Taxpayer Call to IRS Automated Call Site Broadcast Over Radio on Howard Stern Show: Judge Hits Taxpayer With the Hein

Perhaps I am the last person on the planet to know about this case, but in an opinion issued on March 9, 2018, Judge Burroughs of the District of Massachusetts found that the broadcasting of a conversation between a taxpayer and an IRS collector working at its Automated Call Site (ACS) did not give rise to a claim against Howard Stern nor could that taxpayer seek a claim against the IRS under the Federal Tort Claim Act; however, the case can move forward as a violation of the disclosure laws under IRC 6103. For anyone with a curious nature and the love of an amazing story, find the opinion in Barrigas v. United States here.

When I read the opening lines of the case I wondered how in the world would someone calling ACS have their conversation broadcast on a radio show. Not long into the opinion I found out. Truth is stranger than fiction and no one could have made up a case like this. An ACS employee decided that it would be a good idea while he was working to give a call to the Howard Stern radio show. His call was placed on hold by the show (some poetic justice there) and he remained on hold for some unspecified time. While on hold with the Howard Stern show, he received a call from a taxpayer concerning her account. The taxpayer had a payment plan, and while paying on the plan the IRS offset her current year tax return.

So, the ACS employee and the taxpayer begin a 53 minute conversation about her issue and at some point in that conversation the ACS employee comes off of hold with the Howard Stern show and goes live. Now the conversation, at least the ACS’ employee’s side of the conversation, gets broadcast to the listeners of the Howard Stern show. Mr. Stern is puzzled by the conversation taking place. He and another gentleman make comments about it and apparently tried without success to get the attention of the ACS employee. At the end of the three minute portion of the conversation which was broadcast (the transcript of which is spelled out in the opinion), the ACS employee provides the telephone number of the taxpayer. The providing of that telephone number apparently allowed alert listeners of the show to light up the phone of the taxpayer.

The taxpayer was not happy or amused that her conversation with ACS was partly broadcast over the radio, and available for some time thereafter on its web site, so she brought suit against the IRS and Howard Stern. We do not learn from the case the fate of the ACS employee. One suspects that the manager of the ACS employee will be writing memos for the remainder of their career. The career of the ACS employee may be cut short by this episode. Look for a new provision in the IRM directing ACS employees not to call talk radio shows while on duty.

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Reading this post will not bring you much tax knowledge, but how could we not write about such a case. It’s probably best to read the opinion rather than the post but I will provide you with a distilled version of the legal issues and the approach the court took to those issues. For me, the most important thing about the case is that it could exist at all.

Tort Claim Against IRS

The first issue addressed is the taxpayer’s claim against the IRS using the Federal Tort Claims Act. This Act provides a limited waiver of sovereign immunity. Although the Act waives sovereign immunity, it includes a specific exception to the waiver for tax matters for “”[a]ny claim arising in respect of the assessment or collection of any tax or customs duty. . . .” 28 U.S.C. § 2680(c). In the end, the court finds that the exception applies to this situation. This determination keeps the IRS from having liability for damages to the taxpayer arising out of the on air conversation. The taxpayer argued that the phone call by the ACS employee was clearly outside of his duties as an IRS employee and that created an exception to the rule limiting the waiver of sovereign immunity. The court found that basically every time the IRS would get into a bad situation, the agent would be acting outside the scope of their duties since the IRS was not going to give them duties that would harm people in a tortious manner. In this section of the court’s discussion, it did cite to another case in which an IRS employee checking out a casualty loss on a taxpayer’s property took a picture that captured someone standing in a house adjacent to the property in question in less clothes than the individual wanted to be caught on camera. That case provides just another example of the many ways one could not predict that trouble could arise.

Claim against Howard Stern

After dismissing the claim against the IRS for tort damages, the court next looked at the claim against Howard Stern. It determined that Mr. Stern had done nothing wrong by picking up the call from the IRS employee and acknowledged that the call was confusing to Mr. Stern when first received. Her first claim is one of invasion of privacy under Massachusetts’s law. The court found that the actions of Mr. Stern could not be viewed as an intentional act to invade her privacy. The court further found that even if Mr. Stern’s actions were viewed as intentional, “[p]laintiff has not plausibly alleged an unreasonable, substantial, or serious intrusion into highly personal information. To state a claim for invasion of privacy, Plaintiff must prove that there was ‘[1] a gathering and dissemination of facts of a private nature that [2] resulted in an unreasonable, substantial or serious interference with [her] privacy.’”

She alleged that Mr. Stern was negligent in broadcasting the information. Here, the court found ‘[p]laintiff has failed to state a claim under the Massachusetts Privacy Act because, among other things, the disclosed information was not sufficiently personal or intimate in nature.” Most of the conversation disclosed no information about her because the radio show only picked up what the IRS employee was saying and not what the taxpayer was saying. This was not a conference call situation. The data available from the one-sided conversation provided little information about the taxpayer and if the IRS employee had not mentioned her phone number would have provided no information about her.

Her last claim was for intentional infliction of emotional distress. Here again, the court could not find the intent on the part of Mr. Stern necessary for her to succeed. So, it dismissed this count as well and dismissed Mr. Stern and his company from the case.

Disclosure

What remains after this opinion is the cause of action seeking damages for the IRS disclosing tax return information. The court did not discuss the disclosure violation aspect of the lawsuit other than to say that it was not dismissing that part of the case. I will be surprised if we ever see an opinion on that part of the case because I expect that the IRS will work hard to settle that aspect of the case. If it does not, however, we will get the chance for another interesting blog post.

 

The Freedom of Information Act and the Office of Professional Responsibility

Working for over three decades for Chief Counsel’s office, one of my goals was to avoid disclosure issues both on a personal and professional level. On a personal level, I wanted to know enough to keep out of trouble and on a professional level I wanted to avoid getting labeled as someone who knew disclosure law because that could lead to more assignments regarding disclosure issues which I did not want. At Chief Counsel’s office, FOIA was lumped in with IRC 6103 and the Privacy Act. Practicing at a clinic, I only want to know enough about the Office of Professional Responsibility (OPR) to avoid having contact with it. Just as I did not want to know more about section 6103 than I needed in order to avoid trouble while working at Chief Counsel’s office, I do not want to learn more about OPR. I want to know the ethical rules but not what happens when you break them, because I hope that is knowledge I will never need.

