No Right to Intervene?—IRS Third-Party Summonses

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon
Zachary J. Montgomery

Zachary J. Montgomery

Attorney

469.998.8484
zmontgomery@freemanlaw.com

Zachary J. Montgomery is a dual-credentialed attorney and CPA. He practices in the area of federal and state tax litigation, white-collar defense, business and tax planning, and litigation. Mr. Montgomery has experience representing both businesses and individuals in federal tax controversies, including appeals, examinations, penalty abatement and collection matters. He has also represented taxpayers—from small organizations to Fortune 500 companies—with Texas franchise tax refund claims, audits, penalty abatement, and corporate structuring.

Mr. Montgomery is a graduate of the University of Virginia School of Law where he focused his studies on corporate and tax law and served on the editorial board of the Virginia Tax Review. Prior to joining the firm, he gained experience with PricewaterhouseCoopers, LLP, and a regional firm, focusing on federal and state tax controversies. His previous experience also includes Ernst & Young, Deloitte & Touche, and a judicial student clerkship with the First Court of Appeals of Texas.

Mr. Montgomery is a graduate of Texas A&M University, where he graduated Summa Cum Laude and received his B.B.A. with a double major in Accounting and Business Honors and his M.S. in Management Information Systems. While attending Texas A&M, he developed his business acumen, working as an enterprise risk consultant and financial analyst.

Third-party summonses. Taxpayers, individuals, and companies, alike, should be aware of the Internal Revenue Service’s (“IRS”) power to issue third-party summonses. Even more, interested parties should note that only parties who receive notice of a third-party summons may intervene in district court regarding the summons’ enforcement. In a recent decision, the Sixth Circuit Court of Appeals held that certain third parties were not entitled to notice of the summonses, and, therefore, the district court lacked subject-matter jurisdiction over the proceedings to quash the summonses.

Section 7609, Generally

Subchapter A of 26 U.S. Code, Subtitle F, Chapter 78, generally addresses the IRS’ procedures for “examination and inspection” related to the discovery of liability and enforcement of title. Section 7609 of the Internal Revenue Code addresses the special procedures related to third-party summonses. Section 7609 provides, in part:

(a) Notice

(1) In general

If any summons to which this section applies requires the giving of testimony on or relating to, the production of any portion of records made or kept on or relating to, or the production of any computer software source code (as defined in 7612(d)(2)) with respect to, any person (other than the person summoned) who is identified in the summons, then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain an explanation of the right under subsection (b)(2) to bring a proceeding to quash the summons. . . .

(b) Right to intervene; right to proceeding to quash

(1) Intervention

Notwithstanding any other law or rule of law, any person who is entitled to notice of a summons under subsection (a) shall have the right to intervene in any proceeding with respect to the enforcement of such summons under section 7604. . . .

(c) Summons to which section applies

(1) In general

Except as provided in paragraph (2), this section shall apply to any summons issued under paragraph (2) of section 7602(a) or under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7612.

(2) Exception

This section shall not apply to any summons—

. . .

(D) 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) . . . .[1]

Polselli v. United States Dep’t of the Treasury-Internal Revenue Serv.[2]

The IRS made assessments against Mr. Remo Polselli for over $2 million. Thereafter, the IRS issued three administrative summonses to Wells Fargo Bank, N.A.; JP Morgan Chase Bank, N.A.; and Bank of America, N.A. The Wells Fargo summons requested the account and financial information of Mrs. Hannah Karcho Polselli, Mr. Polselli’s wife.[3] Additionally, the JP Morgan and Bank of America summonses requested the account and financial records of the law firm, Abraham and Rose, P.L.C., and a related entity, Jerry R. Abraham, P.C., as Mr. Polselli was a client of those firms.[4]

Accordingly, Mrs. Polselli; Abraham & Rose, P.L.C.; and Jerry R. Abraham, P.C. filed a petition to quash the summonses, as they did not receive notice under I.R.C. § 7609(a). On June 28, 2019, the United States filed a motion to dismiss for lack of subject matter jurisdiction (FRCP 12(b)(1)). On November 16, 2020, the U.S. District Court for the Eastern District of Michigan issued its decision, dismissing the petition to quash based on the “plain language” of Section 7609(c)(2)(D)(i). The Petitioners appealed, and the Sixth Circuit Court of Appeals affirmed the district court’s decision on January 7, 2022. In its decision, the Sixth Circuit noted the following:[5]

We agree with the district court that the summonses at issue 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. We hold that as long as the IRS demonstrates that these conditions are satisfied, it may issue a summons to a third-party recordkeeper without notice to the person or entity identified in the summons. . . .

