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

Bloomberg tax

Quotes from Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director of Compliance

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  • Ruling resolves two-decade-old appeals court split
  • Decision is “critical” for IRS work, former official says

The US Supreme Court on Thursday rejected a proposed limit on the IRS’s ability to demand a bank account holder’s records without giving notice as part of an effort to collect on someone else’s delinquent taxes.

The unanimous ruling, written by Chief Justice John G. Roberts Jr., endorsed a broad reading of Internal Revenue Service power under tax code Section 7609(c)(2)(D), which exempts the agency from giving notice when a summons is issued to help collect a tax assessment “against the person with respect to whose liability the summons is issued.” The question for the court was whether that exemption is confined to records in which the delinquent taxpayer has a legal interest.

“A straightforward reading of the statutory text supplies a ready answer: The notice exception does not contain such a limitation,” Roberts wrote.

The opinion addresses a longstanding circuit split on the issue. The underlying Sixth Circuit opinion in favor of the IRS aligned with a 1999 decision from the Seventh Circuit holding that the agency can issue a summons for an account holder’s records without notice to collect on someone else’s tax liabilities. The Ninth Circuit in 2000 held that, for the notice exception to apply, the delinquent taxpayer has to have a legal interest in the targeted account.

The breadth of the exception also affects whether courts can scrutinize the IRS’s actions: The federal government has only waived its sovereign immunity from lawsuits seeking to quash a summons in cases where account holders were entitled to notice.

Eric Hylton
“I think it’s a critical decision for the IRS,” said Eric Hylton, a former commissioner of the IRS Small Business/Self Employed Division and former deputy chief of the IRS Criminal Investigation Division. Hylton is now the National Director of Compliance at alliantgroup.

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.

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Eric Hylton

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.