IRS Summonses and the Collection of Unpaid Taxes

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Gregory W. Mitchell

Gregory W. Mitchell

Attorney

469.998.8486
gmitchell@freemanlaw.com

Gregory Mitchell joins Freeman Law to lead its bankruptcy practice. Mr. Mitchell is a native of the Dallas area, graduating from Southern Methodist University with a Bachelor’s Degree in Economics in 1991 and with his J.D. in 1994. In 1995, he obtained an LL.M. in Taxation from New York University. Mr. Mitchell currently directs the SMU Dedman School of Law’s federal taxpayer clinic. Mr. Mitchell’s background in tax makes him a natural fit for Freeman Law.

Prior to joining Freeman Law, Mr. Mitchell was the managing partner of The Mitchell Law Firm, L.P., a small firm he started in 2004, where he ran a diverse practice primarily focused on bankruptcy, tax and related litigation matters.

Prior to starting his own firm, Mr. Mitchell served as a Partner and General Counsel with Tax Automation, L.P., a national tax consulting firm. Mr. Mitchell was previously the National Director of Tax Technology at Ryan & Company, a national tax consulting practice, as well as a Senior Manager with KPMG, a “Big Four” accounting firm.

This post focuses on the recent case of Polselli, et al. v. IRS, Case No. 21-1010 (6th Cir., January 7, 2022).

The recent Sixth Circuit’s recent opinion in Polselli, et al. v. IRS, Case No. 21-1010 (6th Cir., January 7, 2022) addresses notice requirements with respect to the issuance by the Internal Revenue Service (“IRS”) of administrative summonses.  In pursuit of over $2 million in unpaid liabilities, the IRS issued administrative summonses to the banks of the wife of the taxpayer – Remo Polselli (“Taxpayer”) – and his lawyers.  The IRS did not notify the Taxpayer of the summonses, relying on applicable provisions of the Internal Revenue Code (“IRC”) excluding summonses issued “in aid of the collection” of tax assessments from its notice provisions.  These recipients filed suit seeking to quash the summonses.  Ultimately, the 6th Circuit affirmed the District Court’s opinion, concluding that the summonses were issued in aid of the IRS’s collection efforts and that the Taxpayer was not entitled to notice.

Relevant Facts

The Taxpayer had underpaid his federal taxes for over a decade.  For those periods, the IRS has made formal assessments against him, with a total outstanding balance of those liabilities exceeding $2 million.  While investigating potential assets that could satisfy those liabilities, an IRS Revenue Officer (“RO”) learned that the Taxpayer had used entities to shield assets from collection.  As an example, the Taxpayer had previously paid approximately $290,000 of his tax liability from the account of an entity named “Dolce Hotel Management, LLC” (“Dolce”).  The RO suspected that the Taxpayer was concealing the balance of his assets to shield them from the IRS.  The RO’s investigation revealed that the Taxpayer had access to bank accounts in the name of his wife, Hanna Karcho Polselli (“Hanna”).  Based on that information, the RO served a summons on Wells Fargo Bank seeking account and financial records of Hanna and Dolce.

The RO also determined that the Taxpayer was a long-time client of the law firm of Abraham & Rose, PLC (“Firm”).  Concluding that the Firm’s financial records might reveal:  (1) the source of Taxpayer’s funds; (2) bank accounts associated with Taxpayer; (3) entities owned or controlled by Taxpayer; or (4) bank accounts associated with those entities, RO served the law firm with a summons.  The Firm responded to that IRS summons indicating that it did not have any documents in its possession responsive to the request.  RO therefore pursued an alternative route to obtain the records, issuing identical summonses against JP Morgan Chase Bank, N.A., and Bank of America, N.A., seeking financial records of the Firm and a related entity – Jerry R. Abraham, P.C. (collectively, the “Firms”) concerning Taxpayer.

Importantly for purposes of this case, the IRS did not notify Taxpayer, Hanna, or the Firms of the bank summonses.  Wells Fargo alerted Hanna that the IRS had summoned her records, and she petitioned to quash the summons in district court.  After JP Morgan Chase and Bank of America notified the Firms of the summonses regarding their accounts, the Firms also petitioned to quash, and Hanna joined.  Hanna and the Firms are the Petitioners in this matter.  The Petitioners alleged that the IRS failed to properly notify them of the summonses pursuant to IRC § 7609(a).  The IRS moved to dismiss the petitions for lack of subject matter jurisdiction, arguing that the relevant provisions of the IRC, §§ 7609(b)(2) and (h), waived its sovereign immunity from suit only for parties entitled to notice of the summonses under the Code.  Because the IRS was seeking the bank records “in aid of the collection” of Taxpayer’s assessed liability, the IRS argued, Petitioners were not entitled to notice under § 7609(c)(2)(D)(i).  Petitioners, in turn, urged the Court to apply a Ninth Circuit rule that narrowly construes § 7609 to exempt a summons from the notice requirements only if (1) “the third party is the assessed taxpayer,” (2) “the third party is a fiduciary or transferee of the taxpayer,” or (3) “the assessed taxpayer has ‘some legal interest or title in the object of the summons.’” (quoting Viewtech, Inc. v. United States, 653 F. 3d 1102, 1105 (9th Cir. 2011)).

