Last month, the U.S. Supreme Court unanimously favored the IRS in the court ruling, Polselli v. Internal Revenue Service, permitting the agency to request the financial records of delinquent taxpayers without notification to third-party businesses.
Many believe the court decision further expands the IRS’s power and frees them of previous limitations promoting privacy protection.
Dry cleaner theory
Justice Ketanji Brown Jackson offered an example to illustrate the decision’s extent.
Think about a delinquent taxpayer who frequents a mom-and-pop dry cleaner. If the IRS believes that financial records from the dry cleaner could help in tax collection, the agency could issue summons to the dry cleaner’s bank for years and years of financial statements without even notifying the shop owners.
The shop owners would not be able to object to the collection request. Experts and tax attorneys argue small businesses have the right to claim their innocence as a third-party simply attempting to do day-to-day business. Since the ruling lacked clarity on how the IRS could leverage this newfound power to obtain information, experts worry the agency could use the summons for one delinquent taxpayer to gain access to another they wish to investigate.
“While the summons is supposed to be about Taxpayer A, if the IRS finds something fishy in a third-party’s records, then the worry is that the IRS will use that information to launch yet another investigation into another taxpayer,” said Tyler Martinez, senior attorney at National Taxpayers Union Foundation.
Another concern is simply the question of privacy. Unlike the criminal court system, where defendants are innocent until proven guilty, some experts believe judges are too quick to assume citizens are guilty of gaming the system to avoid paying taxes. Instead, they argue the agency should be mandated to provide notice and allow those accused to defend their privacy in court. This is especially true when a third-party is involved.
Businesses don’t want to tell their customers when their personal and private data was turned over to the IRS. It can impact business relationships, client trust and privacy.
Polselli vs Internal Revenue Service
The issue made its way to the Supreme Court after an IRS agent suspected Remo Polselli, a delinquent taxpayer in debt to the IRS for $2 million, was using his business ventures to hide assets. The agent was blocked in his request to summon Polselli’s law firm – for whom he had been a long-standing client – for records, including invoices, billing statements, canceled checks, and wire transfers.
The agent then requested financial bank records concerning Poselli, Poselli’s wife, and his law firm. The law firms filed a federal suit to block the requests after learning about the summons from their banks.
However, the court concluded that the law firm could not block the request because no notice was required. The idea behind the ruling was to prevent third-party businesses, such as Polselli’s law firm, from using the notification time period to hide, destroy or alter records needed to prove tax fraud or evasion.
When notice is required
The Supreme Court did clarify that while notice is not required when the IRS is attempting to collect an outstanding tax obligation, it is required when they are trying to determine if taxes are owed.
While experts don’t argue that the IRS needs the ability to summon records without notice to prevent taxpayers from defrauding the agency, they do worry about the privacy of those not in question.
The Court did not clarify or limit the IRS to only summon documents about the person or business in question. Instead, the ruling allows the IRS to obtain documents from third-party businesses for individuals not in question, empowering the agency to investigate anyone and everyone – guilty or innocent.
There are right and wrong ways to lower your tax liability and remain within the limits of the law. Don’t let another agency mishandle your taxes and bring unnecessary attention to you, your family and your business partners. Call us, we can help.