The
Supreme Court
hears a case on March 29 that will test whether there is any real limit to the frighteningly invasive power of the
IRS
.
In Polselli v. IRS, the high court will resolve a matter of statutory interpretation on which circuit courts have disagreed.
NEGLIGENT IRS MISSES DEADLINE TO ACCOUNT FOR OWN MONEY
The case involves disputes about two complicated, badly written subclauses in the same section of a law governing IRS authority. Although the language is confusing, the question itself is plain. If the IRS is investigating Person A, may the agency rifle through the accounts of others who keep records pertaining to, or doing business with, Person A, without telling those others and without giving them a chance to convince a court to quash the search?
In a more rational legal regime, the Constitution’s Fourth Amendment would be directly at issue. The amendment bars law enforcement agencies from warrantless searches of “houses, papers, and effects,” but the Supreme Court has treated the IRS as something other than law enforcement, ruling in 1964 that the agency “need not meet any standard of probable cause to obtain enforcement of [IRS] summons.” Never mind that, for ordinary taxpayers, the IRS is just as fearsome as the local sheriff.
A pair of further Supreme Court cases seemed to expand the IRS’s summons power too far, so Congress worried the agency could go on what the court called “’fishing expeditions’ into the private affairs of bank depositors.” In direct response to those decisions, Congress adopted 26 U.S.C. § 7609, requiring the IRS at least to give notice to people whose records it is trying to obtain. In doing so, however, Congress created an exception so that the IRS need not inform direct targets of its suspicion, to stop the targets from hiding evidence of wrongdoing in the meantime.
The entire reason Congress created
section 7609
was to protect third parties (rather than direct targets) from IRS invasion without notice. Still, the “exception” it provided is horribly written. It’s not just word salad, but word salad blended into a smoothie. The exception says the IRS need not provide notice of summonses “issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).”
Appeals court judges themselves repeatedly said they had trouble making sense of what Congress wrote. Unfortunately, two federal appeals courts ruled that the “in aid of” language essentially reopens the door for the IRS to search almost anybody’s account having any nexus to the targeted person’s account, as long as the IRS asserts the third-party search is “in aid of” its investigatory powers. Again, this is a search without notice to the third party.
Not only do such third-party searches without notice violate the IRS’s own published “Taxpayer Bill of Rights” (right No. 8), but they also pose massive problems for businesses, as laid out in numerous examples in an
amicus brief
from the U.S. Chamber of Commerce, filed against the IRS. To name just one example, an expansive reading of IRS powers could put attorney-client privilege at serious risk if the IRS demands access to an attorney’s files as well.
Unlike the other two circuit courts, the 9th Circuit Court of Appeals (for once) got this matter right. It decided that to read the subsections of section 7609 the way the IRS does would mean that what was intended as a limited exception “would swallow the rule itself.” Why would Congress create a legal provision to narrow the scope of IRS power and then create a subclause that expands its power beyond even what it had been previously? Of course, that’s illogical.
Alas, two of three judges on the 6th Circuit Court of Appeals ruled otherwise, which is why the case is now before the Supreme Court. In
dissent
, conservative Judge Raymond Kethledge offered good sense. He noted that the Supreme Court consistently makes clear that judges should not “interpret a statutory provision so as to render superfluous other provisions in the same enactment.” To say the exception is bigger than the rule itself obviously would render the rule, and Congress’s entire point in section 7609, superfluous. As Kethledge wrote, it would “maul the bulk of section 7609.”
Enough is enough. The nation was founded on a conception of limited government, with the governors accountable to the people. The IRS, for whatever reason, already is, for most intents and purposes, accountable to almost nobody. In section 7609, Congress quite obviously tried to put at least some guardrails on the agency. For the Supreme Court to allow the IRS to break those guardrails should be anathema.
