Supreme Court To Decide If IRS Can Secretly Access Bank Records

Fresh off a new injection of $45 billion to ramp up its enforcement efforts, the IRS is calling on the U.S. Supreme Court to allow its agents to secretly obtain financial records, without ever notifying the account holders. Although the case, which will be argued in March, centers around an arcane statutory dispute, it will have massive implications for the Fourth Amendment rights of taxpayers nationwide.

Now a broad coalition from all across the political spectrum, including the ACLU, the Cato Institute, the Center for Taxpayer Rights, the Institute for Justice, and the U.S. Chamber of Commerce, is urging the Supreme Court to limit the IRS’s power.

If the Supreme Court sides with the IRS, the ruling would grant the agency “effectively unfettered power to seek the complete financial records of anyone with even a tenuous connection to a delinquent taxpayer,” the Institute for Justice warned in its amicus brief. Worse, the IRS could “comb through these third parties’ most sensitive financial records without their knowledge, let alone any opportunity to object.” In fact, “the agency may demand the production of anyone’s most private financial records based on no standard other than that some government agent wants to see them.”

Unfortunately, this is not hypothetical or hyperbole. The case started when an IRS agent suspected that Remo Polselli had been concealing his assets through bank accounts held in his wife’s name. The agent then sent summonses to Hanna Karcho Polselli’s bank as well as to the banks for two law firm Remo had patronized.

Those summonses ordered that the banks “appear before” the IRS “to give testimony” and “to produce for examination…all bank statements relative to the accounts” for Hanna and those law firms. Despite this massive intrusion into their financial privacy, the IRS didn’t even bother to send notice to the two firms or Hanna that it had demanded access to reams of their banking records.

“The problem isn’t just that the government’s rule is un-American or that the IRS fancies itself the NSA,” they argued in their brief. “An IRS agent doesn’t get to secretly comb through years of law-firm bank records—and all the attorney-client information they contain—just because he thinks doing so might be convenient.”

Under federal law, the IRS does have broad power to subpoena personal financial information from third-party record keepers. But the IRS is also required to send notice to “any person…identified in the summons.”

Once notified, those affected can petition a federal court to quash the summons. But if an individual wasn’t notified, they can’t quash the summons. In turn, that effectively renders them powerless to prevent their own records from being handed over. Simply put, providing notice is key to ensure due process and to preserve financial privacy.

The notice requirement has a handful of narrow exceptions, like for cases where “the giving of notice may lead to attempts to conceal, destroy, or alter records.”

But the IRS is attempting to carve out a massive loophole by interpreting another provision that exempts sending notice for cases “in aid of collection” of a tax assessment. Since the IRS was trying to collect on the tax assessment imposed on Remo, Officer Bryant claimed that provision allowed he could dispense with any requirement to notify his law firms or his wife.

If the IRS’s interpretation were accurate, it would completely swallow the rule and nullify the protections Congress enacted. Nevertheless, both a federal district court and the Sixth Circuit U.S. Court of Appeals adopted that line of reasoning and sided with the IRS.

That prompted a sharp dissent from Judge Raymond Kethledge, who blasted the majority for ignoring the “significant intrusion upon the privacy” of Hanna and the two law firms. Accepting the IRS’s interpretation, he wrote, would render the notice requirements “entirely superfluous,” and would mean “Congress was wasting its time in writing” those protections for taxpayers.

And those protections are vital. As the Chamber of Commerce noted in its amicus brief, “many businesses have a far greater need for these protections because their records contain the privileged or confidential information of their customers or clients.” Should the Supreme Court side with the IRS, businesses would be forced into a “no-win situation,” the Chamber cautioned.

They could “either notify their clients and provoke the IRS or provide no notification and alienate their clients.” If a business chooses the first option, sending notice could trigger a years-long litigation battle, like the one currently ensnaring the law firms representing Hanna.

On the other hand, failing to notify would mean disclosing and turning over ledgers, invoices, insurance policies as well as “privileged and confidential customer or client information to the IRS.” Upholding the IRS’s interpretation would be particularly damaging for businesses that offer highly sensitive services, like financial planners, accountancies, brokerages, and law firms, to name just a few.

After all, “to ensure that they receive the best legal, tax, and financial advice, clients must be willing to share sensitive—and sometimes damaging—information about themselves.” Yet individuals may be much less likely to “fully trust” those firms and “share such information if they have reason to believe that it will be disclosed to the government without any opportunity to challenge the disclosure.”

While comprehensive data on how often the IRS flexes its summons power is lacking, that number is sure to skyrocket should the agency prevail at the Supreme Court. Already, the Chamber reported that one of its member banks had received around 3,900 summonses alone from the IRS in just one year.

Even less sensitive industries would still be harmed by a decision in favor of the IRS. As the Chamber wrote, many businesses now operate rewards programs that routinely collect personal contact information from their customers and clients. Moreover, with firms increasingly reliant on acquiring, aggregating, and analyzing data from consumers, that data “has become a prized commodity upon which many businesses depend for their livelihood.” The sheer scope and scale of collecting those records makes protecting the Fourth Amendment rights of third parties even more critical.

“The right to be left alone,” the Cato Institute and Rutherford Institute asserted in an amicus brief, “was a leading motive for the Revolution and the Constitution that followed” from King George III’s “wanton disregard for personal security—not only of one’s home and person, but of papers and effects as well.” One pivotal case that inspired the Framers, they noted, called a person’s papers their “dearest property, and are so far from enduring a seizure, that they will hardly bear an inspection.”

Since the Framers wanted to limit “the government’s ability to peer secretly into the personal affairs of its citizens,” the IRS’s interpretation of the notice exemptions would have been odious to the Founding generation,” the two institutes argued. “Such a sprawling assertion of authority to investigate, particularly clandestinely and beyond the reproach of courts, is repugnant to the nation’s dearest values.”