US tax authority can obtain third-party records without subject's knowledge, says Supreme Court

Thursday, 25 May 2023
The US federal Supreme Court has unanimously ruled that the Internal Revenue Service (IRS) is not required to provide notice when seeking the records of innocent third parties, provided the purpose is to collect a non-compliant taxpayer's tax liability.
US Supreme Court

The taxpayer in the case, Remo Polselli, owed more than USD2 million in back taxes. The IRS focused its collection efforts on financial accounts held by his wife and lawyers at JP Morgan Chase and Bank of America, to which he had allegedly made payments. It issued the banks with summonses for the account records, which it hoped would reveal where Polselli's funds were coming from. The IRS did not inform either the wife or the law firm about the summonses, but the banks did, and Mrs Polselli and the law firm filed petitions to quash them.

At first instance, the US District Court decided it had no jurisdiction to quash the summons because the tax code does not require the IRS to provide notice to third parties where the investigation was aimed at locating assets to satisfy a tax liability. Its ruling was upheld on appeal to the Sixth Circuit, but the case then went to the Supreme Court, as the appeal court's ruling conflicted with another case in which it was found that summons without notice should be limited to cases in which the taxpayer holds a 'legal interest' in the summonsed records.

In reaching its decision in the IRS' favour, the Supreme Court cited the plain language of the statute, which does not mention any need for the taxpayer to have a legal interest in the records sought by the IRS. However, two of the judges, though concurring in the decision, suggested that the IRS could be required to give notice in some circumstances. The example they gave was where the summonsed bank was asked to yield up large amounts of an innocent party's records, without that party having any way to object on the basis of their own privacy concerns. 'Allowing the agency to sidestep oversight of its broad summons power by not providing notice in these kinds of situations undermines the important aims of the default-notice system', said the two judges.

According to Stephen Turanchik of Paul Hastings LLP, the case was a clear win for the IRS as it will allow the IRS to more easily obtain information relating to delinquent taxpayers. Turanchik concludes that more innocent third parties are likely to have their records obtained without their knowledge by the IRS as a result.

However, Daniel Rosen and Eric Aberg of Baker McKenzie noted that the Supreme Court 'was careful to frame its decision in the narrowest possible terms'. Specifically, the judgment suggests that the Court remains open to challenges in future cases where a summons fails to seriously advance collection of a delinquent taxpayer's liability. This, say Rosen and Aberg, signals that the court does not believe the agency's power to issue no-notice summons in aid of collection is unbounded.


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