On February 21, 2023, the DC Circuit reversed the decision of the district court in Waterman v. IRS in which tax practitioner Brad Waterman sought information from the IRS about a referral made to the Office of Professional Responsibility (OPR) regarding his actions during an audit. We discussed this case previously here in a post from five years ago after the first district court opinion. That post sets out the facts in greater detail than I will here.
As I mentioned in that post, Brad and I want to the same law school where he graduated a year ahead of me before going on to a long and successful career as a tax lawyer. The post linked above discusses the first opinion in his FOIA journey after which he appealed to the DC Circuit Court which remanded the case. On the second trip to the district court the court conducted an in camera review of the material and continued to deny access. He appealed that decision. The recent decision reverses the district court for most of the documents sought.
Brad is now essentially retired from practice dividing his time between New England and Florida. While he was in Boston last year, we met for dinner to generally reminisce and discuss our parallel FOIA cases.
Just as I followed Brad at law school, my FOIA litigation follows his. My FOIA case went from a loss at the district court to a remand from the Eighth Circuit back to the district court where, in Fogg v. United States, it recently upheld its initial decision after making an in camera inspection of the documents. An earlier post from four years ago on my case is here. My case may now head back to the Eighth Circuit where I would hope to be so fortunate as Brad.
Although traveling parallel paths, our FOIA cases seek very different types of information invoking different provisions of the FOIA exemptions. Brad’s case involves the deliberative process exemption. The IRS audited his client regarding a tax exempt bond issue. The agent prepared a Suspected Practitioner Misconduct Report and sent it to OPR on March 17, 2014 alleging that Brad unreasonably delayed the prompt disposition of the case in violation of Circular 230. The referral contained a memorandum authored by the agent and the agent’s manager. Brad was notified of the referral and that OPR had decided the report “did not warrant further investigation or action.” The letter also said that if the allegation in the referral was true it did constitute a technical violation of Circular 230 and that OPR would retain the file for 25 years in case it received further referrals since the cumulative effect of referrals could result in a charge against him.
He sought copies of the memos since he wanted to know what was said. The IRS released 34 of 54 pages it discovered as relevant to his request and invoked FOIA exemptions 3 and 5 to withhold the balance. In court the IRS relied on exemption 5 regarding the deliberative process privilege. After the district court in the first instance discussed in the blog post above ruled for the IRS, he appealed and the DC Circuit remanded for the district court to decide if some of the documents might be reasonably segregable in Waterman v. IRS, (Waterman II), 755 F. App’x 26, 27-28 (D.C. Cir. 2019). When the district court again ruled for the IRS, he again went to the DC Circuit which ruled in the recent decision that significant portions of the documents contained only factual information which did not involve the deliberative process stating:
In camera review has revealed two passages, appearing on pages 5 and 6 of the memorandum, that reflect Marchetti’s [the agent’s] evaluation of particular conduct he viewed as evincing Waterman’s “intent to not cooperate with the disposition of the matter[]” and his failure to “negotiate[] with [the] IRS in good faith,” J.A. 120-21, which is punctuated with references to the IRS’s internal strategy in its audit of Waterman’s client. As to those portions, Marchetti exercised his judgment to select and organize facts to support a discretionary agency decision by the OPR, much like the agency employees in Montrose and other cases in which this court has affirmed the nondisclosure of factual material under Exemption 5….
But the remainder of the Marchetti Memo, which is a chronological collection of Waterman’s statements over the course of the audit, falls outside the scope of Exemption 5. The IRS’s affidavit provides no indication that Marchetti exercised his judgment to “separate[e] the pertinent from the impertinent,” Montrose, 491 F.2d at 68, nor that he omitted a “known datum” in creating the chronology, Mapother, 3 F.3d at 1540. Exemption 5 does not protect such a “comprehensive collection of the essential facts.” Id. Because it is “reasonably segregable” from Marchetti’s evaluative commentary, 5 U.S.C.
10 § 552(b), the chronological portion of the Marchetti Memo is subject to disclosure.
The Circuit Court found that the entirety of the manager’s memo fell outside the protection of exemption 5. This is an important decision for individuals referred to OPR who want to know the basis for their referral.
