Supreme Court to Decide if IRS Can Secretly Obtain Bank Records

The U.S. Supreme Court is in the news lately because of the controversy surrounding federal court rulings on the medication mifepristone, which is sometimes referred to as an "abortion pill." But you might not have heard that the Supreme Court is also set to decide whether when a taxpayer owes money, the IRS can obtain bank records from that taxpayer’s relatives — without notice — to help with the agency’s tax collection efforts.

The answer to that question likely won’t come until early this summer when the Supreme Court is expected to issue its ruling in Polselli v. IRS. But the case, which comes as the IRS has been allocated $80 billion in funding over the next 10 years, raises important questions about taxpayer privacy and IRS authority that are good to know. 

Supreme Court: Can the IRS Secretly Obtain Your Relatives’ Bank Records?

The dispute in the Polselli case began when a taxpayer (Remo Polselli) owed more than $2 million in taxes to the IRS.

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• Polselli paid some of his tax liability through a limited liability company that he owned, which prompted the IRS to look more closely at Polselli’s financial records.   
• The IRS issued a number of administrative summonses to determine whether Polselli was shielding assets. 
• Ultimately, the IRS issued summonses to Polselli’s wife’s bank and to two other banks where Polselli’s law firm had accounts. 
• But, the IRS didn’t notify Polselli’s wife, Hanna, or the law firm, that they were trying to obtain the banking information.

The IRS can issue a summons to any person under Section 7602 of the tax code when the agency sees a need to get information that could aid in the collection of federal tax owed. That information can include books, papers, records, or other data. In some cases, it can also involve testimony under oath.

What's the Problem? In IRS v. Polselli, Polselli’s wife, Hanna, and Polselli’s law firm argue that the IRS should have to notify them if they are going to send a summons for their information to — in this case — their banks. In other words, the IRS shouldn’t be able to "secretly" (i.e., without notice) request bank records of a taxpayer’s relatives or associates who don’t owe the IRS money.

What Is the IRS Arguing? The IRS contends that it has the statutory authority to seek those records without notice to aid in the collection of Remo Polselli’s delinquent taxes. Previous federal cases involving similar issues haven’t resolved the question of whether notice is required when IRS summonses are for information from people’s accounts who don’t owe the IRS taxes. But, there is legal precedent for the IRS summoning records without notice when a taxpayer who owes has a recognizable interest in the requested information.

Why is this Case at the Supreme Court? That all may seem confusing, which is partly why the case made its way to the Supreme Court. A lower (federal district) court sided with the IRS in the case, finding that Polselli’s wife and the law firm attorneys were not due notice of the IRS summonses. The 6th Circuit Court of Appeals agreed, affirming the district court’s ruling that notice wasn’t required under relevant law. 

However, ultimately, the Supreme Court will determine whether the facts of this case warrant what would essentially be an exception to the general rule that notice isn’t required for summonses issued to aid in the collection of tax debt. A key reason is that the IRS “secret” summonses here involve records of individuals who do not have an IRS tax liability.

 IRS $80 Billion Spending Plan 

The Polselli case comes to the Supreme Court while the IRS is also in the spotlight on Capitol Hill. The Inflation Reduction Act (IRA) allocates $80 billion in funding to the IRS over the next 10 years, and the agency just released a plan describing how it plans to use the funds. However, some Republicans continue to oppose the idea that the IRS needs additional funding and allege that 87,000 new IRS agents will be coming for the tax dollars of hardworking, middle-income Americans.

For its part, the IRS has said that this filing season, taxpayers have already reaped some benefits from initial IRS funding for the agency. 

“We have dramatically improved our phone service thanks to more staff. More walk-in services are available across the country. New digital tools have been added. And these are just first steps,” IRS Commissioner Danny Werfel said in a statement accompanying the plan’s release.

According to IRS data, some of those filing season 2023 improvements include that the agency: 

• Answered 2 million more phone calls through live assistance this tax filing season compared to the same period in 2022, and cut call wait times from 27 minutes to four minutes, which Treasury Secretary Janet Yellen describes as an 87% level of service.
• Cleared its pandemic-related backlog of millions of paper returns due to new scanning technology.
• Hired 5,000 new IRS staffers.

Now it’s up to the Supreme Court to make the call on the balance between taxpayer privacy and the IRS’ need to collect outstanding tax debt. (Stay tuned to Kiplinger.)