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The IRS faces tough questioning from justices over privacy concerns in third-party summons dispute

Over several years, Remo Polselli racked up over $2 million in federal tax liabilities. After he made a partial payment from the account of one of his limited liability companies, the IRS suspected Remo might be hiding his assets by transferring them to other entities or individuals. The agency thus issued administrative summonses to several banks, including those at which Remo’s wife, Hanna, and his law firms held accounts. Although the IRS failed to notify Hanna or the law firms, the financial institutions did. In Polselli v. United States, Hanna and the firms argued that the IRS is required to notify them and that the summonses should therefore be quashed.

Although taxpayers (and others whose information is sought) are generally entitled to notice when a third party receives an administrative summons concerning their records, there is an exception to that rule for a summons issued “in aid of collecting” taxes formally assessed against a given taxpayer. The IRS relied on that exception to justify its failure to notify Hanna and the law firms of the summonses. Because the summonses were issued to try to collect Remo’s taxes, the IRS reasoned, it simply didn’t matter that Remo was not the account holder.

Although the lawyers for Polselli and the IRS both enjoyed healthy exchanges with the justices, the inquiry was decidedly more searching for the IRS. Shay Dvoretzky, representing Polselli and the law firms, argued that the statute’s default rule requires notice (and an opportunity to quash an administrative summons) because Congress was concerned with protecting taxpayer privacy.

Arguing for the IRS, Assistant to the Solicitor General Ephraim McDowell emphasized the need for compromise, with privacy concerns yielding in the wake of a formal tax assessment and the pressing need to collect revenue. Ultimately, however, the IRS was forced to offer up a number of concessions. 

Several justices expressed concerns regarding the apparent breadth of the statutory provisions excusing notice in specific contexts. Justice Ketanji Brown Jackson turned the focus to the law firms’ privacy concerns, giving Dvoretzky ample opportunity to elaborate on his objections. “[T]he summons … appeared to want all of the financial records of these law firms,” she observed. “Is it limited to the records of the law firms related to Mr. Polselli?” Jackson expressed irritation with the breadth of the IRS’s summonses. “[W]e’re looking for where his assets are, and so we want two years of the bank records of the law firm about anybody so that we can find Polselli’s information,” she noted.

Justice Clarence Thomas appeared unpersuaded by McDowell’s arguments regarding the limits within which the IRS must operate. Thomas noted that any such limits don’t, “seem to be so much. If you can say we’re seeking records about the delinquent taxpayer’s records, we’re seeking information about that, why can’t you also then … issue summons to clients of the law firm, to other partners of the law firm, associates in the law firm, who may have had some connection to this client … or to this taxpayer?”

McDowell countered that the phrase “‘in aid of collection’ is not limitless.”

But Justice Neil Gorsuch pressed even further on this point. He suggested that “[t]here has to be some causal link, some close connection of some kind between the liability and the IRS’s actions.” The phrase “in aid of,” Gorsuch said, “can’t mean the universe.”

Over the course of the argument, McDowell was also unable to reassure the justices that, as a practical matter, the third parties who receive administrative summonses will invariably notify those whose information is sought. Jackson quipped, “So what – what difference does it make if the banks notify the people whose records are being collected? I thought your point was they are not entitled to notice under the statute and, therefore, they can’t bring a challenge.”

Similarly, Chief Justice John Roberts noted that “in terms of notice that anybody can do anything about, I just don’t see where it is … He doesn’t get notice. People who might help figure out how much he owes don’t get notice. Nobody else matters.”

As the argument drew to a close, Justice Sonia Sotomayor acknowledged, “I’ve been struggling with understanding the Ninth Circuit and Judge Kethledge’s concern, okay? And I think, in this conversation, I’m finally coming to understand it.”

Ultimately, it was a decidedly tough day for the IRS. Several justices articulated concerns regarding the breadth of the statutory language excusing situation-specific notice, and McDowell conceded the need to read that language with some degree of causal connection in mind. Clearly emboldened, Dvoretzky emphasized, “I think everybody is agreeing here today that ‘in aid of collection’ is not limitless, that it can’t just be a shot in the dark. The Sixth Circuit’s rule seemed to think that it was in fact limitless.” Rational interpretations and the opportunity for judicial review are certainly in order given that assessments may arise in so many contexts. Some may await the conclusion of Tax Court litigation and subsequent appeals, yet others may arise as jeopardy assessments, termination assessments, waiver-initiated assessments (generally necessary to litigate a tax case in specific federal courts), or the routine and summary assessments that follow when a taxpayer submits a tax return showing a liability.

A decision is expected in this case by summer. We’ll know more then about just how far the justices plan to limit the IRS on how it conducts third-party summonses.

Recommended Citation: Bobby Dexter, The IRS faces tough questioning from justices over privacy concerns in third-party summons dispute, SCOTUSblog (Mar. 30, 2023, 3:27 PM),