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IRS third-party contact summons quashed, Publication 1 not reasonable notice

IRS third-party contact summons quashed

The U.S. Court of Appeals for the Ninth Circuit affirmed a district court order quashing an IRS summons seeking documents, concluding that the government’s Publication 1 did not provide reasonable advance notice to the taxpayer of the third-party contact.

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The case is: J.B. v. United States, No. 16-15999 (9th Cir. February 26, 2019). Read the Ninth Circuit’s opinion [PDF 514 KB]

Summary

The taxpayers are an elderly couple randomly selected for a compliance research examination under the IRS’s National Research Program. In connection with the audit of their 2011 return, the IRS issued a summons to the California Supreme Court from whom taxpayer-husband had accepted appointments to represent indigent criminal defendants in capital cases. The taxpayers filed a petition to quash that the district court granted, ruling that the IRS had not provided “reasonable notice in advance” to taxpayers as required by section 7602(c)(1) before contacting the California Supreme Court.

On appeal, the IRS argued that the two-page notice titled “Your Rights as a Taxpayer,”  known as Publication 1, attached to the IRS letter notifying the couple that they were selected for audit, provided adequate advance notice as required under the statute.

The Ninth Circuit concluded that “reasonable notice in advance” means notice reasonably calculated, under all the 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 third-party contacts are made. The appellate court agreed with the district court that Publication 1 did not provide the requisite reasonable advance notice, explaining that a reasonable notice must provide the taxpayers with a meaningful opportunity to volunteer records on their own, so that third-party contacts may be avoided if the taxpayers comply with the IRS’s demand.

The Ninth Circuit noted that while the courts are not in the position to prescribe the exact form of notice that is reasonable in every circumstance, under the circumstances in this case, the government’s reliance on Publication 1 was plainly unreasonable.

When the IRS seeks information from an employer of a party with whom it is currently in litigation and much of the information sought is covered by common law and state-recognized privileges, additional reasonable measures must be taken to provide meaningful notice and an opportunity to respond, in order to avert the potential third-party contact.

KPMG observation

The decision may lead to significant changes in how the IRS handles third-party contact notices, which is something the IRS National Taxpayer Advocate has pushed for in recent years.

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