The Supreme Court seemed generally sympathetic to the claim of the wife of a delinquent taxpayer that the IRS had gone too far in her case in secretly summonsing third-party bank records.
Throughout the hearing on March 29, the justices acknowledged the Internal Revenue Service needs tools to pursue delinquent accounts but suggested that potential abuses need to be guarded against.
The IRS claims Remo Polselli owes $2 million in assessed taxes and penalties and issued summonses without notice seeking financial records from banks. His bank records as well as those of his wife, Hanna Polselli, and law firms that performed work for them were sought.
The Biden administration says the IRS does not need to provide notice to third parties and that having to do so would give delinquent taxpayers “a head start in hiding assets.” Besides, the administration argues, persons involved in the process have access to the courts to combat alleged abuses.
Petitioner Hanna Polselli and the law firms argue that the U.S. Court of Appeals for the 6th Circuit departed from a 2000 ruling by the U.S. Court of Appeals for the 9th Circuit, creating a circuit split the Supreme Court needs to resolve.
The 6th Circuit held that the disputed summonses were lawful because they were covered by an exception in the tax code pertaining to third-party record keepers. The 6th Circuit rejected the 9th Circuit’s holding that the exception applies only when the targeted taxpayer has a recognized legal interest in the records.
The legal question here “implicates fundamental, constitutionally recognized privacy rights, and this case is an excellent vehicle for resolving” the circuit split, a brief states.
The 6th Circuit’s interpretation created opportunities for “abuse” that left “a gaping hole in [tax code] protections,” according to a friend-of-the-court brief filed by the Center for Taxpayer Rights.
“The Sixth Circuit held that the IRS may issue a summons seeking the records of people who do not owe the IRS a penny, without notice, so long as the IRS issued the summons to aid in the collection of someone else’s tax liability.”
This interpretation “places virtually no limits on the IRS’s ability to seek records without notice,” leaving “an innocent person whose records are sought … [without] any meaningful opportunity to prevent disclosure of her private information,” the group stated.
The IRS previously urged the high court to turn away the appeal, arguing that the circuit split “seems to be more apparent than real.” Hanna Polselli and the law firms wouldn’t have been entitled to notice under the 9th Circuit’s case law, the agency stated.
The attorney arguing for Polselli and the law firms, Shay Dvoretzky, told the justices during oral arguments on March 29 that the 6th Circuit is wrong.
According to that court, “nothing stops the IRS from secretly summonsing all unredacted bank records of anyone who ever received money from a delinquent taxpayer: a lawn care company, a friend splitting a dinner check through Venmo, or, as here, a law firm,” he said.
Congress created Section 7609 of the Internal Revenue Code “to give the public critical privacy rights to notice and an opportunity to quash third-party IRS summonses” and carefully carved out exceptions to those rights.
“In clause (1), Congress allowed the IRS to forgo notice for a summons issued ‘in aid of the collection of an assessment against the person with respect to whose liability the summons is issued.’ In clause (2), Congress separately dispensed with notice for summonses ‘issued in aid of the collection of the liability of any transferee or fiduciary of a delinquent taxpayer with an assessment or judgment,’” the lawyer said.
“But the Sixth Circuit, like the IRS, nullified most of what Congress wrote. It read clause (1) to contain just nine words, a summons ‘issued in aid of the collection of an assessment.’ Period.
“The IRS says those nine words mean that anytime it’s made an assessment, there are no judicially reviewable limits on its power to issue secret, overbroad, third-party summonses.”
The issue here is not whether the IRS can “summons the records it needs, only whether it can do so secretly and without judicial oversight,” Dvoretzky said.
“The IRS says trust us, we police ourselves. But Congress repudiated that approach when it enacted Section 7609’s privacy protections for innocent third parties.”
U.S. Department of Justice attorney Ephraim McDowell acknowledged the law requires that “notice and judicial review” have to be provided to “persons identified in a third-party summons issued in aid of a liability investigation.”
But he said Congress made an exception in the case of “an assessment made against a delinquent taxpayer.”
The petitioner argues that the “statute is an unqualified pro-privacy guarantee” but in reality it is “a compromise” that balances privacy rights with the IRS’s need “to seek out and recover the delinquent taxpayer’s assets,” McDowell said.
Justice Clarence Thomas said the law here is “quite a broad statute.”
McDowell said the IRS has to follow a lengthy procedure before deeming a tax assessment to be delinquent, and that taxpayers have multiple opportunities along the way to challenge a tax bill in court before the agency moves forward with collection.
Justice Neil Gorsuch asked McDowell if he agreed that the phrase “in aid of” cannot mean “a shot in the dark.”
“There has to be some causal link, some close connection of some kind between the liability … between the … request for information and the IRS’s actions?” the justice said.
McDowell replied, “I would not say close connection,” adding there needed to be “some connection.”
Gorsuch said: “And so that’s … what we’re really fighting about – everyone agrees ‘in aid of’ can’t mean the universe.”
McDowell answered “yes.”
Chief Justice John Roberts asked McDowell if the IRS can “get records of family members because maybe he’s put his assets with them?”
“We don’t think standing alone, the fact that someone is a family member is enough to simply summon[s] that family member’s bank records,” McDowell said. “There would have to be some further evidence that there was some financial dealing between the family member and the taxpayer.”
With the Polsellis, the husband and wife had “engaged in significant financial dealings” together,” the lawyer added.
The fact that the two people are married “in and of itself may not be enough … it depends if their assets are intertwined,” he said.
Responding to Thomas, Dvoretzky said “the very concept of ‘in aid of’ in common parlance, to the extent it’s used in common parlance, has a limiting principle.”
Justice Elena Kagan told Dvoretzky the language in the law was straightforward.
“Basically, I read this language just to say, whoever we’re collecting from, and it could be this group of people or it could be that group of people, if it’s in aid of collecting, then we don’t have to issue a notice,” she said.
Dvoretzky disagreed, saying Congress intended to require notice.
“Every indication is that what Congress was concerned with in writing this statute was responding to this Court’s decisions … and protecting third-party privacy rights,” he said.
A decision in the case, Polselli v. IRS, court file 21-1599, is expected by June or July.