Today’s case takes me into the confluence of two things I try to avoid and yet the case has important lessons worth discussion. In Waterman v. IRS, 121 AFTR2d 2018-__(D.D.C. 1-24-2018), the issue before the court is a request for records from OPR regarding an investigation of an attorney. The attorney, Brad Waterman, practices in D.C. and has for several decades. He graduated from my law school the year before me and we have met on several occasions. He has an excellent practice and the last time we met he was splitting his time between D.C. and Florida, depending on the season. The fact that he is seeking records from OPR concerning an investigation does not mean he engaged in inappropriate behavior. I know nothing about the investigation other than it was quickly closed which, it turns out, is his problem in this case. His case caused OPR to change its procedures despite, or maybe because of, his FOIA difficulties to make it easier for someone in his situation to obtain records from OPR.

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In representing a client in a matter involving a tax exempt bond, Mr. Waterman caused the revenue agent in the IRS Tax Exempt Bond office to feel that Mr. Waterman engaged in misconduct. The revenue agent, through his manager, made a referral to OPR. After investigation, OPR determined that “the allegation against Waterman did not warrant further inquiries or action.” I recently attended the ABA Tax Section meeting, at which I attended the Standards of Practice committee meeting in an effort to keep up on ethical issues. At that meeting, the director of OPR, Steve Whitlock, spoke and he talked about this case. I began writing this post on the plane to San Diego to attend the meeting. So, when the director started talking about this case, I woke up from my normal meeting stupor and started listening carefully. I hope I heard and understood him correctly.

Apparently, OPR decided not to pursue this case without sending out a letter to Mr. Waterman asking him for information. OPR regularly determines that many of the referrals it receives do not warrant further investigation and do not require making the referred individual submit material. When it makes this decision at the internal investigation stage, the case is closed with a letter to the individual informing the individual of the closure of the case without need for input from the individual. This was the normal procedure at the time OPR closed Mr. Waterman’s case. It was also, and still is I believe, the normal procedure for the OPR letter informing the individual of its conclusion to also inform the individual that OPR would retain the file on the matter for 25 years and that it reserved the right to reference the file in any future OPR investigations. Ouch. I suspect that receiving such a letter with the language about retention drove Mr. Waterman to want to know as much about the referral and investigation as possible in the event that it might have future ramifications.

The problem Mr. Waterman faced in trying to obtain information about the referral is that because OPR closed its investigation at the time of the sending of the letter, he could not use the section 6103 procedures, see here and here, that OPR suggests individuals use to obtain information about the referral. Had his case not been closed with an early letter, he would have instead received a far more ominous letter informing him of the investigation and asking him to respond to the allegations. In that situation, OPR would not have a closed investigation but a very open one. During an open investigation, OPR suggests that individuals use the section 6103 process to obtain information about the investigation. Because his investigation was closed by the time Mr. Waterman knew he wanted information, he could not use the section 6103 procedure and instead had to revert to FOIA in order to try to obtain the information.

The OPR director stated at the ABA meeting that because of this case, OPR was changing its procedures. Now, instead of issuing the one letter and closing the case immediately, it is going to issue a preliminary letter giving the target individual 60 days to make a statement to OPR and to obtain information about the investigation through section 6103. See the following paragraph for a link to this letter. Now, a recipient of this “good” OPR letter, if there is such a thing, can use the section 6103 procedures for obtaining information before OPR closes its case 60 days later. If someone receiving this good letter fails to ask for information about the investigation under section 6103 during that 60 day period, then they will face the same FOIA obstacles which Mr. Waterman encountered and which I will discuss below. I hope that neither I nor any reader will need the benefit of this knowledge, but just in case I provide it for any who have the misfortune of a referral.

Attached to the outline created by the director of OPR for his presentation at the ABA meeting were samples of the three letters sent by OPR. The first letter is called the pre-allegation letter. This is the letter alerting the recipient of an OPR investigation that is not being dropped after the initial internal review by OPR. The second letter is called the “soft conduct letter – initial” This is the letter giving the recipient the chance to request information from OPR using IRC 6103 and avoiding the problems faced by Mr. Waterman. This letter would be sent to someone that OPR determines not to investigate further after reviewing the incoming allegations. The third letter is called the “soft conduct letter” which should be sent about 60 days after the initial soft conduct letter and which would inform the recipient that OPR was closing its investigation.

The FOIA case does not discuss the merits of the investigation. From the opinion, it is clear that Mr. Waterman made informal requests for information about the investigation and did not receive everything that he wanted. So, he made a formal FOIA request. In responding to the FOIA request, the IRS withheld certain information asserting primarily FOIA exemption 5, which “allows agencies to withhold information that would not be available by law to a party … in litigation with the agency.”

In the FOIA case, Mr. Waterman agreed that the IRS search for the requested records was adequate. I want to take a brief detour here to mention another recent FOIA case, Ayyad v. IRS, No. 8-16-cv-03032 (D. Md. 2-2-2018). In the Ayyad case, the requester did not agree that the search for the records was adequate and for good reason. An examination of the taxpayer was pending for about a decade when they filed the FOIA request seeking records, which included the administrative file developed by the revenue agent including all written correspondence relating to the examination. With relatively amazing speed for a FOIA case, the IRS identified 2,885 pages of responsive records but did not produce a Vaughn index detailing the redacted and withheld records. After the taxpayers filed their FOIA suit, the IRS informed the Court it found an additional 872 pages. Later, after the taxpayer stated records were still missing, the IRS found another 6,568 pages. Needless to say, the IRS did not cover itself in glory in this case and did not prevail. Its inadequate searches and its failures to submit proper Vaughan indices resulted in an unfavorable FOIA decision. So, it is not unimportant that Mr. Waterman agreed with the IRS search. His case was much less involved and he undoubtedly knew what records were out there, but the Ayyad case provides a note of caution in relying on the first submission of records from the IRS.

In Mr. Waterman’s case, the court found that the Vaughn index properly described the withheld documents and the basis for the exemption (also a major issue in the Ayyad case). The documents at issue were pre-deliberative and involved material created by the revenue agent who made the referral, his manager, preliminary findings of the OPR investigator, and an email between OPR and counsel. The court finds all of the documents meet the test under FOIA exemption 5. If I understood Mr. Whitlock correctly, Mr. Waterman would have received the referring documents under a section 6103 request made during an open OPR investigation. I do not believe he would receive the other two documents under section 6103.

I am very sympathetic with Mr. Waterman’s right to know the basis for the investigation. Because OPR is retaining the records for 25 years, he has genuine concerns. I applaud OPR for changing its procedures to allow other similarly situated individuals to obtain records under the more friendly section 6103 procedures. I hope the information in this post is information you and I will never need to know.

 

Seeking Disclosure of Return Information in Tax Court Case

On April 5, 2017, the Tax Court rendered a fully reviewed T.C. opinion in the case of Mescalero Apache Tribe v. Commissioner, 148 T.C. No. 11.  We do not often have two disclosure cases in one week.  It doesn’t get much better than this.

