IRS gains broad powers to request personal tax information after Supreme Court decision

How Much Can the IRS Spy on Your Business Without You Knowing? Now even more so, following a recent Supreme Court ruling that has raised privacy concerns among experts.

Last month, the country's highest court unanimously sided with the IRS in the Polselli v. Internal Revenue Service case, solidifying the IRS' ability to request documents or financial records from anyone associated with a defaulting taxpayer without requiring third parties to do so notify.

The decision strengthened the tax agency's ability to keep information under wraps, experts say, and gave the IRS too much power and too few limits on how that information could be used.

“I think the concern would be that this would ultimately give the IRS access to information purportedly related to collecting taxes from Taxpayer A, but then it would inevitably be information about Taxpayer B that it would not otherwise have had access to would be.” the IRS,” Michael Sardar, a tax litigation attorney and partner at Kostelanetz LLP, told Yahoo Finance.

Dry cleaning theory

Judge Ketanji Brown Jackson used the example of a dry cleaner in the court letter to illustrate the possible extent of this law. In summary, she offered the following.

Think of a defaulting taxpayer who regularly visits a small dry cleaner. If the IRS believes the dry cleaner's financial records could help collect taxes, the agency could subpoena the dry cleaner's bank to file years of financial reports without even notifying the store owners.

In this scenario, the store owners have no option to opt out of the pickup request.

“It's really important to give someone a chance to go into court and say, ‘Wait, I'm this dry cleaners who's just an innocent third party just doing normal business,'” says Tyler Martinez , senior counsel at National Taxpayers Union Foundation, told Yahoo Finance.

The ruling also lacked clarity as to the extent to which the IRS could use the information obtained. Although the court's brief states that the agency can only use the subpoena against the taxpayer targeted by the subpoena, experts fear the IRS could use the same request as a pretext for another case.

“While the subpoena should be for Taxpayer A, there is concern that if the IRS finds anything suspicious in a third party's records, the IRS will use this information to open a further investigation against another taxpayer,” Martinez said.

Although Sardar noted that there are safeguards within the IRS to prevent the overlapping of information from different cases, he acknowledges that typical bank records are not sensitive information.

A closeup of a stamped file folder

A closeup of a file folder stamped “Confidential” lies on top of an IRS Form 1040 document.

Another problem is simply the issue of privacy.

“I think judges in general are concerned about people cheating the system to not pay taxes. I don't think that should be the attitude of judges,” Martinez said. “You should treat this like any other law enforcement context you need to make known and give people the opportunity to defend their privacy rights in court.” Definitely when it comes to third parties.

“For privacy reasons, what information we want to provide to the IRS, one would have hoped the court would have paid a little more attention to that aspect,” Sardar added.

Polselli vs Internal Revenue Service

All the drama began when an IRS agent suspected that Remo Polselli, a taxpayer who owed the IRS $2 million in unpaid taxes and penalties, was hiding assets related to his business ventures. The officer contacted Polselli's law firm, of which he is a long-time client, and unsuccessfully requested documentation — including invoices, statements, canceled checks and wire transfers.

The officer then requested the banks to obtain financial records about Poselli, Poselli's wife, and his law firm. The law firms filed a federal lawsuit to block the applications after learning of their banks' subpoena.

However, the court concluded that the law firm could not block the application because no notification was required.

“The key is that if you don't get fired, you have no way of doing anything about it,” Sardar said. “It's a big deal, the IRS can get records on you and you won't even get a notice about it.”

When notification is required

FILE - The exterior of the Internal Revenue Service (IRS) building in Washington March 22, 2013. To stop personal threats against IRS employees, the agency is announcing it will begin capping the number of workers.  personal data to communicate with taxpayers.  (AP Photo/Susan Walsh, file)

The exterior of the Internal Revenue Service (IRS) building in Washington, March 22, 2013. (AP Photo/Susan Walsh, file)

An important distinction made by the Supreme Court in this case is that the IRS can issue a subpoena to help determine the taxes due, but is required to provide notices under IRC 7609(a)(1). . However, if the purpose of the subpoena is to collect the balance, no notification is required under IRC 7609(c)(2)(D).

The decision helps the agency collect unpaid taxes in two ways. First, taxpayers or their employees cannot refuse an application because they do not know it exists, and second, malicious debtors cannot assign their assets in someone else's name.

“What sometimes happens with tax collection cases is that taxpayers start doing creative things so that the money isn't in their name,” Sardar said, “so I'm not shocked or terribly upset that this decision is the way it is.” she is.”

But Sardar still believes the ruling could have been more specific to address third-party privacy concerns.

“I'm personally disappointed,” he said. “I would have liked more consideration.”

Rebecca Chen is a reporter for Yahoo Finance and previously worked as a CPA for Investment Tax.

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