MARCH 28, 2023
by Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director of Compliance
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Supreme Court Case Pits Privacy Against IRS Power to Trace Cash
- Bank account holders say agency should have notified them
- Justices to hear IRS bank summons case Wednesday
The US Supreme Court is slated to hear a case Wednesday that will test the reach of privacy protections against the IRS’s power to demand bank account records without ever notifying account holders.
The question for the court in the case, Polselli v. IRS, is whether the Internal Revenue Service has to tell account holders it has demanded those records when trying to collect on someone else’s taxes. Taxpayer rights groups and business advocates have urged the justices to rein in the agency, while the IRS has said it is using a power Congress granted.
Typically, the agency’s next step after getting those records would be to levy the account to collect the liabilities, said Frank Agostino, a former IRS attorney and Justice Department criminal tax prosecutor who now specializes in tax law at Agostino & Associates PC.
“It is devastating, the power that the government has to just take the money first and ask questions later,” he said. At that point,”the government has your money and you have to bring a lawsuit for a wrongful levy saying, ‘They’ve taken my money, not the taxpayer’s money.’”
The law says the government doesn’t have to give notice if its goal is to help collect on a tax assessment “against the person with respect to whose liability the summons is issued.” Federal appeals courts have been divided over how to interpret that exception to the notice requirement under tax code Section 7609(c)(2)(D)(i).
The exception applies even when the sought-after records don’t belong to the taxpayer who owes money, according to the IRS. The account holders in the case—the wife of the taxpayer facing liabilities and two law firms—contend the exception only applies when the delinquent taxpayer has a legal interest in the targeted bank account.
Challenges for IRS
Delinquent taxpayers “often control mazes of shell entities,” and so a requirement to give advance notice and litigate third-party summonses “would give taxpayers and their affiliates a sizeable ‘head start in hiding assets,’” the IRS said in its principal high court brief. Congress created the notice requirement for summonses in tax liability investigations, not in post-assessment collection efforts, it said.
Eric Hylton, who previously led both the IRS’s Small Business/Self-Employed Division and IRS Criminal Investigation International Operations, agreed with that concern, describing a photo he once shared with staff of a sign he saw in Singapore advertising the ability to move money around the world in seconds.
“The challenge that the IRS has to face as it pursues, whether it’s from a criminal perspective, whether it’s from a civil perspective,” he said, is “how they will actually be able to legally obtain the funds that a taxpayer owes.” Hylton is now national director of compliance for alliantgroup.
Requiring the IRS to give notice for tax collection-related summonses also “just adds another level of procedural hurdle” for the agency, according to Barbara Kaplan, a former IRS trial attorney who now co-chairs Greenberg Traurig LLP’s Global Tax Practice. “Giving notice is not terribly difficult, you know, you just send the notice,” but it opens the door for the account holder to contest the summons, Kaplan said.
Reading the Tea Leaves
The account holders in the case—Hanna Karcho Polselli, the Detroit tax law firm Abraham & Rose PLC, and Jerry R. Abraham PC—argued in their brief that the IRS’s position is “anathema” to Congress’s desire to address serious privacy concerns through the notice requirement. If the government prevails, delinquent taxpayers would have more privacy rights before a tax assessment than innocent parties have after one, they said.
“The problem isn’t just that the government’s rule is un-American or that the IRS fancies itself the NSA,” they said in their brief, likening the tax collection methods to the National Security Agency’s means of collecting intelligence. “The problem is that statutory text, structure, purpose, history, and policy all show that the IRS is overreaching.”
There’s a good chance the case comes out in favor of the account holders given a trend in the last few years of the IRS losing at the high court “when it has expansive views of its enforcement powers,” said Tyler Martinez, a taxpayer defense litigator at the National Taxpayers Union Foundation who co-authored a brief in the case supporting account holders.
Martinez noted the court’s 2021 CIC Services, LLC v. IRS decision to greenlight a taxpayer challenge against an IRS reporting requirement and the court’s Feb. 28 ruling in Bittner v. United States that the IRS was over-penalizing foreign bank account holders for reporting failures.
Hylton countered that the circumstances in the case would weigh in favor of the IRS: The taxpayer paid about $290,000 toward more than $2 million in tax liabilities from an account belonging to Dolce Hotel Management LLC, rather than from his own account. That led an IRS revenue officer to believe the taxpayer was using entities to shield assets from collection.
“It is unusual, and it gives the appearance that this is what this individual was planning to do,” Hylton said.
Kaplan said the case could go either way because the language of the notice requirement exception is “somewhat confusing when you’re applying it to this kind of context.”
“Both sides have teed up their arguments, and we’ll just have to see,” she said.
The IRS declined to comment. The Justice Department didn’t respond to a request for comment. Shay Dvoretzky of Skadden, Arps, Slate, Meagher & Flom LLP, who represents the account holders, also didn’t respond to a request for comment.
The case is Polselli v. IRS, U.S., No. 21-1599, Oral arguments slated for 3/29/23.
About the Author
Hylton held several prominent positions at the IRS, including serving as Deputy of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.