When searching for assets to collect delinquent tax debt, the IRS can access the records of third parties without telling them, the Supreme Court has held.
In a unanimous opinion May 18 in Polselli v. IRS, the Court ruled that the IRS may withhold notice when it seeks third-party records in aid of collecting assessed tax liabilities, even if the delinquent taxpayer has no legal interest in those records or the underlying accounts.
The petitioners — the wife of a delinquent taxpayer and lawyers that represented him —argued for a reading of section 7609 that would require the IRS to give third parties notice unless the delinquent taxpayer had some legal interest in accounts or records sought by the agency.
Chief Justice John G. Roberts Jr., writing for the Court, rejected that interpretation because it doesn’t appear in the language of the statute.
“None of the three components for excusing notice in section 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,” Roberts wrote.
If Congress had wanted to include a legal interest requirement in the statute, “it certainly knew how to do so,” the Court found. Section 7610 — “the very next provision” in the code, taxpayer’s ‘proprietary interest’ in records summoned by the IRS,” according to the opinion.
That fact “strongly suggests that Congress deliberately omitted a similar requirement with respect to the notice exception” at issue in this case, Roberts concluded.
Under section 7609, the IRS must generally give notice to third parties when it issues summonses for their records.
The statute provides exceptions to that general rule, however, acknowledging that in some situations notice would defeat the purpose of the summons by giving taxpayers a chance to move their assets out of the reach of the IRS.
The exception at issue in Polselli , section 7609(c)(2)(D)(i), allows the IRS to withhold notice when three conditions are met, according to the opinion. The third-party summons must be (1) issued “in aid of… collection” of (2) “an assessment made or judgment rendered” against the delinquent taxpayer, and (3) both the assessment or judgment and the collection activity must pertain to the same taxpayer.
‘In Aid of the Collection’
The Court expressly declined to precisely dene the boundaries of what it considers to be summons activity “in aid of the collection” under the statute, but gave it a broad reading based on dictionary definitions of the word “aid,” meaning to support, help, or assist.
“Even if a summons may not itself reveal taxpayer assets that can be collected, it may nonetheless help the IRS find such assets,” Roberts wrote.
Roberts likened the collection process alternatively to the investigation of a crime and the preparation of a meal. Ordering forensic testing or interviewing witnesses might not, in and of themselves, solve the crime, and grocery shopping is only one step toward getting dinner ready, but those steps still aid in reaching the ultimate goal, he explained.
Obtaining the summoned records from petitioners, similarly, “may be a step in a paper trail leading to assets owned by” the delinquent taxpayer, Roberts wrote.
Privacy and the Constitution
Petitioners’ briefs and much of the amicus briefing in the case centered on privacy concerns and constitutional boundaries that they argued could be affected by a broad reading of the exception.
Roberts concisely dispatched the privacy considerations, finding that the history underlying the 1978 enactment of section 7609 proved Congress was “acutely aware” of the Supreme Court’s decisions and that awareness “supports a plain reading not only of the general notice requirement, but also of the specific exception the statute provides.”
The opinion doesn’t mention the constitutional concerns.
“I was surprised to see that there was no discussion of the canon of constitutional avoidance,” said Matthew P. Cavedon of the Cato Institute. Cato submitted an amicus brief in the case together with the Rutherford Institute.
“We certainly thought it was significant in our brieng that the Constitution should guide the interpretation of a statute, especially when the constitutional provision refers to reasonableness and when the statute appears to open doors to broad discretion,” Cavedon said.
The Court’s reading of this exception “should raise some eyebrows in Congress,” Cavedon said. “I would hope that Congress would revisit this and tighten up the screws here a little bit.”
Not Limitless, But…
In a concurring opinion, Justice Ketanji Brown Jackson emphasized that the IRS’s power to withhold notice under section 7609(c)(2)(D) isn’t limitless.
Jackson described “attenuated tax-collection activities” like seeking records from a dry-cleaning business to see if one of its customers was paying with credit cards in multiple names, and indicated that in her view, requiring notice to that business “is entirely consistent with the statutory scheme.”
“The bottom line is this: As I read the statute, the IRS is not necessarily exempt from notice obligations any time a tax-delinquency matter enters the collection phase,” Jackson wrote.
Justice Neil M. Gorsuch, who joined Jackson’s concurrence, commented at oral argument March 29 that “everyone agrees that ‘in aid of’ can’t mean the universe” and the debate is about “just how closely connected” the summons has to be to collection of the delinquent taxpayer’s assessed tax liability.
The Court declined to answer that question.
In her concurring opinion, Jackson read the exception in section 7609(c)(2)(D)(i) as a reflection of Congress’s balancing competing interests and its determination that in some circumstances, requiring notice undermines that balance.
Jackson envisioned “a careful fact-based inquiry that might well vary from case to case” to determine when notice isn’t required, and expressed her belief that “both courts and the IRS itself must be ever vigilant” in making that determination.
Tyler Badgley of the U.S. Chamber of Commerce Litigation Center emphasized that need for vigilance in comments. The chamber agrees with Jackson and Gorsuch that the summons power of the IRS is circumscribed and “that courts ‘must be ever vigilant’ in policing IRS abuse of that power,” he said.
The Court’s decision is “very narrow and expressly left open the question of the precise bounds of the IRS’s power,” which the chamber believes “is more limited than the agency claims,” Badgley said.
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