After President Nixon tried to run roughshod over the tax information of his enemies and Congress reacted with the new, extremely beefed up section 6103 in 1976, Chief Counsel, IRS soon thereafter created the Disclosure Division.  As you might imagine, new attorneys did not flock to that Division as their first (or second or third) choice.  So, Chief Counsel’s office created a rule that if you worked in the Disclosure Division for three years, you got first choice on any opening in the country.  That rule suggests how sought after a career focused on the disclosure laws was, at least with lawyers in Chief Counsel’s office; however, the disclosure provisions, despite their non-glamorous reputation, contain many important policy issues a number of which have split the circuits.  The Mescalero Apache Tribe case demonstrates one of the interesting issues that can lurk in the disclosure provisions.

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Before I move on to the disclosure issue, I want to pause and discuss an issue that the Court discusses in a footnote – appellate venue in cases brought by Indian tribes.  The issue of appellate venue in Tax Court cases has importance to the outcome of the case at the trial level because of the Golsen rule under which the Tax Court will follow the law of the circuit to which the case will be appealed.  The failure to update the appellate venue rules in 1998 when Congress created several new ways to obtain Tax Court jurisdiction led to some interesting issues we have blogged here and here.  In this case the Tax Court notes that the rules of appellate venue discuss individuals and corporations but not Indian tribes which have a sovereign nation like status.  So, the appellate venue for a Tax Court case involving a tribe put the court in uncharted waters.  It defaulted to looking to the law of the 10th Circuit which is the circuit where the tribal lands of the tribe appearing before the court are located.  I suspect that most readers will have few cases in which they represent an Indian tribe in Tax Court but the case points out in yet another context a hole that exists in the appellate venue of the Tax Court and how that hole can impact the resolution of the case when a circuit split exists on an issue.

The taxpayer is an Indian tribe that hired workers.  At issue in the Tax Court case is the classification of those workers as independent contractors or employees.  The tribe classified the works as independent contractors and the IRS seeks in the case to obtain a determination that the workers were employees.  If the IRS wins this argument, the tribe would owe the taxes on the workers under the theory that its failure to properly classify the workers and consequent failure to withhold taxes with each payment caused the non-payment of the taxes.  Section 3402(d) allows a company deemed to have employees rather than independent contractors to avoid the additional liability to the extent that the company can show that the workers independently paid the taxes to the IRS.  This offers a significant way out of what could be a heavy tax liability; however, there is one catch – the payment by the employees of their taxes is return information under IRC 6103 and return information, like tax returns themselves, comes under the broad umbrella of the protection from disclosure.

The structure of 6103 basically sets out the broad general rule at the outset that returns and return information is covered by the disclosure provisions and cannot be disclosed by the IRS.  The lengthy code section then has a multitude of exceptions.  At issue in this case is the application of one or more of the exceptions.  The case is a slightly unusual disclosure case in that both the IRS and the taxpayer before the court know the names of all of the individuals who worked for the tribe.  So, the tribe does not want taxpayer identity information but simply whether the identified individuals paid their taxes for the years at issue so that the tribe knows if the defense available in 3402(d) protects it.  Before seeking the information in discovery in the Tax Court case, the tribe sought to gather the information from the individuals who previously worked with it.  Because of time and mobility of the work force and maybe because some of the former workers did not want to provide the information, the tribe was unable to get information about all of its former workers.  So, it sent a discovery request to the IRS seeking to obtain information about a group of identified former workers and whether they paid taxes on the compensation they received.  The IRS objected to the request citing the general rule that it may not disclose this return information.  The tribe brought an action to enforce discovery citing to an exception in 6103(h) and the Tax Court, in a fully reviewed, unanimous opinion, holds that the tribe is entitled to the information through discovery.

This is a big deal for taxpayers who need information from the IRS in order to defend themselves in a tax matter.  The decision here will not open the IRS records in every case but it does provide a model for seeking information in Tax Court cases.  Because the Tax Court had not previously addressed this issue, it did so here through court conference.

As the Tax Court examined the issue of whether 6103(h)(4) provides an exception to the general rule of nondisclosure, it found the circuits were split.  The 5th Circuit held that this subsection applied to disclosures to certain federal officers because of the title of the section; however, the 10th Circuit held the 6103(h)(4), unlike earlier subparagraphs of the subsection,” speaks specifically of disclosure in a judicial or administrative tax proceeding with no indication that disclosure should be limited to officials.”  The Tax Court found that most courts had followed the 10th Circuit; however, the fact that (h)(4) created an opportunity for disclosure in a court proceeding did not mean that its language required or allowed disclosure in this circumstance.  So, the Tax Court had to look further at the statute.  Subparagraph (h)(4)(B) refers to returns and return information and another part refers only to returns.  Without getting into a significant discussion of returns and return information, it is important to understand that these are two different classes of information protected by 6103 and the tribe wants return information.  Two circuits found the subsequent reference to returns which omitted the phrase return information to create a limitation on the disclosure of return information.  The 10th Circuit had two opinions which, in different contexts, did not impose that limitation.

The Tax Court avoided that issue by looking at 6103(h)(4)(C) which allows for disclosure of both returns and return information; however, it limits disclosure to situations in which “return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.”  So, the Tax Court needed to decide if the employer/worker relationship is a transactional relationship and whether the return information of the workers directly relates to this relationship and whether “information related to the transactional relationship directly affect(s) the resolution of the issue in this case.”

The court found that the relationship met the necessary test, that the return information directly relates to this relationship and that the return information directly affects the resolution of an issue in the case.  So, it found the return information disclosable but that did not end the matter because the IRS objected that even if it is disclosable “it is still not discoverable.”  The IRS pointed to the fact that the tribe bore the burden of proof that the workers paid their taxes.  This seems like a cruel argument if the IRS has the information that will allow the taxpayer to win their case and does not have to give it to the taxpayer because the taxpayer must prove their case.  The Tax Court found that just because the tribe had the burden of proof does not mean that discovery cannot be had of the IRS citing to Tax Court Rule 70(b) which says parties can discover information “regardless of the burden of proof involved.”  Keep in mind that sometimes the IRS has the burden of proof and it should be careful of arguments like this that could limit its ability to obtain information from the taxpayer through discovery.

In a case like this the IRS represents the interest of the 70 individuals whose return information will come out even though they have no voice in the matter.  The IRS defense of disclosure makes sense but so does the Court’s determination that the information meets the exception in the statute.  Failure to allow the information to come out could cause the tribe to pay a tax which its workers already paid.  The competing policy interest of the protection of the worker’s return information and the tribe’s interests properly fall on the side of preventing the tribe from having to pay a tax it should not owe.  The case does not talk about how the return information of the workers might be protected as the information is disclosed but that issue is present.

