In tax disputes, the IRS holds a considerable advantage, as the law is often stacked in their favor, granting them broad collection powers.
When all other avenues fail, the IRS summons becomes their primary tool for obtaining taxpayer records and information needed to assess and collect taxes.
Despite the summons rules being unchanged for a long long time, there are still a number of unanswered questions. This is likely due to the fact that most taxpayers simply comply with the IRS summons and don’t raise challenges, as they don’t want to further disturb or upset the IRS as it conducts its investigation. It may also be due to the IRS’s ability to simply cure a defective summons by issuing another one and thereby avoid legal disputes that it might not win.
This article addresses an exception to the notice requirement for the IRS summons. The Polselli v. Commissioner, No. 21-1599 (2023) case considers whether the IRS can issue a summons to try to gather information to collect taxes without providing notice to the taxpayer.
Facts & Procedural History
During a period spanning from 2005 to 2017, the taxpayer underpaid his federal taxes. He owed more than $2 million.
The IRS assigned a revenue officer to try to collect the taxes. The revenue officer focused on bank accounts belonging to the taxpayer’s wife and a legal entity that the IRS suspected the taxpayer of having control over.
The revenue officer issued an administrative summons to the law firm that represented the taxpayer. The law firm did not produce any records. The revenue officer then issued summons to various banks, such as Wells Fargo, JP Morgan Chase, and Bank of America.
The revenue officer did not notify the taxpayer of these summonses, but the banks did. The taxpayers filed motions to quash the summons, which was the subject of this court case.
The question for the court was whether the summons is invalid if the IRS does not give notice of the summons to the taxpayer.
About the IRS Summons
An IRS summons is a tool used by the IRS to obtain taxpayer records and information when other methods, such as Information Document Requests (IDRs) or third-party contacts, have been unsuccessful.
The IRS summons grants the authority to request and access a wide range of records, including those located in foreign countries.
In most cases, the IRS can issue a summons without court approval, similar to a subpoena. The summons must be served on the taxpayer or third party, either through hand delivery, leaving a copy at the individual’s last known address, or by certified or registered mail for third-party record keepers.
Once served, the recipient has several options: comply with the summons, choose not to comply, or challenge the summons by filing a proceeding to quash it.
If a taxpayer fails to comply with the summons, the IRS can seek court enforcement. Whether the court enforces the summons or not depends on various factors.
While receiving an IRS summons does not automatically require compliance, there are legal grounds for refusing to respond. Asserting privilege, such as attorney-client privilege, can be one way to avoid providing information to the IRS. The Powell v. United States case established a four-factor test to determine the validity of an IRS summons, ensuring it is issued for a legitimate purpose, relevant to that purpose, not already possessed by the IRS, and following administrative procedures outlined in the tax code.
Failure to comply with court-ordered enforcement can result in sanctions imposed on the taxpayer by the court.
The Collections Exception for Notice
This case focused on one of the exceptions for the notice requirement for summonses–the collection exception.
This exception is in Section 7609(c)(2)(D)(i) of the tax code. This law says that the IRS need not provide notice to a person “who is identified in the summons,” § 7609(a)(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).
Thus, with this exception, the tax has to already have been assessed and it has to be for collections. This exception does not apply in IRS audits where the IRS has not yet assessed the tax. It also does not apply in certain penalty investigations before the penalty has been assessed.
At least one circuit court had previously clarified that this exception does not apply if the party who received the summons has “some legal interest or title in the object of the summons.”
No Notice, But Not Always
The Court concluded that the IRS did not have to give notice of the summons, as this was a collection matter and the exception did not apply. The Court rejected the “legal interest” argument as this was not provided for in the statute.
The Court also considered the policy implications of effective tax administration vs. the ability to exercise one’s right to court. On the one hand, the Court noted that notice may tip off the taxpayer allowing them to move assets, and on the other, the Court noted that absent notice the right to court is denied.
The Court found that notice tipping off the taxpayer outweighed the right to court. The opinion did not address the mechanics of summonses and how they freeze assets held by third parties. Third parties, such as banks, cannot allow the taxpayer to remove assets once a summons is received. If they do, the statute says that they are liable. The Court apparently did not factor this into its decision.
The dissenting judges noted that the majority decision does not give the IRS carte blanche to issue summonses without notice in collection cases, as the exception does not apply to every fishing expedition that the IRS may engage in. The judges used the example of a dry cleaners business that a taxpayer paid using a credit card. In the example, the IRS could issue a summons to the dry cleaners requesting all of the dry cleaner’s records to try to ascertain what the taxpayer’s credit card number was. The judges suggested that this would require the IRS to provide notice so that the taxpayer can file a motion to quash given the broad scope of the IRS’s request.
The IRS often uses the IRS summons sparingly. But there are instances where it has not, such as the sparring with Microsoft Corp over the use of summonses to allow the IRS’s third-party experts to conduct investigations or the IRS seeking a law firm’s client list. In cases where the IRS summons actually matters, the IRS’s overreaching is often problematic. This case does not provide the facts that are as problematic, as it was a taxpayer who owed back taxes and the summonses when to his banks. The rule announced could be problematic under different facts, like those suggested by the dissenting judges. Hopefully, the IRS will continue to provide notice even if not required and just as a courtesy to ensure that taxpayers know of the summons and can exercise their rights when necessary.
What to do if you receive an IRS summons:
If you receive a summons from the IRS, it is important to take appropriate actions to protect your rights. Here are some of the steps to consider:
- Review and Understand the Summons: Carefully read and understand the contents of the summons, including the specific information or records being requested by the IRS.
- Preserve Relevant Documents: Ensure that all relevant documents, records, and communication related to the summons are preserved. This will be important for future reference and potential legal proceedings.
- Consult with a Tax Attorney: Seek guidance from a tax attorney who has experience in dealing with IRS matters. They can provide valuable advice and help navigate the situation, as the rules here are nuanced and can impact your tax liability.
- Assess the Validity of the Summons: Evaluate the validity of the summons by considering factors such as the purpose of the summons, relevance of the requested information, whether the IRS has already possessed the information, and whether proper administrative procedures have been followed.
- Determine the Appropriate Response: Depending on the circumstances, there are several response options available:
- Comply with the Summons: If the summons is valid and the requested information is available and can be provided without legal issues, complying with the summons may be the best course of action.
- Challenge the Summons: If there are legitimate grounds to challenge the summons, such as asserting privilege or demonstrating that the summons is overly broad or burdensome, it may be necessary to file a motion to quash the summons in federal court.
- Negotiate or Seek Resolution: In some cases, it may be possible to negotiate with the IRS or seek a resolution, such as narrowing the scope of the summons or reaching an agreement on how the requested information will be provided.
- Act within the Appropriate Timeframe: Be aware of any deadlines or time limits specified in the summons. It is crucial to respond within the given timeframe to avoid potential penalties or legal consequences.
- Document and Maintain Records: Keep detailed records of all interactions, communications, and actions taken regarding the summons. This documentation will be useful for future reference and potential legal proceedings.
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