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Supreme Court Affirms Exception to Notice Requirement for Certain IRS Summonses/Subpoenas

5/31/23

subpoena

By: David Chang and Elizabeth Lowery

On May 18, 2023, the Supreme Court affirmed that when the Internal Revenue Service issues a summons/subpoena in connection with its efforts to collect a tax liability, third-party recordkeepers – like accountants, banks and brokerage firms – who receive such summonses/subpoenas do not need to provide notice to the taxpayer, or the related persons and entities, whose records are being sought.  However, notice is still required if the summons/subpoena is instead issued to determine the amount of a tax liability.    

Chief Justice Roberts explained that this exception only applies to a summons/subpoena to collect an already determined liability.  “In other words, the IRS may issue summonses both to determine whether a taxpayer owes money and later to collect any outstanding liability. When the IRS conducts an investigation for the purpose of ‘determining the liability of a taxpayer,’ § 7602(a), it must provide notice, § 7609(a)(1).  But once the [IRS] 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).”  Importantly, these summonses/subpoenas can extend to third parties beyond the taxpayer.  So, the IRS may request the production of “books, papers, records, or other data” from any person or entity who possesses information concerning a delinquent taxpayer. § 7602(a)(2).  

This ruling is from Polselli v. Internal Revenue Service, where taxpayer Remo Polselli accumulated tax liabilities totaling over $2 million.  The IRS suspected that Mr. Polselli hid assets through other entities and individuals; it knew $300,000 of a previous tax liability had been paid from a bank account for Dolce Hotel Management (“Dolce”).  The IRS surmised that Mr. Polselli might have control over funds belonging to Dolce.  So, pursuant to § 7602(a), the IRS issued several summonses/subpoenas, including to Wells Fargo requesting financial records of Dolce and Mrs. Polselli.  The IRS did not notify third-parties Dolce or Mrs. Polselli that their records were being sought, but Wells Fargo did.  As a result, Dolce, and Mr. and Mrs. Polselli argued that the IRS summonses/subpoenas to Wells Fargo should be quashed and deemed unenforceable because advance notice was not given pursuant to § 7609.  They urged the Supreme Court to adopt the limitation previously recognized by the Ninth Circuit whereby the notice exception would only apply if the taxpayer had some legal interest or title in the object of the summons/subpoena, which is referred to as the “legal sufficiency test.” (The Ninth Circuit is comprised of western states California, Oregon, Washington, Nevada, Montana, Alaska and Hawaii.)  

The Supreme Court rejected the legal sufficiency test, concluding that it was contrary to the plan language of the statutory exception.  It upheld the notice exception set forth in § 7609(c)(2)(D)(i) stating that notice is not required when a summons/subpoena is “issued in aid of the collection of an assessment made or judgment rendered against the person with respect to whose liability the summons is issued.”  But, that decision also states that “[T]his is not, however, the case to try to define the precise boundaries of the phrase “in aid of collection.” 

Notwithstanding the foregoing, even when the “no notice exception” applies, third-party recipients of such summonses/subpoenas can still provide notice to taxpayers and third-parties whose records are being sought because a government nondisclosure order is not part of the applicable statute.  Moreover, the notice requirement remains in force for all non-IRS issued summonses/subpoenas, as well as for IRS issued summonses/subpoenas not issued in aid of collection of an outstanding tax liability.   Critically, these are not the only factors that must be considered before responding to summonses/subpoenas.  For example, I.R.C. § 7216 requires either a court order or specific written consent from a taxpayer before a tax preparer can produce any documents or information received in connection with a tax engagement – unless such production is in response to a grand jury subpoena.  Failure to comply can subject the tax preparer to criminal penalties, as explained in more detailed in our previous article here.  

For help with dealing with IRS-issued summonses/subpoenas, or those issued by other tax authorities, please contact David Chang (dchang@fmglaw.com), Elizabeth Lowery (elowery@fmglaw.com), or your local FMG attorney for more information.