With the passage of the Inflation Reduction Act last year, the IRS found itself with $80 billion more dollars to spend and a mandate from Congress to focus on cracking down on a rather nebulous concept known as the “tax gap.” That open-ended directive to step up scrutiny on taxpayers created concern that taxpayers’ privacy might be violated in the process — concerns that were entirely ignored by progressives in Congress who manage to be surprised every time stepped-up IRS enforcement inevitably catches low-income taxpayers in its dragnet.
There were plenty of examples at the time that suggested that the IRS was not going to restrict its expanded scrutiny to taxpayers wealthy enough to have their tax data leaked to ProPublica. The most worrisome of these was a plan to allow the IRS to pull financial account data from any account with gross transactions exceeding just $600 — in other words, just about every adult’s bank and investment accounts.
But a case currently before the Supreme Court should leave taxpayers even more skeptical of the IRS’s ability to respect taxpayers’ rights in its pursuit of tax cheats. This case, Polselli v. IRS, asks the Court to determine whether merely being associated with a delinquent taxpayer leaves a taxpayer as fair game for IRS snooping.
Remo Polselli owes the federal government a lot of money. No one disputes that he owes $2 million in back taxes, interest, and penalties. In seeking to recoup Polselli’s unpaid taxes, IRS agents issued summonses to his bank, not notifying Polselli, demanding his financial records. To this point, the IRS acted legally — the IRS can demand financial records from a delinquent taxpayer’s accounts.
But then the IRS took things a step further. Seeking to track down what it believed were Polselli’s assets that he was hiding, the IRS then issued summonses for information on Polselli’s wife’s account, as well as the law firm that Polselli was a client of. Not only that, the IRS failed to notify these taxpayers, who were not delinquent, depriving them of an opportunity to dispute the summons in court. The IRS generally must notify taxpayers when it demands records from a third party, unless the summonses are “in aid of” a collection against a delinquent taxpayer.
Fortunately for Polselli’s wife and law firm, their banks let them know independently about the IRS’s legally dubious action, leading to the case that is now before the Supreme Court. But setting aside the legal question, which hinges on interpretation of that “in aid of” phrase, the case asks whether taxpayers can be subjected to secret IRS snooping just by virtue of being too close to someone behind on their taxes.
At this point, the Supreme Court, once again seeing the IRS in front of it for misbehaving, must feel like a principal dealing with the school troublemaker. Over just the last two years, the IRS has been handed two unanimous 9-0 defeats in front of the Supreme Court — a particularly embarrassing record given the deference courts usually show government agencies.
These two cases, CIC Services v. IRS and Boechler v. IRS, appear at first glance to be technical rulings, but really provide insight on an IRS that is both inflexible for taxpayers and indifferent to constraints it finds bothersome. In CIC Services, the IRS ignored federal law requiring it to provide a notice-and-comment period for new regulations, and tried to enforce a new regulation that had bypassed this requirement. In Boechler, the IRS tried to claim a taxpayer’s appeal of a (wrongly) assessed penalty was invalid because it was issued a single day past the 30-day deadline — a particularly ironic position given the IRS’s enormous backlog of tax returns and the fact that it just recently blew off a deadline from Treasury Secretary Janet Yellen to report on how it will use the aforementioned $80 billion.
Far from an agency that deserves a massive budget boost, the IRS begins to look more like a rogue agency that desperately needs a culture change and sufficient guardrails to protect taxpayers. The Supreme Court has done its part in recent years, but clearly occasional court defeats are not enough. Congress must stop rewarding bad behavior and look at far more meaningful reforms than blank checks.