the delinquent taxpayer had a legal interest in the requested records.

However, the U.S. Supreme Court disagreed and affirmed. Writing for the majority, Chief Justice John Roberts emphasized “none of the three components for excusing notice in § 7609(c)(2)(D)(i) mentions a taxpayer’s legal interest in records sought by the IRS, much less requires that a taxpayer maintain such an interest for the exception to apply.” The majority also relied on IRC § 7610, which requires the IRS to “establish the rates and conditions” for reimbursing costs “incurred in searching for, reproducing, or transporting” information sought by a summons. But IRC § 7610(b)(1) prohibits reimbursement if “the person with respect to whose liability the summons is issued has a proprietary interest in” the records “to be produced.” In the Court’s view, Congress “acts intentionally and purposely” when it “includes particular language in one section of a statute but omits it in another section of the same Act.” In IRC § 7610, the IRS specifically mentioned “proprietary interest” in the records. According to the Court, the failure to include that same language in IRC § 7609 meant that Congress intended to exclude certain persons from receiving notice.

In concurrence, Justice Ketanji Brown Jackson asserted the IRS is not automatically exempt from the notification requirements for IRS summonses. Still, Justice Jackson emphasized the exception to the notice requirement is intended to help the IRS by not tipping off a delinquent taxpayer who tries to hide assets.

Bottom Line: Although the decision is a win for IRS, the Court expressed apprehension about the scope of IRS’s power to issue summonses. The Court declined to define what “in aid of the collection” of an assessment or judgment means, which, in other cases, could still limit the IRS’s ability to issue summonses without giving notice.

Documents: Opinion

Tags: Banking Docket
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