In a unanimous decision, the US Supreme Court ruled last week that it’s legal for the IRS to secretly obtain the bank records of third parties who are not under investigation, when seeking a summons for banking records believed to be relevant to the tax delinquency of another person.
The new ruling gives the IRS “startlingly broad authority to pry into the financial records of people who may be only remotely connected to a delinquent taxpayer,” according to one lawyer briefed on the decision, the Epoch Times reports.
The ruling, a victory for the Biden administration, came after the administration’s attempts to strengthen IRS enforcement efforts became an issue in the midterm congressional elections. The Inflation Reduction Act, which President Joe Biden signed into law in August 2022, allocated almost $80 billion to the IRS to hire an extra 87,000 agents. Democrats say the IRS has long been underfunded, but Republicans say the extra money will be used to harass taxpayers.
At oral arguments on March 29 the justices had seemed sympathetic to the claim of the wife of a man who owed substantial taxes that the IRS went too far in pursuing her bank records without prior notice. At the same time, they acknowledged the agency needs effective tools to attempt to collect delinquent accounts. -Epoch Times
In the court’s May 18 opinion, Chief Justice John Roberts wrote in Polselli v. IRS (court file 21-1599) sided with the Biden administration, which argued that the IRS does not need to provide notice to third parties, and that having to do so would give delinquent taxpayers “a head start in hiding assets.”
The administration also argued that people involved in the process have access to the courts to combat alleged abuses.
In an earlier decision, the U.S. Court of Appeals for the 6th Circuit split from the U.S. Court of Appeals for the 9th Circuit over the matter, requiring the Supreme Court to decide the matter. In their decision, Roberts wrote that the Court disagreed with Polselli – affirming the 6th Circuit’s ruling.
“Congress has given the IRS considerable power to go after unpaid taxes,” wrote Roberts.
“One tool at the Service’s disposal is the authority to summon people with information concerning a delinquent taxpayer. But to safeguard privacy, the IRS is generally required to provide notice to anyone named in a summons, who can then sue to quash it. Today’s case concerns an exception to that general rule.”
The IRS can now request the production of “books, papers, records, or other data” from “any person” who may possess information regarding a delinquent taxpayer, Roberts wrote.
“Given the breadth of this power, Congress has imposed certain safeguards” and will typically have to give notice of the summons to anyone identified in it, who is then entitled to bring a motion to quash said summons (at considerable personal legal expense, of course). If the summons is issued in aid of the collection of an assessment made or judgement rendered, however, the notice does not have to be provided.
“In other words, the IRS may issue summonses both to determine whether a taxpayer owes money and later to collect any outstanding liability. When the IRS conducts an investigation for the purpose of ‘determining the liability’ of a taxpayer … it must provide notice … But once the Service has reached the stage of ‘collecting any such liability,’ … —which is a distinct activity—notice may not be required.”
In a separate opinion which Roberts concurred with, Justice Ketanji Brown Jackson wrote that Congress has “recognized that there might be situations, particularly in the collection context, where providing notice could frustrate the IRS’s ability to effectively administer the tax laws.”
“For instance, upon receiving notice that the IRS has served a summons, interested persons might move or hide collectable assets, making the agency’s collection efforts substantially harder.”
According to Paul Sherman, counsel for the Institute for Justice, a nonprofit public interest law firm, “The Supreme Court’s ruling grants the IRS startlingly broad authority to pry into the financial records of people who may be only remotely connected to a delinquent taxpayer.”
“That ruling raises serious Fourth Amendment concerns. Thankfully, the Court stressed that its ruling was narrowly focused on the statutory question before it. In a future case, the Court should address the constitutional limits on the government’s power to demand access to people’s most sensitive financial information.”
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