Mailing Your Revenue Agent’s Report to a Stranger

The recent Second Circuit case of Minda v. United States, addresses the damages the IRS must pay when it sends detailed information about a taxpayer to an unrelated third party.  The issues in the case did not involve whether a disclosure violation occurred but the appropriate amount of damages for the violation.  The IRS prevailed in the sense that it limited the damages to the lowest possible amount.  The court’s analysis provides insight for others who might find their tax information wrongfully disclosed.  If you feel the IRS got off too lightly, the remedy may lie in stronger legislation.

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The IRS examined the 2007 return of Gary Minda and Nancy Findlay Frost.  The examination resulted in proposed adjustments which the revenue agent’s report (RAR) set forth.  The RAR, as usual, contained a fair amount of information about the taxpayers, such as their social security numbers and financial information.  All of this type of information fits under the definition of “return information” in IRC 6103.  The IRS mailed the RAR to an unrelated third party in Ohio.  I did not see in the opinion where Gary and Nancy live but assume from the fact they brought their wrongful disclosure action in the Eastern District of New York that the did not live in Ohio at the time of the mailing of the RAR report.  The individual in Ohio who received the report gave it to his attorney who wrote to the IRS advising the IRS of the erroneous mailing.  The attorney for the third party also sent a copy of the report to Gary and Nancy whose address, I assume, was a party of the many pieces of information in the RAR identifying them and their finances.

Gary and Nancy complained to the IRS about the fact their RAR was sent to Ohio.  The Treasury Inspector General for Tax Administration (TIGTA) conducted an investigation and found that Gary and Nancy’s examination occurred about the same time as the individual in Ohio, somehow the reports got comingled, and TIGTA could not identify the person who sent the RAR to the third party in Ohio.  The circumstances surrounding the disclosure seemed inadvertent.  The court found that Gary and Nancy “did not suffer any actual damages as a result of the unauthorized disclosure of their return information.”

When Gary and Nancy brought suit in district court seeking damages for unauthorized disclosure the IRS conceded the unauthorized disclosure and conceded liability for statutory damages but denied that they should receive any other relief.  The IRS moved for summary judgment contending that the damages were limited to $1,000 each.  The EDNY granted the motion.  The Second Circuit looked at 6103(b)(8) which provides that a disclosure is “the making known to any person in any manner whatever a return or return information” and then at 7431 which governs damages for wrongful disclosure.  When the IRS makes a wrongful disclosure, taxpayers can bring a civil action in the appropriate district court which they did here.  Section 7431(c) provides that the IRS is liable for the greater of “(A) $1,000 for each act of unauthorized inspection or disclosure of a return or return information with respect to which such defendant is found liable or (B) the sum of (i) the actual damages sustained by the plaintiff as a result of such unauthorized inspection or disclosure, plus (ii) in the case of a willful inspection or disclosure or an inspection or disclosure which is the result of gross negligence, punitive damages, plus (2) the cost of the action, plus…” reasonable attorney’s fees it the action met the criteria for (ii).

Because the IRS conceded that an unlawful disclosure occurred and petitioners conceded they had no actual damages, the issue before the court turned on whether the negligent or willful standard applied.  In determining the amount of statutory damages the court had to decide what the statute meant when it said “each act.”  Was the mailing of the RAR to the wrong person the act – meaning that a single act occurred and limiting the damages to that single act or did many acts occur because the single document contained many disclosures of return information.  The court found that the statute description look at acts and did not say “for each item of return information disclosed.”  The word “each” served as a modifier of act and not information.  After going through its analysis of the statute, the Second Circuit also bolstered its determination with the statement that 7431 provides a waiver of sovereign immunity and those waivers must be strictly construed.  So, the Second Circuit sustained the decision of the district court and limited the recovery of damages to $1,000 for each person based on the act of wrongfully mailing the document once.

Next, the court took up plaintiffs’ argument that they should receive punitive damages.  Because plaintiffs must essentially rely on the investigation by TIGTA and did not have a way to conduct their own investigation (not that I am suggesting their own investigation would necessarily have led to a different conclusion), they are hamstrung on this part of their case.  They really had no evidence that someone at the IRS engaged in aggravated conduct or that the action in mailing the RAR to the wrong place resulted from wanton or reckless disregard or their rights.  So, they could get no traction on this issue.  The government argued that a taxpayer can only receive a punitive damage award if the disclosure resulted in actual damages.  The Second Circuit did not reach this issue but noted a split between the 4th and 5th Circuits on this interpretation.

The outcome here does not surprise me given that the wrongful disclosure did not result in actual damages.  This type of wrongful disclosure may occur more frequently that we see litigation because the IRS will concede the violation and offer statutory damages.  Not many taxpayers push for additional damages because doing so involves resources and costs.  With the possibility that taxpayers in New York could have their case handled anywhere in the US, these types of mistakes will happen.  The inability of TIGTA to get to the source of the problem is perhaps more troubling than the inability of the taxpayers to get a greater award.  Without figuring out why the IRS system went wrong here, corrective action may not occur.

Disclosing President Trump’s Tax Returns – An Unconventional Idea

This post originally appeared on the Forbes PT site on February 21, 2017.

We welcome guest bloggers Bryan Camp and Victor Thuronyi. Professor Camp has been our guest before and posted, inter alia, a very popular three part series on Eight Tax Myths – Lessons for Tax Week. Post 1 can be found here, Post II can be found here and Post III can be found here. Professor Camp is the George H. Mahon Professor of Law at Texas Tech. Mr. Thuronyi writes for PT for the first time. Mr. Thuronyi practiced tax law, served in the U.S. Treasury Department, and taught tax law before joining the International Monetary Fund in 1991 where he worked until retirement in 2014 as lead counsel (taxation). He has worked on tax reform in many countries and is the author of Comparative Tax Law (2003) and other writings on tax law.

 Whether you want to see President Trump’s returns or not, the controversy points out to me a couple of things we have gotten right that we ought to celebrate. After abuses of information at the IRS by President Nixon in an attempt by him to make life difficult for his enemies, Congress significantly tightened the disclosure laws in 1976. That legislation has worked. The legislation has worked in part because of the laws enacted but also in part because of the culture it has created at the IRS regarding taxpayer information. Despite a lot of curiosity about President Trump’s returns starting months before his election, the returns have not surfaced. He had no legal duty to disclose them even though precedent of many recent presidential candidates created a cultural expectation of disclosure. I celebrate the success of Congress and the IRS in protecting the returns.

