IRS Can Seek Bank Records Without Notice, Supreme Court Says (2)

The government already collects hundreds of billions of dollars less than what taxpayers owe, according to Hylton. In 2021, a Treasury official pegged that shortfall at about $600 billion annually.

“If the courts would have ruled in favor of the taxpayer, then that would narrow the possibility of the service being able to collect,” Hylton said.

In rejecting the proposed limitation on the IRS’s power, Roberts said nothing in the statute’s notice exemption “mentions a taxpayer’s legal interest in records sought by the IRS, much less requires that a taxpayer maintain such an interest for the exception to apply.”

Limits on IRS

The high court wasn’t dismissing concerns about the scope of IRS power, Roberts insisted. He noted language in the statute restricting the power to summonses that are “issued in aid of the collection” of an assessment or judgment.

“This is not, however, the case to try to define the precise bounds of the phrase ‘in aid of the collection,’” he wrote. That issue wasn’t decided by the lower court and wasn’t the focus of the parties’ briefing to the justices, he said.

In a concurring opinion that was joined by Justice Neil M. Gorsuch, Justice Ketanji Brown Jackson discussed what she said were limits to the IRS’s power, despite the agency’s victory. The default rule for the IRS is to give notice, she emphasized, adding that the exception prevents the default requirement “from tipping the balance entirely in favor of the delinquent taxpayer.”

“In other words, the statute’s balancing of interests indicates that Congress did not give the IRS a blank check, so to speak, to do with as it will in the collection arena,” she said, cautioning courts not to interpret the notice exception “as if that agency has been gifted with boundless authority.”

The IRS win comes after it suffered two significant losses at the high court in recent years. In February, the court ruled 5-4 that the agency had been over-penalizing non-willful failures to report foreign bank accounts. In 2021, the court unanimously found the agency had an overly expansive view of a law that blocks certain taxpayer lawsuits.

Third-Party Accounts

The IRS argued the exception backed the way in which it sought to collect on a tax assessment of more than $2 million against Remo Polselli. It demanded bank records for Mr. Polselli’s wife as well as two firms that have said they represented him, Detroit tax law firm Abraham & Rose PLC and a firm that bears the name of one of the tax firm’s founding members, Jerry R. Abraham PC.

The Abraham & Rose bank summons in particular was aimed at uncovering the bank accounts Mr. Polselli used to pay the firm after the IRS obtained evidence that led it to believe he used third-party entities to control and shield his assets, the IRS told the Supreme Court. The agency had already issued a summons directly to the firm, which said it didn’t have any responsive documents.

The account holders argued that innocent parties have a “right to know when the IRS is snooping through their information” and to force the IRS to justify the intrusion in court. Allowing no-notice summonses when the delinquent taxpayer doesn’t have a legal interest in the targeted account “creates exactly the potential for abuse that Congress sought to eliminate,” they said.

Although a petition to quash a summons must be filed within 20 days, the litigation could take “months or years,” thereby stalling tax collection and inviting evasive asset-shifting, the IRS said.

Shay Dvoretzky of Skadden, Arps, Slate, Meagher & Flom LLP, who represented the account holders, didn’t respond to a request for comment. The IRS and Justice Department declined to comment.

The case is Polselli v. IRS, U.S., No. 21-1599, 5/18/23.