Jul 10, 2023 Understanding The Broad Authority of the IRS: A Closer Look at the Polselli Case
Recent developments in the United States legal sphere might have significant implications for U.S. taxpayers abroad, particularly those residing in Israel. In May 2023, a unanimous decision was made in the case of Polselli v. Internal Revenue Service (IRS), empowering the IRS with a sweeping ability to issue third-party summonses in the process of collecting tax debt. What’s intriguing about this development is that it includes issuing summonses without providing notice to the account holders, a previously contested area in the legal realm.
In the Polselli case, the IRS sought to collect over $2 million in unpaid taxes from taxpayer Remo Polselli. The IRS issued summonses to three banks seeking financial records from third parties, including Polselli’s wife and two law firms representing him. While these third parties were given notice by the banks who received the summonses, and one moved to quash the summons, Polselli himself was not given notice. The IRS maintained that the third-party summonses were issued “in aid of the collection of an assessment made or judgment rendered against” Polselli; therefore, they were not required to provide notice to him.
How the Polselli case affects you
This decision could significantly affect U.S. citizens living in Israel, as they might find their financial information obtainable by the IRS from third parties without their knowledge. Suppose the IRS believes that a U.S. taxpayer residing in Israel owes taxes. In that case, it can now directly summon information from third parties who might have financial dealings with the taxpayer without notifying the taxpayer.
However, the broader implications of the Polselli ruling come into sharper focus when considering existing international financial regulations, such as the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers. Therefore, in a FATCA context, foreign banks are already obligated to provide certain account information to the IRS, without individual summonses and without direct notification to the account holders.
Yet, the Polselli ruling could potentially expand the IRS’s investigative reach beyond the information already provided under FATCA. If the IRS believes that additional information not covered by FATCA reporting is needed from a foreign financial institution to aid in the collection of a tax debt, it can now issue a third-party summons to that institution without providing notice to the U.S. taxpayer involved.
These developments underscore the importance of transparency in financial affairs for U.S. taxpayers residing in Israel, and indeed anywhere outside the U.S. It highlights the need for professional advice to navigate the complex world of international taxation and ensure compliance with U.S. tax regulations. Even as the regulations evolve, one thing remains clear: The IRS is equipped with broad powers in its mission to combat tax evasion, and U.S. taxpayers around the globe should take note.