Frost Law
The Supreme Court recently issued its decision in Polselli v. Internal Revenue Service, resolving a circuit split which resurfaced in 2022 when the Sixth Circuit ruled that third-party recordkeepers’ account holders are not entitled to notice if a summons is issued “in aid of the collection” of delinquent tax liabilities. In its unanimous, and taxpayer unfriendly ruling, the Supreme Court affirmed the Sixth Circuit’s ruling, without clarifying the scope of the Internal Revenue Service’s (IRS’s) summons authority and notice requirements. We have followed this development from start to finish, so we invite our readers to join us here for our final thoughts.
Briefly, the facts again in Polselli involved a taxpayer who was assessed millions of dollars in back taxes and who the IRS suspected was hiding money. The IRS also suspected that the taxpayer’s wife and law firm may have been in possession of information that could shed light on the situation. Without providing notice to either the wife or law firm, the IRS contacted their banks, issuing summonses for their bank records. The bank informed the taxpayer’s wife and the law firm that this was happening. The taxpayer's wife and law firm brought an action to quash the summonses.
The Supreme Court ruled in the IRS’s favor, rejecting the petitioners’ argument that the Internal Revenue Code (IRC) §7609(c)(2)(D)(i) exception to the notice requirement “applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.” Importantly, the Supreme Court stated that: “[t]he Court does not dismiss any apprehension about the scope of the IRS’s power to issue summonses and does not define the precise contours of the phrase “in aid of the collection.”
A general takeaway here is that the Supreme Court delivered a rather rigid textualist opinion. It’s fair to say that the Justices adhered to the “letter of the law” in this case. They gave little, if any, weight to legislative intent or policy arguments. In Polselli, textualism wins.
More importantly, we note that Polselli leaves the IRS with “considerable power to go after unpaid taxes.” How much? In her concurring opinion, Justice Jackson expresses her own belief that the IRS’s power is not “boundless;” however, the opinion clarifies that Polselli would not be “the case to try to define the precise bounds of the phrase “in aid of the collection.” We may need to just wait for Congress to delineate those boundaries.
Finally, Justice Jackson’s concurrence is especially poignant, effectively illustrating in practical terms just how an overly broad power here is highly intrusive to third parties who are not receiving notice. In one hypothetical, Justice Jackson considers a mom-and-pop dry cleaning business, which unlike a law firm, is not accustomed to dealing with customers' financial or private matters. They only deal with actual dirty laundry. The IRS believes its customer, a delinquent taxpayer, may sometimes use aliases on credit cards. Unchecked, the IRS would be able to summon the dry cleaner’s bank records, without notice, to look for information that would aid its tax collection efforts. Justice Jackson expresses that “[t]he owners would have to rely on the recipient of the summons (the bank) to articulate their privacy concerns and negotiate with the agency.”
The Supreme Court recently issued its decision in Polselli v. Internal Revenue Service, resolving a circuit split which resurfaced in 2022 when the Sixth Circuit ruled that third-party recordkeepers’ account holders are not entitled to notice if a summons is issued “in aid of the collection” of delinquent tax liabilities. In its unanimous, and taxpayer unfriendly ruling, the Supreme Court affirmed the Sixth Circuit’s ruling, without clarifying the scope of the Internal Revenue Service’s (IRS’s) summons authority and notice requirements. We have followed this development from start to finish, so we invite our readers to join us here for our final thoughts.
Briefly, the facts again in Polselli involved a taxpayer who was assessed millions of dollars in back taxes and who the IRS suspected was hiding money. The IRS also suspected that the taxpayer’s wife and law firm may have been in possession of information that could shed light on the situation. Without providing notice to either the wife or law firm, the IRS contacted their banks, issuing summonses for their bank records. The bank informed the taxpayer’s wife and the law firm that this was happening. The taxpayer's wife and law firm brought an action to quash the summonses.
The Supreme Court ruled in the IRS’s favor, rejecting the petitioners’ argument that the Internal Revenue Code (IRC) §7609(c)(2)(D)(i) exception to the notice requirement “applies only if the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.” Importantly, the Supreme Court stated that: “[t]he Court does not dismiss any apprehension about the scope of the IRS’s power to issue summonses and does not define the precise contours of the phrase “in aid of the collection.”
A general takeaway here is that the Supreme Court delivered a rather rigid textualist opinion. It’s fair to say that the Justices adhered to the “letter of the law” in this case. They gave little, if any, weight to legislative intent or policy arguments. In Polselli, textualism wins.
More importantly, we note that Polselli leaves the IRS with “considerable power to go after unpaid taxes.” How much? In her concurring opinion, Justice Jackson expresses her own belief that the IRS’s power is not “boundless;” however, the opinion clarifies that Polselli would not be “the case to try to define the precise bounds of the phrase “in aid of the collection.” We may need to just wait for Congress to delineate those boundaries.
Finally, Justice Jackson’s concurrence is especially poignant, effectively illustrating in practical terms just how an overly broad power here is highly intrusive to third parties who are not receiving notice. In one hypothetical, Justice Jackson considers a mom-and-pop dry cleaning business, which unlike a law firm, is not accustomed to dealing with customers' financial or private matters. They only deal with actual dirty laundry. The IRS believes its customer, a delinquent taxpayer, may sometimes use aliases on credit cards. Unchecked, the IRS would be able to summon the dry cleaner’s bank records, without notice, to look for information that would aid its tax collection efforts. Justice Jackson expresses that “[t]he owners would have to rely on the recipient of the summons (the bank) to articulate their privacy concerns and negotiate with the agency.”