 Recently, Democrats on the Ways and Means Committee tried to use the power of their committee to make public President Trump’s personal income tax returns. This effort failed because they had insufficient votes. Professors Camp and Thuronyi suggest an alternative path to the disclosure of the returns to the Ways and Means Committee or one of the other tax writing committees of Congress. Their approach looks at a little used subsection of the laws governing tax disclosure. Although President Trump did not have a legal duty to disclose his returns and the disclosure laws protect them from disclosure in most circumstances, there may be a way to make them public and one such possibility is the subject of this post. Keith

Lots of folks want to see Donald Trump’s tax returns. Conventional wisdom is that the returns cannot be disclosed unless he consents. That conventional wisdom is based on the general rule contained in 26 U.S.C. §6103(a). The general rule forbids IRS employees (and some folks who receive information from IRS employees) from disclosing “return information.” That is a term of art that means more than just tax returns but basically means anything in the IRS files.

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Section 6103 is a really complex statute, mostly because of the exceptions to the general rule. The exceptions are found in subsections (c) through (o). These exceptions balance a taxpayer’s privacy with the needs of government officers and employees to do their jobs. So the exceptions to the general rule can get quite gnarly.

Several commentators have begun to explore some of the lesser known exceptions to the general rule of nondisclosure. George Yin has a nice op-ed piece that explains one exception to the general rule in §6103: Congress can ask for Trump’s returns. Andy Grewal also explores this idea in a well done post over at the Yale regulation blog. Both posts are worth reading.

Both George and Andy focus on the power of certain Congressional committees and staff to ask for tax returns as part of their oversight function. That power is found in §6103(f)(1) through (f)(4). Democrats have acted on the ideas in George and Andy’s blogs. Stephen Ohlemacher from the AP reports that Democrats on the House Ways and Means Committee tried to get the Committee to ask for Trump’s returns, but were outvoted by Committee Republicans.

The Unconventional Idea

But what if the returns were dumped on the Committee’s lap by an IRS employee without the Committee having made a request? That could happen under the very last paragraph in subsection (f).

Section §6103(f)(5) is a whistleblower exception to the general rule of non-disclosure. It permits disclosure of tax returns to one of the tax-writing committees by “any person who otherwise has or had access to any return or return information under this section” when that person believes that “such return or return information may relate to possible misconduct, maladministration, or taxpayer abuse.”

The plain language of this provision suggests that an IRS employee who otherwise has authorized access to Trump’s tax returns could blow the whistle on Trump if that employee believes Trump’s tax returns related to “possible misconduct” or “possible maladministration.”

The statute does not say whose misconduct or whose maladministration the returns must relate to. An employee’s concern could be that Trump’s extensive business holdings and his well-documented refusal to divest himself of business relationships will create (or has already created) misconduct and maladministration on his part. For example, all of the profits from Trump’s businesses still accrue to his benefit. That means when the federal government leases an entire floor of Trump Tower for $1.5 million, Trump is directly benefitting from that decision.   Or, for example, Trump might sign an executive order barring immigration from certain countries but he might exclude from that order immigration from countries where he or his businesses own property and businesses.

The Problems with the Idea

However, while §6103(f)(5) is a possible avenue for an IRS employee to blow the whistle on Trump, two obstacles make it a tricky one. First, despite the statute’s broad language, the history of its enactment suggests that the language may refer only to the misconduct or maladministration by the IRS or its employees. Second, only an IRS employee who has proper access to return information is permitted to disclose.

  1. Legislative History

Congress enacted §6103(f)(5) in 1998 as part of the IRS Restructuring and Reform Act of 1998 (“RRA”). RRA originated in the House as H.R. 2676 but the provision now codified in §6103(f)(5) was not in the House version. It came from the Senate Finance Committee’s version. You can find all the documents and history of the bill here.

The Senate Finance Committee proposed creating a whistle-blower exception to the general rule of §6103(a). The proposal would have made the exception part of §6103(f)(1) and the proposed statutory language read as follows:

‘‘(B) WHISTLEBLOWER INFORMATION.—Any person who otherwise has or had access to any return or return information under this section may disclose such return or return information to a chairman of a committee referred to in subparagraph (A) or the chief of staff of the Joint Committee of Taxation only if—

(i) the disclosure is for the purpose of alleging an incident of employee misconduct or taxpayer abuse, and

(ii) the chairman of the committee to11 which the disclosure is made (or either chairman in the case of disclosure to the chief of staff) gives prior written approval for the disclosure.’’

The Senate Finance Committee Report explains that “it is appropriate to have the opportunity to receive tax return information directly from whistleblowers.” (p. 105).

Notice, however, how the language chosen by the Senate tax writers limited the authority to blow the whistle. Disclosure was authorized only “for the purpose of alleging an incident of employee misconduct or taxpayer abuse.” The Senate Finance Committee report refers specifically to “IRS employee or taxpayer abuse.”

The Conference Committee expanded the limiting language to the language that became the law. Under the expanded language, disclosure is authorized if the IRS employee making the disclosure believes that the return is related to “possible misconduct, maladministration, or taxpayer abuse.” The expansion, however, seems to stop short of expanding the idea of whose improper conduct is at issue. Under the Senate version, the improper conduct was explicitly linked to IRS employee misconduct or taxpayer abuse. The revised language expanded the kind of improper conduct to include “maladministration.” But whether the revised language expanded the idea to misconduct or maladministration by a government employee other than an IRS employee is unclear. Arguably, however, if the misconduct is relevant to misconduct of the sort that a Congressional committee might investigate, then the broad language of the statute could cover it.

2. Whistleblower Must Have Access

Even if one reads §6103(f)(5) as authorizing an IRS employee to blow the whistle on a non-IRS government employee, one large obstacle remains. Section 6103(f)(5) only applies when the IRS employee making the disclosure has authorized “access” to the return. This would mean that only the relatively narrow group of IRS employees who are authorized to view the returns for audit or other purposes would be eligible whistleblowers. That brings us back to Trump’s claim that he is under audit.  If he is telling the truth about that, then there are certainly some IRS employees who have legitimate access to at least the returns being audited.

In addition, any other person, such as an employee of a state taxing agency, who has properly received the returns from the IRS pursuant to the exceptions listed in §6103(a)(3) would also have proper access. We do not explore the legal position for this group, however, since it would involve delving into potential state law prohibitions on their action.

Congress has enacted a number of statutes that make willful violation of the disclosure rules a crime. First up is §7213 which imposes a fine up to $5,000, and up to five years imprisonment for any willful violation of §6103. See e.g. United States v. Richey, 924 F.2d 857 (9th Cir. 1991).   In the criminal context, however, the Supreme Court has instructed that a good-faith misunderstanding of the law or a good-faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable. Cheek v. U.S. 498 U.S. 192 (1991).

