In a rare unanimous opinion, the U.S. Supreme Court recently confirmed that existing law allows the IRS to probe your bank records, without ever notifying you. Under the applicable statute, the Court concluded the IRS is not required, in every circumstance, to notify third parties when requesting a summons for banking records in collection matters.
POWER TO ISSUE SUMMONS BY THE IRS
Generally, the IRS may issue summons to determine the liability of a taxpayer and to pursue unpaid taxes against people who owe them. The issuance of a summons extends beyond purely the taxpayer to the production of books, records, papers, or other data from any person who possesses information about a delinquent taxpayer.
Because of this broad power to gather information, the IRS is generally required to give notice to any person identified in the summons. Any party entitled to notice can bring a motion to quash the summons under applicable law. Despite this general standard, there are certain circumstances in which exceptions apply.
THE EXCEPTION AT ISSUE
In Polselli v. International Revenue Service, the IRS determined taxpayer Remo Polselli was underpaying his federal taxes for over ten years, resulting in over $2 million in an outstanding balance. To determine where Polselli may be shielding these funds, the IRS revenue agent, handling the case, issued summons to banks where Polselli’s wife and Polselli’s lawyers had accounts. Although the IRS never issued notice to Polselli’s wife and attorneys, the banks did issue notice, and the parties moved to quash the summons. Under applicable law, the district court and the appellant court (6th Circuit) determined the IRS did not need to issue a notice under an exception to the general notice provision, thus the parties did not have a right to the motion to quash and the IRS was free to collect the information.
Under Section 7609(c)(2)(D)(i), the statute provides that the IRS does not need to give notice to a person identified in the summons if the summons is “issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued….” In layman’s terms, the Court held that the IRS does not need to provide notice to a third party if all three circumstances exist:
- A summons must be issued to aid in collection,
- A summons must aid the collection of a previously issued assessment or judgment, and
- A summons must aid the collection of assessments or judgments against the assessed taxpayer.
LIMITS TO THE EXCEPTION
While the US Supreme Court took this case to resolve a split of the various Circuit Courts, the Polselli ruling should not be seen as a grant of unlimited power to the IRS to issue summons to anyone. The Court clearly articulated that the issuance of a summons is but a mere tool in the IRS’s toolkit to ensure that taxpayers do not avoid their legal obligations. However, it cautioned the IRS that the exception is just that. It is an exception to the general rule that should only be used when appropriate. It is unclear what “issued in aid of…collection” means, and the Court did not find this case ripe for such a determination, therefore there are likely to be additional opportunities for the Court to address this phrase’s meaning in the future.
WHAT DOES THIS MEAN FOR YOU?
Luckily, the exception is narrow, and the IRS cannot start digging into anyone’s records without notice. Although Polselli is an important case that questions the limits of our government and our privacy, it may cause concern for some who may owe money to the IRS or are concerned about the reach of the IRS. For individuals that may have delinquent tax obligations, it’s important to note that the IRS will likely only use this exception when: a taxpayer has already been issued an assessment, and
- It believes that an individual has control of funds that may not be in their legal name or they don’t have a formal ownership interest.
- An individual is attempting to shield assets from the IRS through the use of a legal entity.
In most other circumstances, the IRS is likely to take a narrow approach in the use of these summons.
Taxpayers concerned with the IRS abusing its discretion, in the issuance of a summons, should remain vigilant and seek to challenge the summons, when appropriate. As outlined in the Internal Revenue Service’s Strategic Operating Plan, taxpayers are likely to see a renewed focus on compliance and enforcement. Taxpayers who owe delinquent tax obligations have a variety of options to assist in the resolution of their tax obligations including repayment plans, offers-in-compromise, and certain abatement programs.