Last week, in Polseilli v IRS the Supreme Court held for the government, finding that the IRS need not notify third parties when it issues a summons in the aid of collecting some other person’s tax liability.
Why is notice important? Under the statutory scheme set out in Section 7609, the entitlement to notice is the ticket to a waiver of the government’s sovereign immunity. Without the right to notice, there is no clear path to a federal district court. The opinion brings into sharp relief how the government’s power to gather information that may help it collect taxes trumps a third party’s privacy interest in sensitive and personal information.
While Polselli is a resounding government victory, it does leave the window open ever so slightly to push back against the IRS’s broad summons’ powers, even in collection cases. And when the government is seeking information about anyone identified in a summons for the purposes of determining a liability, Polselli does not disrupt the IRS’s requirement to notify anyone identified in the summons.
There are two opinions in Polselli, a unanimous opinion by Chief Justice Roberts and a concurrence by Justice Jackson that Justice Gorsuch joined. I will briefly summarize them and offer some observations below.
The main opinion mostly walks through the statutory analysis of Section 7609(c)(2)(D). That section provides that the IRS need not provide notice to a person “who is identified in the summons,” …(1), if the summons is: “issued in aid of the collection of— “(i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or “(ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).”
As Chief Justice Roberts explains, to fit within the language in (i), a summons must satisfy three conditions:
- First, a summons must be issued in aid of collection;
- Second, it must aid the collection of an assessment made or judgment rendered; and
- Third, a summons must aid the collection of assessments or judgments against the person with respect to whose liability the summons is issued.
What led the Court to accept cert was that the Ninth Circuit in the Ip case added some gloss to the statute, effectively limiting the circumstances when no notice would be required to situations when the taxpayer has a legal interest in accounts or records summoned by the IRS. When the Sixth Circuit declined to follow Ip, there was a clear circuit split.
The Supreme Court did not embrace the Ninth Circuit’s approach:
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 opinion goes deeper into the statutory analysis, but the main takeaway is that the Court declined to read an exception that Congress did not clearly add, emphasizing that the statutory term “in aid of collection” is broad, with “aid” meaning to help or assist.
The opinion applies these broad terms to the case at hand, noting that the IRS had a reasonable belief that Polselli was shielding assets in other entities and perhaps had effective control over bank accounts which he had no legal interest. And for good measure the opinion details how clause (ii) in Section 7609(c)(2)(D), which provides another exception to notice when pursuing a summons to aid in collecting the delinquent taxpayer’s tax debt from transferees or fiduciaries, is not superfluous in light of how clause (ii) may apply when the IRS is attempting to collect taxes from those third parties in the absence of an assessment, a rare but not impossible scenario (see slip opinion, p. 10).
What of the slight window to challenges to collection summonses that I referred to earlier in this post? At oral argument, as the opinion noted, the government conceded that its power to summons is not limitless, and proposed the following test:
So long as a summons is “reasonably calculated to assisting in collection,” it can fairly be characterized as being issued “in aid of ” that collection. Adding some more detail, at oral argument it stated that the “third party should have some financial ties or ha[ve] engaged in financial transactions with the delinquent taxpayer.”
But the Court declined to adopt this test, as neither party briefed it and it was “not the case to try to define the precise bounds of the phrase ‘in aid of the collection.’”
This is the kind of case that rightfully raises privacy concerns. When, as in Polselli, the government seeks records from the taxpayer’s wife and a law firm and can do so without telling anyone other than the summoned party it disrupts a reasonable expectation in the privacy around one’s sensitive records and information. To be sure, Polselli himself put the third parties in harm’s way by not paying his taxes, and the government is prohibited from disclosing this information to other third parties, but that is unlikely to satisfy someone whose records are released to the IRS without their knowledge.
As the government noted in briefing (see p. 46), some cases such as the Second Circuit’s 2016 Haber v US have entertained limited discovery following a summons issued to aid in collection. Haber involved a summons to a bank purportedly to aid in collection of an assessed liability, and following the taxpayer’s petition to quash, the district court required the government to prove that its summons was in aid of collection.
For litigants interested in the contours of future challenges, Justice Jackson’s concurrence provides a possible roadmap. After recounting how the government’s interest in collection generally trumps the right to notice, the concurrence notes that the government’s right to pursue this information without informing affected parties should yield in certain circumstances:
But, depending on whose information the summons seeks (for example, an innocent third party’s), or the nature of the requested records, it might not be reasonable to conclude that providing notice would frustrate the IRS’s tax-collection goal. And when that is the case, it might unjustifiably tip the scales in the other direction (i.e., entirely in the IRS’s favor) to allow the IRS to proceed without notice just because its delinquency resolution process has entered the collection phase.
Justice Jackson continues, emphasizing that “the statute’s balancing of interests indicates that Congress did not give the IRS a blank check…” Justice Jackson expresses disbelief that the 7609(c)(2)(D)(i) exception could “so dramatically” upset Congress’ objective of allowing courts to check the IRS’s efforts to obtain information “no matter how broad the summons is or how potentially intrusive that records request might be, so long as the agency thinks doing so would provide a clue to the location of a delinquent taxpayer’s assets.”
The concurring opinion expresses reservations about the IRS having a blank check “any time a tax-delinquency matter enters the collection phase.” Noting that this type of inquiry is likely fact specific, she urges courts, and the IRS, to be “ever vigilant” in determining when notice is not required.
I suspect that the next step will be litigation attempting to cabin precisely when a summons is issued “in aid of collection”, though that litigation is likely dependent on third parties, rather than the IRS, telling interested parties of the summons. Balancing the government’s interest in searching for assets from recalcitrant taxpayers without tipping their hand with the legitimate privacy interest in sensitive information also lends itself to a legislative fix.
Despite a unanimous opinion, this is likely not the last chapter in this story.