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The IRS does not need to notify third parties when subpoenaing bank records for collection purposes. This was the decision of the Supreme Court Polsel v. Internal Revenue Service.
background
The case involved taxpayer Remo Paulsel, who had underpaid his federal taxes for many years, resulting in a balance of more than $2 million. The IRS moved to collect and eventually requested and was granted an order to produce certain financial and business records for Polselli. The IRS also issued administrative subpoenas to banks where Paulsel’s wife, Hannah Carcho Paulsel, and her attorneys had accounts.
A subpoena is usually a request to turn over specific information – in this case, financial records. The reason for the subpoena, according to the IRS, is that the information they’re asking for might help them collect what Paulsel had already decided.
The IRS did not notify Polsel’s wife or her attorneys of the subpoenas to the banks, relying on an exception in Internal Revenue Code section 7609(c)(2)(D)(i) that eliminates the notification requirement. Summons issued “for the purpose of collecting” tax collections.
You can read more about the case and oral arguments here.
thought
When it comes to subpoenas, there is a legal requirement to send some kind of notice – that’s not in dispute. However, the focus of that case was whether the statute’s exception to the notice requirement applies only when the taxpayer has a legitimate interest in the records or records subpoenaed by the IRS. The court held that “a literal reading of the text of the statute provides a ready answer: the notice exception contains no such limitation.”
The statute (section 7609) establishes three conditions to exempt the IRS from sending a notice under these circumstances:
- The summons must be “issued … in aid of collection.”
- The subpoena should help collect the “assessment or decision made.”
- The subpoena must assist in gathering assessments or judgments against “the person for whose liability the subpoena is issued.”
The court made clear that “none of the three components of §7609(c)(2)(D)(i)’s notice of excuse indicates a taxpayer’s legitimate interest in the records requested by the IRS, much less requires the taxpayer to maintain the application of such an exception. interest”.
And, if Congress wanted to introduce a legal interest requirement, the Court noted, it certainly knew how to do so.
Specifically, in this case, the IRS had certain statutory obligations to Polsell—the person they were targeting for collection. That’s because the tax code generally requires the IRS, when it serves a subpoena for records about a person “identified in the subpoena,” to notify that identified person. However, while hunting for the assets, the IRS had reason to believe that third parties (the law firms and Paulsel’s wife, as mentioned above) might have information in their records that would aid collections. The IRS has interpreted the statute to mean that they do not have to provide notice to these third parties when they request access to these records. The shutdown, they said, was the result of congressional concerns that in some cases, sending a subpoena notice — such as when the IRS is trying to locate assets — could cause a taxpayer to turn over those assets before the government could. to act.
limits
Importantly, the court clarified that they were not ignoring “any apprehension about the scope of the IRS’s authority to issue subpoenas”—a central privacy concern. And they noted that even the government concedes that the phrase “in aid of collection” — one of the terms of the statute — is not “limitless.”
Although the government suggests that the standard must be reasonable, the court found that “[t]However, this is not the occasion to attempt to define the precise limits of the phrase “in aid of collection”. And so they didn’t—it was enough to answer the question of whether the notice exception required the taxpayer to maintain. A legal interest in the records subpoenaed by the IRS, and to that, the court found the answer is no.
Chief Justice Roberts delivered the unanimous opinion of the Court. Justice Jackson filed a concurring opinion in which Justice Gorsuch joined.
(Updated with additional background on the case. For a deeper dive, including oral arguments, see the article below.)
