Supreme Court Leaves Open Question on Limit of IRS Summons Power

A unanimous US Supreme Court sided with the IRS in a closely-watched case over the agency’s authority to seek bank records without notice, while signaling the court may need to revisit the limits of the agency’s power.

The court ruled Thursday that the IRS can exercise its no-notice power to aid tax collection even if the delinquent taxpayer doesn’t have a legal interest in the targeted records. The case, Polselli v. IRS, involved summonses issued for the bank records of two law firms and the wife of a suspected tax scofflaw.

The issue impacts bank account holder protections because account holders are only allowed to challenge the summons’s validity in court if they had the right to notice. The IRS argued that lawsuits to quash summonses can take months or years, thereby stalling collection and inviting asset shifting.

The opinion by Chief Justice John Roberts acknowledged potential concerns about the scope of IRS authority, pointing to language in tax code Section 7609(c)(2)(D) stating that the summons must be 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,’” Roberts wrote.

Roberts reasoned that the parties hadn’t presented full arguments or briefing on the contours of the phrase, and the underlying Sixth Circuit ruling didn’t define it.

“The narrow ruling and the fact that it did not address anything other than what the parties argued leaves open for another day whether there are further limits on the exception,” said Barbara Kaplan, co-chair of Greenberg Traurig LLP’s global tax practice.

Kaplan said it will be interesting to track whether the IRS applies its authority narrowly or in ways that may seem inappropriate.

Suggested Boundaries

Mayling Blanco, a partner at Norton Rose Fulbright US LLP who specializes in white collar defense and tax issues, said the IRS is under growing pressure to close the gap between the taxes it collects and the amount taxpayers owe.

“I am concerned that under these circumstances, we are eroding an important counterweight in our default notice system and leaving it to the IRS to self-police when notice is required,” she said.

In a concurring opinion, Justice Ketanji Brown Jackson outlined situations in which the IRS may be required to directly notify the account holders, such as when circumstances indicate doing so wouldn’t frustrate its tax collection goal or when a summons is overly-broad or intrusive.

For example, she questioned the permissibility of a no-notice summons for all the financial records of a “local mom-and-pop dry cleaning business” because the agency suspects a delinquent taxpayer uses credit cards under different names and wants to uncover transaction information.

“The owners would have to rely on the recipient of the summons (the bank) to articulate their privacy concerns and negotiate with the agency,” but there is no guarantee the bank will do that, Jackson wrote.

Only Justice Neil Gorsuch signed onto Jackson’s concurrence, so it is unclear how many of the high court’s justices would agree with those potential limits.

“Both the majority and concurring opinions indicated a different rule might apply” if a summons isn’t reasonably calculated to help in collection, but when that rule might come into play “was a question for another day,” said Gil Rothenberg, who previously headed the Justice Department Tax Division’s appellate section and is now an instructor at multiple law schools.

At oral arguments, the government suggested its own possible test for whether no-notice summonses are allowed: a proposed requirement that the demands be “reasonably calculated to assisting in collection.”

Collection Challenges

Despite the exception to notice upheld in Polselli for post-assessment collection cases, the IRS is typically required to give notice to an account holder if it issues a summons for records before a tax assessment, and taxpayers generally have multiple procedural rights with which to dispute a tax bill before a formal assessment.

Eric Hylton, a former high-level IRS official who is now alliantgroup’s national director of compliance, emphasized that distinction and the specific collection challenges the agency described in the Polselli case.

The case arose as the IRS tried to collect on a tax assessment of more than $2 million against Remo Polselli. An agency revenue officer found evidence suggesting Polselli had used entities to shield assets from collection.

The agency issued a summons to Polselli’s law firm, hoping to uncover information on accounts used to pay the firm. When the firm said it didn’t have responsive documents, the IRS issued no-notice summonses to banks for the records of the firm, a related firm, and Polselli’s wife.

“That’s where that exception really comes into play because” Polselli wasn’t using traditional means to actually pay the taxes, Hylton said.

The government’s proposal to have the limit on IRS authority turn on reasonableness is “fair” and “truly characterizes what the IRS is doing,” Hylton said.