The District Court agreed with the IRS that the court lacked subject matter jurisdiction, finding that Petitioners were not entitled to notice under the plain language of § 7609(c)(2)(D)(i).  Therefore, Petitioners appealed.

Sixth Circuit’s Opinion

The Sixth Circuit began its analysis by looking at principles of sovereign immunity.  As a government agency, the IRS is immune from suit absent an explicit statutory waiver.  Clay v. United States, 199 F.3d 876, 879 (6th Cir. 1999).  The Court noted that it has held that § 7609(b)(2) waives the Government’s sovereign immunity for a “narrow class of taxpayers” petitioning to quash an IRS summons seeking materials from a third-party recordkeeper. Gaetano v. United States, 994 F.3d 501, 506 (6th Cir. 2021).  Therefore, it continued, federal district courts have subject-matter jurisdiction over petitions to quash summonses filed by any party that is entitled to notice under § 7609(a)(1).  If one of the exceptions to the notice requirement applies, however, “the bar of sovereign immunity remains, and the court lacks subject-matter jurisdiction.” Id. at 509.  Therefore, the Court turned to the issue of whether Petitioners were entitled to notice of the IRS summonses.

It began this part of the analysis by noting that IRC § 7602 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 the tax inquiry.  I.R.C. § 7602(a)(2).  The IRS may also seek information from third parties to advance its enforcement efforts pursuant to IRC §7609.  In general, the IRS must give notice to “any person . . . who is identified” in such a summons within three days of issuing the summons to the third-party recordkeeper. § 7609(a)(1). The third-party recordkeeper then has at least twenty-three days to comply, and the IRS may not examine the records prior to that time. § 7609(d).

These notice requirements, however, contain several exceptions. As relevant here, 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 . . . (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).

7609(c)(2)(D).

Turning to the summonses at issue, the Sixth Circuit found them to fall squarely within the exception listed in § 7609(c)(2)(D)(i).  “That section unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency.”  Finding that the IRS had satisfied its burden that those requirements were met, the Court affirmed the ruling of the District Court, holding that the district court lacked subject matter jurisdiction over the petitions to quash.

The Court went on to note that its decision was consistent with rulings in both the 10th and the 7th Circuit.  See Davidson v. United States, 149 F.3d 1190, 1998 WL 339541 (10th Cir., June 9, 1998); Barmes v. United States, 199 F.3d 386 (7th Cir., 1999).  Petitioners cited to the 9th Circuit’s opinion in Ip v. United States, 205 F.3d 1168 (9th Cir. 2000), where the Ninth Circuit examined § 7609’s legislative history and concluded that the statute’s stated purpose was generally to facilitate notice to taxpayers and to enable them to challenge summonses in district court.  Id., at 1172.  Finding that Congress would not have allowed the IRS to summon a third-party recordkeeper for the information of any person without notice, the Ninth Circuit held that the notice exception applies “only where the assessed taxpayer ‘has a recognizable [legal] interest in the records summoned.’” Id. at 1176 (quoting Robertson v. United States, 843 F. Supp. 705, 706 (S.D. Fla. 1993)).  Here, however, the Sixth Circuit declined to adopt the Ninth Circuit’s rule, finding that it is inconsistent with the literal language of the statute.

The Dissent agreed with the Ninth Circuit’s ruling in Ip and argued that the Court’s ruling herein essentially renders § 7609(c)(2)(D)(ii) superfluous – because “every summons that falls within §7609(c)(2)(D)(ii) already falls within the government’s (and now the majority’s) interpretation of § 7609(c)(2)(D)(i)—because every such summons is ‘issued in the aid of the collection of previously assessed tax liabilities.’”  According to the Dissent, the way to reconcile the two provisions is to adopt the approach of the Ninth Circuit and more narrowly construe § 7609(c)(2)(D)(i) such that a summons has this more direct connection with the collection of those persons’ liability “only where the assessed taxpayer[,]” in the case of § 7609(c)(2)(D)(i), or a fiduciary or transferee, in the case of § 7609(c)(2)(D)(ii), “has a recognizable legal interest in the records summoned.” (citing to Ip v. United States, 205 F.3d at 1176).

Application

This case represents a potentially intrusive interpretation of the IRS’s authority to obtain records without notice if they can label the summons as being “in aid of collection.”  Taxpayers should consider objections, particularly in jurisdictions that have not addressed this issue.  These provisions may also be candidates for Congressional action to clarify and hopefully limit situations where the IRS can act without notice.

 

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