IRS not required to notify you when investigating another party

How well do you get along with your spouse or ex? Or boss? Or the company’s president? It’s not an idle question. The Supreme Court has settled the question of whether the IRS must provide third parties notice when it subpoenas their bank accounts to uncover a tax delinquent’s assets. The answer is no.

Other people’s money, other people’s bank accounts

You can shuffle money around into different bank accounts you own, but if you think you’re hiding the money from the IRS, think again. The IRS can subpoena those bank accounts and trace your income. When it does, it must provide you with notice, which you can contest in court.

But what if you’re not hiding the money? This is what Hanna Polselli and her lawyers confronted. Hanna’s husband owed the IRS north of $2 million, and the IRS, anxious to not let such a large sum go uncollected, subpoenaed her bank accounts and the bank accounts of her lawyers to try to trace her husband’s money.

The issue in the case was whether the IRS must provide notice to you if it’s subpoenaing your bank records because it’s trying to nail down another delinquent taxpayer’s assets.

Two sections of the Internal Revenue Code are relevant:

FLSA Compliance D
  • IRC § 7609(a)(1), which requires the IRS to notify anyone identified in a bank summons.
  • IRC § 7609(c)(2)(D)(I), which excuses the IRS from notifying an individual if it issues a summons in aid of the collection of an assessment.

The second subsection was at issue in this case.

In the lower courts, Hanna and her lawyers said the exception to the notice requirement applied only if the delinquent taxpayer had a legal interest in the accounts or records summoned by the IRS. The lower courts ruled in favor of the IRS. The Supreme Court, in a unanimous opinion, affirmed the lower courts’ rulings.

Supreme Court: The subsection means what it says—if Congress wanted the exception to apply only when a delinquent taxpayer had a legal interest in another person’s accounts, it could have said so.

The subsection, according to the Court’s opinion, has three conditions:

  • A summons must be issued in aid of collection.
  • It must aid the collection of an assessment made or judgment rendered.
  • A summons must aid the collection of assessments or judgments against the person with respect to whose liability the summons is issued.

None of these conditions require a tax-delinquent taxpayer to have an interest in the subpoenaed accounts.

The case is Polselli v. IRS.

The takeaway

Maybe you don’t want the IRS snooping around your bank records to determine someone else’s tax liability. You now have no way of knowing what the IRS is up to. And without the IRS providing you notice, you can’t go to court to stop it.

You could also be left with the impression that the IRS now has incredible power to summon anyone’s records at any time for anything. A concurring opinion by Justices Jackson and Gorsuch tries to allay this fear.

Justice Jackson: The IRS’ obligation to collect delinquent taxes and third parties’ right to privacy must be balanced. Where providing notice could frustrate the IRS’ ability to effectively administer the tax laws, the law would tilt in its favor. But if the IRS’ collection efforts aren’t thwarted, notice to a third party would be appropriate.