The U.S. Supreme Court has unanimously ruled that the IRS can, without notice, review the bank accounts of third parties associated with delinquent taxpayers.
The decision was part of Polselli v. Internal Revenue Service, a case involving an underpayment of more than $2 million in federal taxes over several years. After failed attempts to receive payment from the delinquent taxpayer, Remo Polselli, the IRS issued administrative summonses to access the bank accounts of Polselli’s wife and his lawyers for the purpose of acquiring information that might aid in their collection. However, the IRS didn’t notify the wife or attorneys about the summonses. Instead, they were informed by their banks.
Was the IRS in the wrong? The Supreme Court upheld that it wasn’t. Here’s why:
The areas of the tax code in question include Sec. 7609(a)(1), which requires that the IRS provide notice to anyone named in a summons, allowing them an opportunity to bring a motion to stop it. But Sec. 7609(c)(2)(D)(i) names exceptions, including no notice required if the summons is “in aid of the collection of” the underpaid taxes.
“The IRS can issue a summons both to determine whether a taxpayer owes money and also to collect that debt…It must provide notice only in the former situation,” points out the Journal of Accountancy. Polselli’s wife and attorneys, however, argued that their bank accounts weren’t directly related to him, meaning that the accounts didn’t include collectible assets and, therefore, didn’t qualify under the exception.
As Forbes’ Kelly Phillips Erb explains, the IRS pushed back, asserting that it had reason to believe that the third parties might have information in their records that would, indeed, assist with collections, justifying the action. The IRS suspected that Polselli may have used his wife’s bank account to shield assets and that he could have paid his attorneys in a way that offered additional clues about where hidden assets were being held. (The law firm had previously claimed attorney-client privilege and a lack of retained documentation in response to a direct summons.)
In the end, the Supreme Court ruled that tax-code language left room for the interpretation that the summonses were carried out “in aid of collection” and that Polselli didn’t necessarily need direct legal interest in the third-party accounts for the exception to apply.
Of course, privacy concerns were a centerpiece of the case. The House Ways and Means Committee once stated that under Tax Reform Act of 1976, “the use of [the third-party summons as an] important investigative tool should not unreasonably infringe on the civil rights of taxpayers.” However, Congress also recognized that “it must balance this right to privacy with the IRS’s ability to collect on an assessment.” And that was the rationale the Supreme Court used to support this decision.
“At a time when some taxpayers and politicians are already concerned about billions in funding for stepped up IRS collection and enforcement activities—and what that might mean for related privacy issues—Polselli is raising questions about the IRS’ right to collect financial and other information without giving taxpayers notice that it’s happening,” adds Erb.
Could the IRS be poking around your bank accounts or the accounts of your acquaintances without your knowledge? Not exactly: Reaching this point would certainly involve the delinquent taxpayer being aware the IRS is seeking payment. This was certainly true in Polselli’s case. The underpayment of more than $2 million had been established, and it was only after the taxpayer failed to cooperate that the IRS widened its scope. Remember also that the attorneys received a direct summons notification, which they petitioned.
What other similar actions could be taken secretly? Your bank may inform the IRS of certain payment thresholds and suspicious activity without your knowledge. The U.S. Financial Crimes Enforcement Network (FinCEN) asks financial and related institutions (including insurance and brokerage firms) to file a Suspicious Activity Report (SAR) when they suspect a case of money laundering or fraud. You may be aware that the standard trigger for reporting under the Bank Secrecy Act is $10,000, but institutions are asked to file a SAR for any amount or series of activity when criminal activity is suspected.
Feel free to contact us with questions.