Taxpayers’ privacy rights hang in the balance in a Supreme Court case challenging the IRS’ authority to examine financial documents in third-party investigations.
The challenge questions whether an individual who is not the subject of an IRS probe must be given notice when their financial records and dealings are reviewed in another taxpayer’s investigation.
Groups concerned about government accountability say the legal battle has major privacy implications for individuals, especially given the Biden administration’s plan to beef up the IRS.
“It is important to make sure that the IRS keeps to its mandate to focus on the people who owe it money and not go rifling around people’s personal records,” said Devin Watkins, an attorney with the Competitive Enterprise Institute.
Richard Samp, a senior attorney with the New Civil Liberties Alliance, said tax attorneys and civil rights advocates are increasingly concerned about the IRS’ trend of going after a third-party’s records to aid in its collection of a taxpayer’s information.
“The government needs to be able to enforce the tax laws in order to generate the revenues necessary to fund its operation,” Mr. Samp said. “But the IRS has increasingly taken the position that its efforts to obtain taxpayer information are virtually never subject to challenge. That’s not what the tax law says, and courts should be vigilant in ensuring that the IRS abides by statutory and constitutional constraints on its power.”
The challenge was brought to the high court by two law firms, Abraham & Rose, P.L.C., and Jerry R. Abraham, P.C. They represented Remo Polselli, a delinquent taxpayer, and his wife, Hanna Karcho Polselli.
An IRS agent sought the law firms’ bank records over a multiyear period but did not give the firms notice. The law firms were notified by the bank and moved to halt the summons. The firms argue that the move violates their privacy interests and those of their other clients, as well.
The IRS had summoned the information to find the source of Mr. Polselli’s funds for paying the law firms. The feds sought roughly $2 million from him.
Generally, the IRS is required to give a third-party notice when it seeks records so the individual can protest the summons.
However, there are some exceptions under the Internal Revenue Code. For example, if a judgment is rendered against an individual, the IRS does not have to provide notice to a third party when it seeks records in connection with collecting on the judgment.
Lawyers for the law firms argued in its filing to the Supreme Court in June that Congress, when drafting laws pertaining to the IRS’ notice requirements, did “not give the IRS carte blanche to seize private records from innocent third parties whenever it is trying to collect a tax assessment.”
The IRS, meanwhile, had urged the court not to review the case, saying the justices should leave the lower court’s ruling in place, which sided with the tax-collection agency.
U.S. Solicitor General Elizabeth Prelogar argued in her court filing that there are other safeguards in place to protect privacy interests.
“In order to facilitate the work of the Secretary of the Treasury and the IRS in enforcing the Nation’s revenue laws, ascertaining taxes owed, and collecting unpaid taxes, Congress has given the government ‘broad latitude’ to issue summonses requiring the production of financial records,” Ms. Prelogar wrote in the government’s brief.
The U.S. Circuit Court for the 9th Circuit, though, has ruled against the IRS in a separate case. The 9th Circuit ruled that an innocent person must be given notice when the IRS seeks the individual’s information in aid of its investigations and collections efforts.
Given the split in lower court rulings, the Supreme Court announced this month that it will hear the firms’ appeal.
It took four justices to vote in favor of hearing the dispute, but a date for oral arguments has not yet been scheduled.
A spokesperson from the Justice Department did not immediately respond to a request for comment.
The Biden administration has allocated to the IRS $80 billion from the $740 billion Inflation Reduction Act. The agency plans to add personnel and resources to close the $600 billion annual deficit between the taxes it collects and the levies that are owed.
Pete Sepp, president of the National Taxpayers Union Foundation, said the increase in staffing could give the IRS even further reach into taxpayers’ privacy interests and impact their remedies.
“The latitude that the IRS can develop for itself in court combined with more resources to push its positions further and on many, many more taxpayers represents a very troubling combination,” Mr. Sepp said.
Mike Palicz, federal affairs manager for Americans for Tax Reform, was critical of the IRS, citing recent scandals.
“The IRS has demonstrated time and again that it can’t be … trusted to handle private taxpayer information. It’s been 555 days since the IRS selectively leaked taxpayer information to ProPublica and IRS leadership has zero answers,” Mr. Palicz said in an email. “The IRS didn’t want this case taken up because they think they can snoop on your bank account with impunity.
“This is a positive development for taxpayers who want to see IRS abuse and misuse of power [reined] in.”
The case is Hanna Karcho Polselli, et al. v. Internal Revenue Service.
• Alex Swoyer can be reached at aswoyer@washingtontimes.com.
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