In contrast with Brad’s case, I joined Nick Xanthopoulos in seeking to learn from the IRS what it does with our personal information, such as our social security numbers, when we call on a client’s case. Does our personal information become part of the taxpayer’s tax return information? Can the taxpayer access our personal information? Might the IRS work with the practitioner community to devise a less intrusive method for verifying who we are?
The post above, written by Nick, talks about the reasons for the FOIA request. Nick has subsequently dropped out of the litigation because of a job change. The FOIA request sought information in the Internal Revenue Manual (IRM) that describes the practice, but which is shielded from public view. The suit resulted in some concessions by the IRS opening up more portions of the IRM. The concessions let many questions unanswered as much of the IRM remained shielded from the public. The district court declined to engage in an in camera inspection of the shielded portions and held for the IRS based on FOIA exemption 7.
The Eighth Circuit remanded the case to the district court holding, inter alia, that the court should have an in camera inspection of the IRM and that the affidavit submitted by the IRS was insufficient to show that the agency had met its burden of establishing a reason for non-disclosure. The affidavit relied heavily on the need for the request for personal information of representatives as a part of the IRS law enforcement activities. The Eighth Circuit was also concerned about the characterization of the IRS:
Although we find no evidence of bad faith by the IRS, the Barnes Declaration contains a legal error in at least one respect: it states “the I.R.M. generally” is “compiled for law enforcement purposes because the I.R.M. is an internal manual for the IRS, a law enforcement agency.”
The Barnes Declaration erroneously characterizes the IRS as only a law enforcement agency. The IRS is instead a federal agency with mixed law enforcement and administrative functions.
On remand, the district court has recently held that after inspection of the IRS, it sustains its initial determination finding:
Exemption 7(E) requires the IRS to show that the withheld material was “compiled for law enforcement purposes.” 5 U.S.C. § 552(b)(7)(E); see John Doe Agency v. John Doe Corp., 493 U.S. 146, 153 (1989) (“Before it may invoke [Exemption 7], the Government has the burden of proving the existence of . . . a compilation for such a purpose.”). Then, the IRS must show that: (1) releasing the records “would disclose techniques and procedures for law enforcement investigations or prosecutions ;” and that (2) “such disclosure could reasonably be expected to risk circumvention of the law.” 5 U.S.C. § 552(b)(7)(E).2 Upon the Court’s in camera inspection of the withheld material and of Mr. Donaghy’s affidavit, the Court finds that the redactions in IRM § 21.1.3.3 meet each of these requirements.
The district court quoted from the supplemental affidavit submitted by the IRS which stated the redactions were necessary “to combat theft, fraud, and other wrongdoing in the context of telephone calls from third parties who claim to have authorization from a taxpayer for the IRS to disclose that taxpayer’s confidential return information to the caller.” The court cited to a 2018 report of the Treasury Inspector General finding that the IRS procedures at the time were insufficient to properly authenticate the identity of third parties. Based on this the court found that the IRS met its threshold burden of showing that the redactions served a law enforcement purpose.
In such a case the IRS must then show that the withheld material would disclose “techniques and procedures for law enforcement investigations or prosecutions.” The court states:
The Court finds that releasing the redacted portions of IRM § 21.1.3.3 would “disclose techniques and procedures for law enforcement investigations.” 5 U.S.C. § 552(b)(7)(E). As noted above, the redactions address different situations in which the behavior or the information provided by the third party seeking authorization raises a suspicion of fraud. Disclosing the withheld material would reveal techniques that IRS agents use to confirm or disprove their suspicions, including the information that the IRS seeks from individuals in these particular situations.
The IRS must also show that if it discloses the material at issue it could reasonably expect the risk of circumvention of the law. The court describes this requirement as a low bar the IRS must clear and finds that it cleared that bar.
So, practitioners must continue to provide their personal information without knowing what becomes of it. Perhaps there will be another journey the circuit court with an outcome as favorable as the one obtained by Brad. So far, my wonderful attorneys, Tuan Samahon (a colleague when I was at Villanova) and Shawn Rodgers of Goldstein Law Partners have done a great job presenting the case.