The IRS has very broad powers to acquire documents and other records to determine a tax liability and for other tax administration reasons; for example, section 7602 provides that, for the purpose of determining the correctness of any return, the Secretary may “examine any books, papers, records, or other data which may be relevant to such inquiry.”
Now, sometimes that information may be in the hands of people other than the individual taxpayer, such as employers or financial institutions. Section 7602(c) provides that
“An officer or employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.”
A recent Ninth Circuit case examined what constitutes “reasonable notice in advance” under section 7602(c).
In the case, the taxpayers (a married couple) were selected for random audit, and this audit was under the “IRS’s National Research Program,” which means it was more exhaustive than may be typical. In the correspondence sent to the taxpayers, the IRS instructed them to contact a revenue agent to discuss their 2011 tax return; enclosed in that mailing was a standard two-page IRS notice, Publication 1, also known as The Taxpayer Bill of Rights.
Importantly, on the second page of that document, the IRS explained under the heading “Potential Third Party Contacts”:
Generally, the IRS will deal directly with you or your duly authorized representative. However, we sometimes talk with other persons if we need information that you have been unable to provide, or to verify information we have received. If we do contact other persons, such as a neighbor, bank, employer, or employees, we will generally need to tell them limited information, such as your name. . . . Our need to contact other persons may continue as long as there is activity in your case. If we do contact other persons, you have a right to request a list of those contacted.
Eventually, the IRS issued summons to the California Supreme Court for all billing statement and invoices related to payments made to one of the taxpayers (who, as an attorney, had accepted representation appointments from the California Supreme Court). The taxpayers filed a petition to quash the summons.
As noted, section 7602(c) prohibits, with some limited exceptions, third-party contact (here, the summons to the California to the Supreme Court) unless prior reasonable notice was provided to the taxpayer. The IRS argued that its Publication 1 provided the required statutory notice.
The Ninth Circuit started its analysis by noting that “reasonable notice in advance” is not ambiguous. It further explained that the concept of “notice,” as elucidated by the Supreme Court, means “notice reasonably calculated, under all circumstances, to apprise interested parties” and “afford them an opportunity to present their objections.”
Moreover, the Ninth Circuit reasoned that third-party contact is an exception to the general rule that taxpayer records are confidential. Thus, the court continued, the exception to confidentiality must be construed narrowly, and the protection in subsection (c) to be construed broadly.
The Ninth Circuit also explained that section 7602(c)’s notice requirement is designed to protect the taxpayer’s reputational interest. That is, subsection (c) affords the taxpayer an opportunity to provide the needed information to the IRS before it seeks that information from third parties.
In sum, the court held here that Publication 1 did not provide the taxpayers in this case with reasonable notice in advance. The court reasoned that there must be a context-specific inquiry to determine whether 7602(c)(1) was satisfied. It explained that:
“the IRS does not satisfy the pre-contact notice requirement, § 7602(c)(1), unless it provides notice reasonably calculated, under all relevant circumstances, to apprise interested parties of the possibility that the IRS may contact third parties, and that affords interested parties a meaningful opportunity to resolve issues and volunteer information before those third- party contacts are made.”
The case is J.B. v. United States, No. 16-15999 (9th Cir. Feb. 26, 2019), available here.