Second, 18 U.S.C. § 1030(a)(2) makes the unauthorized access of government computers a felony. This provision includes the unauthorized access of returns or return information in government computer files.

Third, in the RRA, Congress created 26 U.S.C. §7213A to specifically make the unauthorized inspection of returns or return information, whether in paper or computer files, a misdemeanor. See Pub. L. No. 105-206, 112 Stat. 711 (1998).

Conclusion

We have never before had a President so vulnerable to conflicts of interest and, at the same time, so callous about his governing duties and so careless of the law. This potent combination requires checks, it requires balances. Checks and balances are what have enabled this country to thrive for over 200 years. A review of Trump’s tax returns is but a small part of what is necessary to check on his behavior. If the Congress does not have the political will to use its powers, there remains a possibility that a whistleblower from the IRS or a State agency could force the issue.

 

Disclosure of Donald Trump’s Tax Returns

trumpSteve, Les and I vote in the battleground state of Pennsylvania which means we get more than our fair share of advertising on the upcoming election.  Over the past week much attention has been focused on the disclosure of three state tax returns allegedly filed by Mr. Trump.  Most of that discussion has centered on pundits seeking to interpret what the small snippet of information available in the state tax returns means about Mr. Trump’s tax liabilities 20 years ago and today.  As a procedural blog, our interest is not focused on the substance of his returns but on the procedural issues implicated by the disclosure.

1040sToday’s guest blogger, Stu Bassin, provides insight into the federal disclosure laws that govern the disclosure by the New York Times of the returns and, to a certain extent, the disclosure of the returns by the person who mailed the returns to the New York Times.  I say to a certain extent because there may be other laws governing the individual relating to how the information was obtained – something we do not know.

While the federal laws that Stu discusses provide a framework for thinking about the issue, the returns that were disclosed were state tax returns of three states, New York, New Jersey and Connecticut.  Neither we nor Stu practice in those states and we are not prepared to write opinions on the applications of the laws of those states to this situation.  You can find here, the comments on this subject provided by Slate which states that the disclosure does not violate the laws of the three states involved.  We know we have readers from the states involved and welcome comments that address the implications of the disclosure vis a vis the laws of those states.  Having persons disclose information in this fashion seems to be more popular today than in the past.  If current laws do not address this type of disclosure, the disclosure of Mr. Trump’s returns raises the issue of whether the federal or state laws should address this type of disclosure with civil or criminal penalties or whether the matter is one between the person making the disclosure and the person whose information is disclosed.

While we may wish that Mr. Trump would disclose his tax returns for whatever benefit we would derive from such disclosure, the disclosure of his returns, even 20 year old state returns which provide a basis for more speculation than true knowledge, also leaves us wondering how the system should treat the making public of someone’s returns who wants them to remain private and who filed them with that expectation.  Keith

Last week, the New York Times published excerpts from Donald Trump’s 1995 tax returns.  Soon thereafter, Mr. Trump’s spokesmen charged that the Times violated federal law by illegally disclosing Mr. Trump’s returns.  Invoking the First Amendment, the Times defended the publication.  Which side correctly read the tax law?

The public generally believes that federal tax returns are confidential and that disclosure of a taxpayer’s return or return information is illegal.  Indeed, Code Section 6103(a) provides that returns and return information are “confidential” and that government employees are prohibited from disclosing returns and return information.  Section 7431 authorizes civil damage claims for unauthorized disclosures and Section 7213 establishes criminal penalties for unauthorized disclosures.

Those general principles are qualified, however, by the specific language of the statute.  Section 6103(b) defines “return” as those returns filed with the Service.  Distinguishing between the signed return formally filed with the Service and other copies of the return, the courts have ruled that, when a government employee obtains a copy of a taxpayer’s Form 1040 from a source other than the Service, that tax form is not protected by Section 6103.  For example, where naval investigators obtained a copy of a return from a briefcase stored in the taxpayer’s government workspace, the Ninth Circuit held that Section 6103 did not apply because the return was not obtained from the Service.  See Stokwitz v. United States, 831 F.2d 893 (9th Cir.1987), cert. denied, 485 U.S. 1033 (1988).   Copies of returns obtained from the taxpayer’s accountant or through a grand jury subpoena are likewise not protected.

Similarly, the statutory language of the Section 6103 applies only to disclosures by federal employees and state employees.  Similar limiting language can be found in the statutes authorizing civil suits for unlawful disclosure and imposing criminal sanctions for unlawful disclosures.   The statutes simply do not reach publications of returns by persons other than government employee, such as the Times.

Section 6103 is not implicated by publication of Mr. Trump’s returns unless he can establish that the published actually came from the Service.  That issue of proof is complicated by the fact that a laundry list of regulatory agencies, lenders, and litigants, including Mr. Trump’s former spouses (and their representatives) have probably obtained copies of the returns during the past two decades.  Because the Times’ documents did not bear any IRS file-stamps and the fact that the disclosures included state tax returns which would not have been filed with the Service strongly suggests that the source was not the IRS.

Bottom line.   Section 6103 almost surely did not protect Mr. Trump’s returns and he has no wrongful disclosure claim against the Times or anyone else.

Summary Opinions — For the last time.

This could be our last Summary Opinions.  Moving forward, similar posts and content will be found in the grab bags.  This SumOp covers items from March that weren’t otherwise written about.  There are a few bankruptcy holdings of note, an interesting mitigation case, an interesting carryback Flora issue, and a handful of other important items.

