Ninth Circuit Rejects IRS Argument as to What Constitutes Reasonable Third Party Notice in Summons Case
I.R.C. Section 7602(c) prohibits the Internal Revenue Service from contacting any person other than the taxpayer with respect to the determination or collection of a tax liability of the taxpayer unless the taxpayer is provided reasonable notice in advance that third party contacts may be made. This prohibitive rule does not apply if the Secretary determines advance notice would jeopardize collection or create the possibility of reprisal against the third party. Advance notice also need not be given in cases involving a criminal tax investigation.
The Court of Appeals for the Ninth Circuit, on February 26, 2019, in the case of J.B v. United States, No. 16-15999 (9th Cir. 2019) determined that a notice sent by the IRS which indicated the possibility of third party contacts was insufficient and was not in compliance with the requirements of Section 7602(c).
In the J.B case, the taxpayers (husband and wife) were selected for a random audit in 2011 under the IRS National Research Program. The audit notice contained Publication 1, which described the Taxpayer Bill and Rights and indicated the IRS might contact third parties as part of the audit process.
During the course of the audit, the IRS issued a summons to a third party seeking billing statements submitted to the third party by the taxpayer husband (an attorney). Advance notice of the contact was not provided to the taxpayers. The third party who received the summons notified the taxpayers. The taxpayers filed a motion to quash the summons.
The district court for the Northern District of California agreed with the taxpayers. It found that the general information contained in Publication 1 advising the taxpayers third party contacts might be made failed to satisfy the “reasonable notice in advance” requirement of Section 7602(c). The Ninth Circuit in affirming the district court’s decision held that the language of Section 7602(c) was clear and unambiguous and the third party contact information contained in Publication 1. did not provide the taxpayers with a meaningful opportunity to respond to the IRS prior to a third party contact being made.