Fact Check: Can the IRS secretly seize bank records?

The Supreme Court issued a unanimous, but controversial, decision in May allowing the IRS to summon some bank accounts, records, books, papers and other data, without notice, depriving the subject of the summons the opportunity to object to the seizure of those documents by government officials.

Probable cause

Normally, the IRS must give notice at least 23 days before accounts and records subject to a summons may be examined. In that time, the account or record holder may file a motion to quash the summons if they believe the summons to be unjustified. A bank account owner may object, for example, that there is no “probable cause” for the IRS to seize their records and that the summons therefore violates their Fourth Amendment rights.

Amendment IV

The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized. [Emphases added].

Exceptions

Congress made an exception to the notice requirement when an account or record holder has already been assessed or judged to have a tax debt. In that case, the person has already had a chance to argue their side and Congress wanted to ease the process whereby the IRS seizes funds or property to satisfy a proven debt. That is, they did not want to afford a tax debtor the opportunity to move funds out of the reach of government before it could locate and seize those funds.

Congress extended this notice exception to a summons for accounts and records of even innocent third parties if the summons is “issued in aid of the collection" of a tax debt. The question before the Supreme Court was whether third parties could have their records seized without notice even where the tax debtor has no legal interest in the third party's accounts or business.

You subpoenaed my bank records because I once had a customer who owes money?

In the case before the Supreme Court, the IRS aggressively pursued a debt of $2 million for taxes and penalties that were assessed for 13 years of underpayment. An IRS agent subpoenaed the records of a law firm that represented the debtor, hoping to discover an undisclosed bank account used by the debtor to pay for legal services. 

When the law firm responded to the IRS that it “did not retain" any records of payments by the debtor, the agent summoned the bank accounts of the law firm and one of their lawyers, directly from their banks, without notifying the law firm, the lawyer or the debtor — essentially a secret subpoena designed to prevent any of the parties from objecting to the records search until it would be too late.

Supremes allow

The law firm and the lawyer, as well as the debtor's wife, whose accounts were also secretly subpoenaed though she was not connected to the IRS debt, objected to the lack of notice, arguing that they had a right to receive notice since the debtor had no interest in their accounts — his name was not on the accounts and he had no ability to withdraw funds from those accounts.

The Supreme Court rejected their argument, holding that secret subpoenas may be issued for accounts and records, even where the debtor has no interest in those accounts, if the subpoenaed information may “aid” the IRS in collecting a debt. 

In the legislature's hands

The statute allowing searches without notice did not require that the debtor have an interest in the accounts and the Court declined to read one into the statute. If it was the intent of Congress to limit no-notice summonses to accounts partially owned by an IRS debtor, they will have to pass a new law making that clear.

Until then

Kiplinger therefore warns tax debtors to quickly make a payment arrangement to avoid infringement of privacy of uninvolved relatives.

The IRS scored a win at the U.S. Supreme Court that could impact your privacy . . . the IRS can secretly probe your bank records and potentially your relatives’ bank records without notice . . . Given that the agency has significant resources at its disposal (including the power to issue bank summonses) to collect a tax debt that you owe, it’s usually a good idea to pay the IRS taxes you owe on time or as soon as you can.

But what if you can’t pay the IRS? The IRS offers options including agreements to pay your taxes within a certain amount of time.

How far does it go?

Justice Ketanji Brown Jackson, while agreeing with the court decision allowing an exception to the notice rule even where the tax debtor has no interest in an account, still voiced concern for how broadly this exception could be applied by overzealous IRS agents. She described, in a concurrence, a disturbing, though hypothetical, case where the government might bring its resources down on a totally innocent third party.

Imagine, for example, a delinquent taxpayer who routinely visits his local mom-and-pop dry cleaning business.
Imagine also that the IRS suspects this delinquent taxpayer sometimes uses credit cards with different names.
Under a broad reading of §7609(c)(2)(D)(i), I suppose the IRS could issue a summons to the dry cleaner’s bank with out notice to the dry cleaner, seeking years of the dry cleaner’s financial records. 

She then concludes that the exception provided by Congress should only be applied on a case-by-case basis.

The bottom line is this: As I read the statute, the IRS is not necessarily exempt from notice obligations any time a
tax-delinquency matter enters the collection phase. 

Being that Justice Jackson was not able to prevail on the majority of her colleagues to include that wording in the opinion of the Court, fears have been raised that people only “remotely connected” to a tax debtor will have their accounts raided.

Verdict

The ACLU filed an amicus brief with the Court specifically warning that accepting the IRS position would make it far too easy for the IRS to claim an exception to the notice requirement.

[The IRS's] interpretation allows the IRS to drive a truck through this limited exception and to swallow the remainder of the statute, making notice the exception rather than the rule. 

The ACLU's position having been rejected, social media has seen an abundance of posts warning of the consequences.

Posts like the above, claiming that now the “IRS Can Secretly Obtain Bank Records of Americans NOT under Investigation,” are technically correct. The IRS may do so. But not always; not every American can have their records secretly summoned. A more accurate statement would add context:

The IRS can secretly obtain bank records of Americans NOT under investigation if they have some connection to a person who has been judged or assessed to have a tax debt.

We therefore judge the claim that the IRS can seize bank records without notice as technically true but in need of the above clarification. And yes, business owners should be concerned that their records may be secretly subpoenaed if they enter into transactions with tax debtors, particularly if there are multiple transactions. Close relatives like spouses should consider the possibility of being subject to a secret summons even in the absence of transactions with the debtor. 

Even Justice Clarence Thomas, a strict constitutionalist, found himself unable to assist the subjects of the secret subpoenas, stating during oral argument, “This is quite a broad statute," leaving business associates and relatives of tax debtors with the sole option of petitioning Congress to amend the law and expressly limit the use of notice exceptions. Till then, claims of secret IRS subpoenas will remain “mostly true.”