Justices Mull Need to Limit IRS Power to Demand Bank Records (1)

US Supreme Court justices Wednesday acknowledged a broad statute backs the IRS’s power to seek bank account holders’ records without telling them, but expressed the need for some limit to prevent abuse.

The case being argued, Polselli v. IRS, pits account holder privacy against Internal Revenue Service efforts to collect on taxes that have already been assessed. Account holders in the case are seeking a ruling that the IRS has to give notice unless the taxpayer who owes the liabilities has a legal interest in the targeted accounts; the IRS opposes that restriction.

“This is quite a broad statute,” Justice Clarence Thomas said, referring to an exception to the notice requirement. Thomas asked Justice Department attorney Ephraim McDowell, who argued on behalf of the IRS, how the agency would be limited in what it can do after it has formally determined a taxpayer owes money.

McDowell said there is a significant process the agency must follow before assessing a tax deficiency, and that a subsequent summons needs to be reasonably calculated to assist in collection. Later at arguments, McDowell explained that taxpayers have an opportunity to challenge a federal tax bill at the US Tax Court and a federal appeals court before the agency moves to collect.

The IRS has argued that giving account holders notice and a chance to litigate would give delinquent taxpayers a “head start in hiding assets.” Account holders in the case—backed by taxpayer rights groups and business advocates—say the agency’s position is “anathema” to Congress’s goal of protecting privacy through the notice requirement.

Defining a Limit

The case arose from the IRS’s work to collect on more than $2 million in taxes owed by Remo Polselli, who the IRS believed was shielding his assets. The agency demanded records for his wife, Hanna Karcho Polselli, Detroit tax law firm Abraham & Rose PLC, and another firm that bears the name of one of Abraham & Rose PLC’s founding members, Jerry R. Abraham.

The Supreme Court’s eventual ruling is expected to resolve a more than 20-year-old circuit split on the issue. The account holders are appealing a 2022 ruling in favor of the IRS by the US Court of Appeals for the Sixth Circuit. That circuit’s interpretation of the notice exception was consistent with the Seventh Circuit’s interpretation in a 1999 ruling, but differed from the Ninth Circuit’s holding in a 2000 ruling.

Justice Neil Gorsuch emphasized the need to spell out some limit on IRS power, asking McDowell whether the court’s analysis should be informed by recognizing the notice requirement as “the default rule” and construing an exception “reasonably in light of the general rule.”

“Reasonably, but not narrowly,” McDowell responded. The account holder should have financial ties with the delinquent taxpayer—"otherwise, the point is not to locate the delinquent taxpayer’s assets,” he said.

Both sides have leaned on statutory arguments to sway the justices, claiming their positions are backed by language that exempts the IRS from giving notice in certain circumstances. Tax code Section 7609(c)(2)(D)(i) states that notice isn’t required if the goal of summoning third-party records is to help with tax collection “against the person with respect to whose liability the summons is issued.”

Tracing Money

Justice Elena Kagan said she read the relevant statutory language as reflecting the agency’s authority to collect from taxpayers and sometimes from their fiduciaries or transferees, noting a dichotomy between those two groups across the tax code. If a summons aids in that collection, the statute doesn’t require notice, she said.

Shay Dvoretzky of Skadden, Arps, Slate, Meagher & Flom LLP, who argued for the account holders, responded that the much more plausible inference is a concern from Congress about privacy rights.

Justice Ketanji Brown Jackson wondered about the scope of a summons targeted at a law firm in particular, asking McDowell whether the IRS believes it could get all a bank’s records related to a law firm.

“I think in an ordinary case, that would be out, but I think this could be a different type of case if you think about the facts here,” McDowell said.

He noted the IRS only went to the law firm’s bank after the firm said it didn’t have any records of Mr. Polselli’s payments to the firm.

“The rationale for that more broad, that broader reading would be that they would have to have all of the relevant bank statements in order to figure out what the shell companies he was using were, because the bank itself wouldn’t know what those shell companies were,” McDowell said.

The case is Polselli v. IRS, U.S., No. 21-1599, oral arguments 3/29/23.