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  • Near and dear to our heart, the IRS has issued regulations and additional guidance regarding litigation cost awards under Section 7430, including information regarding awards to pro bono representatives. The Journal of Accountancy has a summary found here.
  • The Bankruptcy Court for the Southern District of Florida in In Re Robles has dismissed a taxpayer/debtor’s request to have the Court determine his post-petition tax obligations, as authorized under 11 USC 505, finding it lacked jurisdiction because the IRS had already conceded the claim was untimely, and, even if not the case, the estate was insolvent, and no payment would pass to the IRS. Just a delay tactic?  Maybe not.  There is significant procedural history to this case, and this 505 motion was left undecided for considerable time as there was some question about whether post-petition years would generate losses that could be carried back against tax debts, which would generate more money for creditors.  This became moot, so the Court stated it lacked jurisdiction; however, the taxpayer still wanted the determination to show tax losses, which he could then carryforward to future years (“establishing those losses will further his ‘fresh start’”).  The Court held that since the tax losses did not impact the estate it no longer a “matter arising under title 11, or [was] a matter arising in or related to a case under title 11”, which are required under the statutes.
  • The Tax Court in Best v. Comm’r has imposed $20,000 in excess litigation costs on an attorney representing clients in a CDP case. The Court, highlighting the difference in various courts regarding the level of conduct needed, held the attorney was “unreasonable and vexations” and multiplied the proceedings.  Because the appeal in this case could have gone to the Ninth Circuit or the DC Circuit, it looked to the more stringent “bad faith” requirements of the Ninth Circuit.  The predominate issue with the attorney Donald MacPherson’s conduct appears to have been the raising of stated frivolous positions repeatedly, which the Court found to be in bad faith.
  • And, Donald MacPherson calls himself the “Courtroom Commando”, and he is apparently willing to go to battle with the IRS, even when his position may not be great…and the Service and courts have told him his position was frivolous. Great tenacity, but also expensive.  In May v. Commissioner, the Tax Court sanctioned him another seven grand.
  • The Northern District of Ohio granted the government’s motion for summary judgement in WRK Rarities, LLC v. United States, where a successor entity to the taxpayer attempted to argue a wrongful levy under Section 7426 for the predecessor’s tax obligation. The Court found the successor was completely the alter ego of the predecessor, and therefore levy was appropriate, and dismissal on summary judgement was proper.
  • I’m not sure there is too much of importance in Costello v. Comm’r, but it is a mitigation case. Those don’t come up all that frequently.  The mitigation provisions are found in Sections 1311 to 1314 and allow relief from the statute of limitations on assessment (for the Service) and on refunds (for taxpayers) in certain specific situations defined in the Code.  This is a confusing area, made more confusing by case law that isn’t exactly uniformly applied.  The new chapter 5 of SaltzBook will have some heavily revised content in this area, and I should have a longer post soon touching on mitigation and demutualization in the near future.  In Costello, the IRS sought to assess tax in a closed year where refunds had been issued to a trustee and a beneficiary on the same income, resulting in no income tax being paid.  Section 1312(5) allows mitigation in this situation dealing with a trust and beneficiary.  There were two interesting aspects of this case, including whether the parties were sufficiently still related parties where the trust was subsequently wound down, and whether amending a return in response to an IRS audit was the taxpayer taking a position.
  • The First Circuit has joined all other Circuits in holding “that the taxpayer must comply with an IRS summons for documents he or she is required to keep under the [Bank Secrecy Act], where the IRS is investigating civilly the failure to pay taxes and the matter has not been referred for criminal prosecution,” and not allowing the taxpayer for invoking the Fifth Amendment. See US v. Chen. I can’t recall how many Circuit Courts have reviewed this matter, but it is at least five or six now.
  • The District Court for the District of Minnesota in McBrady v. United States has determined it lacks jurisdiction to review a refund claim for taxpayers who failed to timely file a refund request, and also had an interesting Flora holding regarding a credit carryback. The IRS never received the refund claim for 2009, which the taxpayer’s accountant and employee both testified was timely sent, but there was not USPS postmark or other proof of timely mailing, so Section 7502 requirements were not met.  Following an audit, income was shifted from 2009 to other years, including 2008.  This resulted in an outstanding liability that was not paid at the time the suit was filed, but the ’09 refund also generated credits that the taxpayer elected to apply to 2008.  The taxpayers also sought a refund for 2008, arguing the full payment of the ’09 tax that created the ’08 credit should be viewed as “full payment”, which they compared to the extended deadline for refunds when credits are carried back.  The Court did not find this persuasive, and stated full payment of the assessed amount of the ’08 tax was needed for the Court to have jurisdiction over the refund suite under Flora.  Sorry, couldn’t find a free link.
  • The IRS lost a motion for summary judgement regarding prior opportunity to dispute employment taxes related to a worker reclassification that occurred in prior proceeding. The case is called Hampton Software Development, LLC v. Commissioner, which is an interesting name for the entity because the LLC operated an apartment complex.  The IRS argued that during a preassessment conference determining the worker classification the taxpayer had the opportunity to dispute the liability, and was not now entitled to CDP review of the same.  The Court stated the conference was not the opportunity, as the worker classification determination notice is what would have triggered the right under Section 6330(c)(2)(B), and such notice was not received by the taxpayer (there was a material question about whether the taxpayer was dodging the notice, but that was a fact question to be resolved later).  The Hochman, Salkin blog has a good write up of this case, which can be found here.
  • The IRS has issued additional regulations under Section 6103 allowing disclosure of return information to the Census Bureau. This was requested so the Census could attempt to create more cost-efficient methods of conducting the census.  I don’t trust the “Census”.  Too much information, and it sounds really ominous.  That is definitely the group in Big Brother that will start rounding up undesirables, and now they have my mortgage info.
  • The Service has issued Chief Counsel Notice 2016-007, which provides internal guidance on how the results of TEFRA unified partnership audit and litigation procedures should be applied in CDP Tax Court cases. The notice provides a fair amount of guidance, and worth a review if you work in this area.
  • More bankruptcy. The US Bankruptcy Court for the Eastern District of Virginia has held that exemption rights under section 522 of the BR Code supersede the IRS offset rights under section 533 of the BR Code and Section 6402.  In In Re Copley, the Court directed the IRS to issue a refund to the estate after the IRS offset the refund with prepetition tax liabilities.  The setoff was not found to violate the automatic stay, but the court found the IRS could not continue to hold funds that the taxpayer has already indicated it was applying an exemption to in the proceeding.   There is a split among courts regarding the preservation of this setoff right for the IRS.  Keith wrote about the offset program generally and the TIGTA’s recent critical report of the same last week, which can be found here.

 

 

What Duty/Ability Does the IRS Have to Notify Clients of Professionals It is Auditing?

We welcome back guest blogger Marilyn Ames who takes a look at a recent complaint filed against the IRS by individuals who may not have received zealous representation from their accountants based on a conflict of interest.  Like me, Marilyn is retired from the Office of Chief Counsel, IRS where she worked for many years as a manager in the Houston office.  She currently assists in updating Saltzman and Book, IRS Practice and Procedure chapters while enjoying her retirement in Alaska.  Keith

In an action that partakes a little of the old fairy tale of spinning gold out of straw, on April 22, 2016, the former CEO and COO of Sprint Corporation, William Esrey and Ronald LeMay, filed suit against the United States seeking damages of $42.5 and $116.8 million, respectively, under the Federal Tort Claims Act.  The basis for their suit is that the Internal Revenue Service did not inform them that their long-time accounting firm, Ernst & Young, was under investigation for its actions in selling tax shelters. Mr. Esrey and Mr. LeMay had not only purchased tax shelters from Ernst & Young, but Ernst & Young was the certified public accounting firm for their employer, Sprint.  The plaintiffs contend the IRS “helped EY to hide information from Plaintiffs knowing that such information would have been critical to Plaintiffs’ evaluation of whether to trust EY and whether to continue to tell Sprint that EY was trustworthy and devoted to helping Plaintiffs resolve their tax audits with the IRS.” The complaint can be viewed here.

