The US Supreme Court recently ruled in a case called Polselli v. IRS, that the IRS can sometimes secretly probe bank records without notice to taxpayers. Under an existing statute, the IRS can also without notice request and examine bank records of people who don't even owe it money - like friends, family, and associates of a taxpayer who does owe the IRS.
This dispute began when a taxpayer (Remo Polselli) owed more than $2 million in taxes to the IRS.
- Polselli paid some of his tax liability through a limited liability company (LLC) that he owned. This prompted the IRS to look more closely at his financial records.
- The IRS issued a number of administrative summonses to try and determine whether Polselli was shielding assets.
- After being ignored, the IRS then issued summonses to Polselli’s wife’s bank and to two other banks where Polselli’s law firm had accounts.
- The perceived problem was that the IRS didn’t notify Polselli’s wife, Hanna, or the law firm, that they were trying to obtain the banking information.
The law states that 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. This information includes books, papers, records, or other data. It can also involve testimony under oath in some cases.
In the lawsuit, Polselli’s wife, Hanna, and Polselli’s law firm argued that the IRS should have to notify them if they are going to send a summons for their information to — such as in this particular case — their banks. They believed that the IRS shouldn’t be able to "secretly" without notice request bank records of a taxpayer’s relatives or associates who don’t owe the IRS money.
The IRS, on the other hand, countered that it does have the statutory authority to seek those records without notice to aid in the collection of a taxpayer's delinquent taxes. In previous federal cases involving similar issues, the question of whether notice is required when IRS summonses are for information from people’s accounts who don’t owe the IRS taxes has never been resolved. But, the IRS believed that there is legal precedent for summoning records without notice when a taxpayer who owes has a recognizable interest in the requested information.
This all may seem confusing, but it took a bunch of appeals before it got all the way to the supreme court. First, a federal district court sided with the IRS, determining that Polselli’s wife and the law firm attorneys were not due notice of the IRS summonses. Then, the 6th Circuit Court of Appeals agreed with district court’s ruling that notice wasn’t required under relevant law. Another appeal sent the case to the Supreme Court which has now given the IRS permission to go poking around our entire lives if you owe taxes.
So, what can we learn from all this:
- Your bank and financial records are not be as private as you might believe.
- Sensitive financial information belonging not only to you if you owe taxes, but to loved ones and associates, could be accessible to the IRS without your prior knowledge.
- Don't try to play games with the IRS, especially with pass-through entities. Just find a really good tax professional that knows how to use the IRS's rules to your advantage.
And with the creation of the Beneficial Ownership Information (BOI) reporting requirements, not just the big firms, but all of the small businesses are now under the microscope.