On July 18, 2018, the Eleventh Circuit issued its decision in Presley v. United States. The holding of the Court focused on upholding the Internal Revenue Service’s ability to issue summonses to banks that may hold private and confidential information of third-parties. In particular, the Court held that the IRS may issue a summons to a bank to obtain a law firm’s escrow and trust bank account records, which contain sensitive client financial information. Facing insurmountable odds, the plaintiffs made several arguments to quash the IRS’s summonses. However, as the Court stated at the beginning of its opinion:
To say that the 1980 United States Men’s Olympic Hockey Team had the odds stacked against it would be an understatement. . . . Beating the Soviet team seemed impossible. Yet on February 22, 1980, the U.S. team—led by Coach Herb Brooks—did exactly that, scoring a 4-3 “Miracle” win. Our history contains many such stories of triumphs over long odds. This, however, is not one of those.
In 2016, the IRS issued three summonses to Bank of America, N.A. This was a part of its investigation into the 2014 income tax liabilities of four parties: Michael Presley, an attorney; Cynthia Presley; BMP Family Limited Partnership; and Presley Law and Associates, P.A., Mr. Presley’s law firm. The summonses sought records related to “any and all accounts over which [each Plaintiff] has signature authority,” including the law firm’s escrow and trust bank account records. The bank accounts were held in the name of Presley Law and BMP and contained information about client finances. The IRS notified Plaintiffs of these summonses but did not notify the Plaintiffs’ clients.
The Plaintiffs moved to quash the IRS’s summonses, objecting only to the bank’s production of the law firm’s escrow and trust bank account records. The Plaintiffs argued that the production of those documents would infringe on their clients’ financial information and privacy rights. The IRS moved to dismiss, and the district court granted its motion. The Plaintiffs appealed.
David Falls to Goliath
The Plaintiffs objections to the summonses ultimately failed for multiple reasons, which the Court outlined with particularity. First, the IRS has “broad statutory authority to summon a taxpayer to produce documents or give testimony relevant to determining tax liability.”In particular, Section 7602 of the Internal Revenue Code provides as follows:
(a) Authority to summon, etc. For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary is authorized—
(1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry;
(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act, or any other person the Secretary may deem proper, to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and
(3) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.
However, while the IRS has broad authority, it must still establish its case for enforcement and demonstrate the following factors established by United States v. Powell: (1) the investigation has a legitimate purpose; (2) the information summoned is relevant to that purpose; (3) the IRS does not already possess the documents sought; and (4) the IRS has followed the procedural steps required by the tax code. If the IRS satisfies the requirements under Powell, the “burden shifts to the taxpayer ‘to disprove one of the four Powell criteria, or to demonstrate that judicial enforcement should be denied on the ground that it would be an ‘abuse of the court’s process.’” Unfortunately, the Plaintiffs did not attempt to disprove any of the four Powell criteria.
Instead, they argued that Powell did not apply at all because “the Fourth Amendment and the Internal Revenue Code preclude its application in the circumstances of this case.” Specifically, the Plaintiffs asserted that they had standing to guard their clients’ privacy rights under the Fourth Amendment. The Court noted that plaintiffs ordinarily lack Fourth Amendment standing to contest others’ privacy rights. Furthermore, the Court recognized that the Plaintiffs’ clients’ objections relied on the Fourth Amendment, not Article III of the Constitution. Consequently, the Court analyzed the argument on its merits.
The Eleventh Circuit came to two important conclusions. First, the Plaintiffs’ clients lacked a reasonable expectation of privacy of their financial records held at the bank. Importantly, the Court referenced United States v. Millerin its explanation:
[A] party lacks a reasonable expectation of privacy under the Fourth Amendment in information “revealed to a third party and conveyed by [that third party] to Government authorities, even if the information is revealed on the assumption that it will be used only for a limited purpose and the confidence placed in the third party will not be betrayed.
The Plaintiffs neither owned nor possessed the clients’ financial records because they were records of the bank. And, the Court noted the fact that the financial records did not constitute confidential communications.
Second, the IRS summonses were reasonable underPowell. As the Eleventh Circuit previously noted, “when it comes to the IRS’s issuance of a summons, compliance with the Powell factors satisfies the Fourth Amendment’s reasonable requirements.” Moreover, the Court was not convinced by the Plaintiffs’ argument that the district court did not comply with I.R.C. § 7609(f). Again, the Court noted that the Plaintiffs’ argument was too late and not supported by the Internal Revenue Code.
Ultimately, taxpayers should pay special attention to the IRS’s broad power to issue summonses under I.R.C. § 7602. Moreover, corporate taxpayers and service providers who deal with sensitive client information—law firms and accounting firms—should also be aware of the IRS’ ability to obtain taxpayer information involving confidential client information. However, the IRS’s power is not unchecked, and taxpayers should be prepared to argue the IRS has failed to satisfy the Powell factors or demonstrate that the IRS’s actions are an abuse of the court process. Unfortunately, in this case, the Plaintiffs did not come out on top. While the U.S. hockey team attempted multiple shots on goal, the Soviet hockey team defended against them all. Goliath triumphed over David.
Need assistance in managing the audit process? Freeman Law’s team of attorneys and dual-credentialed attorney-CPAs regularly represents taxpayers before the IRS and Texas Comptroller. Our team also provides tax return-related representations and helps taxpayers navigate state tax laws. Our Firm offers value-driven services and provides practical solutions to complex issues. Schedule a consultation or call (214) 984-3000 to discuss our tax representation services.
Presley v. United States, 895 F.3d 1284 (11th Cir. 2018).
Id. at 1288 (quoting United States v. Clarke, 134 S. Ct. 2361, 2364 (2014)).
I.R.C. § 7602.
United States v. Powell, 379 U.S. 48, 57-58 (1964).
United States v. Centennial Builders, Inc., 747 F.2d 678, 680 (11th Cir. 1984) (quoting United States v. Beacon Fed. Sav. & Loan, 718 F.2d 49, 52 (2d Cir. 1983)).
Presley, at 1289.
Id.at 1291 (quoting United States v. Miller, 425 U.S. 435, 443 (1976)).
Id. at 1293 (citing United States v. McAnlis, 721 F.2d 334, 337 (11th Cir. 1983)).