In sum, Petitioners’ conjectural fears do not defeat Congress’s prerogative to prioritize the IRS’s collection efforts over taxpayer privacy. Any other result would significantly impede the IRS’s “expansive information-gathering authority.” Arthur Young, 465 U.S. at 816, 104 S.Ct. 1495. Congress explained that the impetus for excluding the notice requirement from collection efforts is to prevent individuals from hiding their assets. See H.R. Rep. No 94-658 at 310 (explaining exemptions to notice provisions prevent the possibility that the taxpayer could use the extra time to withdraw assets indirectly, thus “frustrating the collection activity of the Service.”). One can easily imagine how a delinquent taxpayer could shield money from the IRS under Petitioners’ view. Remo could have, for example, transferred money from an alter ego company to a bank account solely under Hanna’s name. Once the IRS gave Hanna notice of the summons, she would have twenty-three days to transfer that money elsewhere before the bank would be required to respond to the summons. I.R.C. § 7609. Petitioners would require that the IRS prove that Remo transferred assets to them in order to justify the issuance of a summons on their bank accounts without notice. But how would the IRS accomplish that without access to the information in the bank accounts? We conclude that the IRS does not need to navigate such a Catch-22 to seek information about delinquent taxpayer obligations it has already assessed.[6]

Conclusion

The central issue addressed by this decision was whether the third parties were entitled to notice under Section 7609, as only those persons who are entitled to notice may challenge the enforcement of third-party summonses. The Sixth Circuit interpreted the notice requirement in light of Section 7609(c)(2)(D)(i), favoring the government’s position and holding that the third parties were not entitled to notice since the summonses were issued to aid in the collection of Mr. Polselli’s assessed taxes. Notably, the Sixth Circuit’s decision joins the Tenth Circuit and the Seventh Circuit in its interpretation of Section 7609(c)(2)(D)(i).[7] This interpretation, however, is at odds with the Ninth Circuit’s decision in Ip v. United States.[8]

Even the Sixth Circuit decision was not unanimous, as Circuit Judge Kethledge wrote the dissent.[9] The dissent highlights the interpretative maneuvering of the majority, and the conflict created between Section 7609(c)(2)(D)(i) and 7609(c)(2)(D)(ii):

Thus, in the government’s view, § 7609(c)(2)(D)(i) applies whenever two conditions are met: first, a tax assessment was previously rendered against someone else; and second, the summons would be helpful in the collection of that assessment. The identity of the person whose records are the object of the summons—and her relationship, if any, with the delinquent taxpayer—is immaterial. According to the government, therefore, the IRS need not provide notice to any person whose records are the object of a summons “issued in the aid of the collection of” a tax assessment rendered against someone else.[10]

Thus, in the view of the petitioners, the dissenting opinion, and the Ninth Circuit, the Sixth Circuit’s (and government’s) interpretation of Section 7609(c)(2)(D)(i) renders Section 7609(c)(2)(D)(ii) superfluous and meaningless. By satisfying subsection (i), the IRS’ ability to issue summonses to third parties is seemingly limitless, which is cause for concern in light of constitutionally guaranteed protections. But the majority’s statement above says it all: “Petitioners’ conjectural fears do not defeat Congress’s prerogative to prioritize the IRS’s collection efforts over taxpayer privacy.”

 

Expert Tax Defense Attorneys

Need help with federal tax issues? Contact us as soon as possible to discuss your rights and the ways we can assist in your defenseWe handle all types of cases, including IRS enforcement cases. Schedule a Consultation Today!

 

[1] I.R.C. § 7609(a), (b)(1), (c)(1), (c)(2)(D)(i)-(ii).

[2] Polselli v. United States Dep’t of the Treasury-Internal Revenue Serv., No. 21-1010, 2022 WL 71953, at *1 (6th Cir. Jan. 7, 2022).

[3] Id. at *1.

[4] Id. at *2.

[5] Id.

[6] Id. at *4, *9.

[7] Davidson v. United States, 149 F.3d 1190 (10th Cir. 1998); Barmes v. United States, 199 F.3d 386 (7th Cir. 1999).

[8] Ip v. United States, 205 F.3d 1168 (9th Cir. 2000).

[9] Polselli, at *10 (Kethledge, J., dissenting).

[10] Id. at *11.