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A little background to this convoluted story might be helpful before taking a quick look at the basis for Mr. Esrey’s and Mr. LeMay’s suit and the greater issues the suit raises.  At the time when our story begins unfolding, Mr. Esrey was Sprint’s CEO and the Chairman of its board, and Mr. LeMay was its COO and, according to the complaint, Mr. Esrey’s heir apparent.  Mr. Esrey and Mr. LeMay both employed Ernst & Young as a tax advisor and financial planner, and Ernst & Young was also the certified public accountant for Sprint.  Messrs. Esrey and LeMay both purchased tax shelters from E&Y in each of the years from 1999 through 2001.

The IRS did not take a kindly view of E&Y’s tax shelters, and according to the complaint, began an investigation of these transactions in March of 2002, that at some point included both civil and criminal investigators. The IRS also began auditing those taxpayers who had purchased tax shelters from E&Y, including the plaintiffs. Apparently not recognizing that having the seller of your tax shelter represent you before the IRS might be problematic, Mr. Esrey and Mr. LeMay engaged E&Y to represent them when the IRS began looking at their tax returns.  In the meantime, E&Y negotiated a resolution with the IRS with respect to some of its tax shelter activities, and in June of 2003, paid the IRS $15 million for failing to register the tax shelters they were selling and for failing to maintain lists of those for whom E&Y had acted as a material advisor with respect to the tax shelters.  (Although neither the complaint nor the IRS press release indicate the basis for the payment, presumably these were penalties imposed under IRC §§ 6707 and 6708, which are in a subchapter titled “Assessable Penalties.”) According to the complaint, as part of the settlement the IRS agreed not to use the word “penalty” in its press release in exchange for an additional $1.4 million over the amount previously agreed to.

After the settlement in 2003, the criminal investigation of E&Y and its employees continued on, and in May of 2007, four employees were indicted on tax charges in connection with the marketing of tax shelters, and two were eventually convicted.  Newspapers began reporting that E&Y was under investigation for these activities.  Plaintiffs contend that it was at this time they learned of the criminal investigation.

When the employment contracts for Mr. Esrey and Mr. LeMay were renewed in 2001, the plaintiffs disclosed to the Sprint board of directors that they had “entered into the transactions that EY had promoted.”  By 2002, according to the complaint, the Sprint board and audit committee became concerned there would be a conflict of interest between Esrey and LeMay and E&Y because of the audit of the tax shelters.  The complaint does not disclose what caused Sprint to become concerned about this.  The plaintiffs made a presentation to the board in December of 2002 recommending that Sprint dismiss E&Y as its auditor because of the board’s concern regarding a conflict of interest, and E&Y made a presentation that its advice to the plaintiffs “was sound and its actions proper.” The board determined that a potential conflict of interest was great, but that firing its auditor would result in negative publicity and would impact Sprint.  Instead, they asked Mr. Esrey and Mr. LeMay to resign, which they did in 2003.  Although the complaint does not indicate how the amount requested in damages was computed, it was this loss of their employment that has caused the plaintiffs to sue the United States. For those of you who want to know the rest of the story, the complaint also states that Mr. Esrey and Mr. LeMay filed suit in the Tax Court with respect to their tax shelters, the result of which is not disclosed, and they also initiated an arbitration action against E&Y and received a final award in 2014, the amount of which is also unknown.

Ignoring such obvious issues as the statute of limitations problem and the causation issue (after all, the injury complained of occurred in 2003, and was the result of Sprint choosing its auditor over its executives), the larger questions for the tax community are whether a failure to disclose information about a taxpayer’s representative to the taxpayer is actionable under the Federal Tort Claims Act, and whether it should be. By its terms, 28 USC § 2674 provides a remedy for persons injured by governmental negligence in circumstances like those in which a person would be compensated for the negligence of another private person.  Generally, in litigation between private parties, the burden to disclose a conflict of interest in legal representation is on the attorney representing the taxpayer, not on the opposing party or the opposing party’s counsel.  Is it ethical or even desirable to have the IRS reaching out to a taxpayer to question the taxpayer’s choice of representative? If a failure to warn a taxpayer is actionable, when does the duty to warn arise?  Should the IRS issue press releases when it begins investigating return preparers, so the public can avoid those who may prepare questionable returns – at the risk of ruining a potentially innocent person’s business?  An investigation is simply that – an investigation.

The FTCA also permits the United States to assert any defense based on judicial or legislative immunity that would otherwise have been available to the employee whose actions form the basis for the suit.  Any plaintiff arguing that the IRS should have disclosed information to the plaintiff that does not involve the plaintiff’s own tax returns is always going to have to overcome the hurdle of IRC § 6103 – the disclosure statute.  The plaintiffs have ignored this hurdle in their complaint, but it is a sure bet that the United States will not.  It is clear that the IRS believed that Section 6103 applied to the investigation of E&Y; the press release announcing the $15 million paid to the IRS expressly states that the closing agreement between E&Y and the IRS included a disclosure authorization allowing the IRS to issue the press release. If the IRS does have a duty to disclose that a representative is questionable, how does the IRS do that without potentially disclosing the tax return information of other taxpayers?

In support of its allegations that the IRS is liable for the plaintiffs losing their jobs, the complaint asserts that the IRS had a policy at the time of the E&Y audits to seek assurances from taxpayer representatives who were tax shelter promoters that their clients were informed of potential conflicts of interest, citing a then-applicable provision of the IRM and an opinion given by Chief Counsel to an employee of the IRS.  While the plaintiffs are correct that there was such a policy, the policy was to require promoters to inform their clients of a potential conflict of interest, and for the IRS to seek assurances from the representative that it had done so.  While the complaint is silent on whether the IRS asked for and received such an assurance from E&Y, it is not clear that even if the IRS failed to do so that the plaintiffs would have a right to recover.  They would first have to overcome the hurdle of United States v. Caceres, 440 US 741 (1979), in which the Supreme Court held, in a case involving the Internal Revenue Manual, that courts are only required to enforce agency regulations when compliance is mandated by the Constitution or federal law; otherwise, agency directives do not give taxpayers rights not otherwise given.  If the plaintiffs prevail in this suit against the United States, will the IRS be tempted to hide its directions to employees in documents not publicly disclosed, or for IRS attorneys to only give oral advice not made available to the public?

This case raises a number of interesting questions, and its progress will bear watching for the greater impact it may have on both those who enforce the tax laws and those who represent taxpayers.