The IRS is prohibited from disclosing taxpayer information to third parties. There are a number of exceptions. But when the laws are violated, the courts can and do award damages to taxpayers.
In Ward v. United States, 973 F. Supp. 996 (Dist. Colo. 1997), the court found that the IRS had violated the law by disclosing the taxpayer’s “return information” to third parties without authorization. The court awarded damages to the taxpayer for the emotional distress suffered as a result of the disclosures, as well as other damages resulting from the unauthorized disclosures. This case serves as a reminder of the importance of protecting taxpayers’ privacy and the consequences of violating the laws governing the disclosure of taxpayer information.
Facts & Procedural History
The taxpayer owned and operated a retail store located in the Citadel Mall, Villa Italia Mall, and the Lakeside Mall. The IRS made a jeopardy assessment and seized the business.
The taxpayer brought suit against the IRS to recover damages for the IRS’s unlawful disclosure of confidential information.
The taxpayer alleged that shortly after the seizure several IRS employees unlawfully disclosed the taxpayer’s confidential tax return information.
The IRS denied that any “return information” was ever posted in any of the three “Kid’s Avenue” stores or that any verbal disclosures were made to Plaintiff’s customers or Citadel Mall management.
The IRS acknowledged that IRS agents discussed the taxpayer’s “return information” during a radio talk show and provided a “fact sheet” to Inside Edition/American Journal that contained “return information,” but asserts that the IRS did not willfully or intentionally violate the law.
The IRS admitted that a published letter to the editor of the Colorado Springs Gazette Telegraph by James Scholan, a revenue officer in the Colorado Springs office of the IRS, contained “return information,” but asserts that Mr. Scholan obtained this information from newspaper articles and other publications and not from any information he obtained as an employee of the IRS.
IRS Disclosure of Tax Return Information
The IRS is generally prohibited from disclosing the taxpayer’s tax return information to third parties. Tax return information is defined broadly as:
a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer’s return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense,
There are several other items that are included in this definition. There are also several exceptions, such as the IRS’s ability to share information with law enforcement, etc.
Damages for Unlawful Disclosure
The code also provides for an award of damages if the IRS discloses a taxpayer’s tax return information. The amount is:
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 costs of the action, plus
(3) in the case of a plaintiff which is described in section 7430(c)(4)(A)(ii), reasonable attorneys fees
Given the extreme conduct, the court allowed claims for damages for mental distress, emotional damages and humiliation resulting from the IRS’s unauthorized disclosures of “return information.” The court noted that the taxpayer presented evidence showing that the IRS’s wrongful conduct caused a significant change in her personality, making her bitter and consumed by a battle with the IRS to establish the incorrectness of what IRS agents and employees had said and done. Testimony from the taxpayer’s mother, son, and daughter attested to the extent of the taxpayer’s emotional distress caused by the IRS’s actions, including her becoming irritable, frequently crying, and becoming obsessed with the situation to the point of being hated by her family. The court also noted that the taxpayer’s reputation was also damaged by the wrongful disclosures, with friends and family members questioning whether the taxpayer was a drug dealer or tax protestor as a result.
Given the extreme disclosures in this case, the court awarded Ward $325,000 in damages, which was $111 more than the initial tax assessed against the taxpayer.
The court left the IRS with this warning:
The conduct of our Nation’s affairs always demands that public servants discharge their duties under the Constitution and laws of this Republic with fairness and a proper spirit of subservience to the people whom they are sworn to serve. Public servants cannot be arbitrarily selective in their treatment of citizens, dispensing equity to those who please them and withholding it from those who do not. Respect for the law can only be fostered if citizens believe that those responsible for implementing and enforcing the law are themselves acting in conformity with the law. By this award, this Court gives notice to the IRS that reprehensible abuse of authority by one of its employees cannot and will not be tolerated.
A fitting warning given the IRS’s extreme conduct.
The IRS is an organization staffed by employees. There are more good IRS employees who are true professionals and work hard to serve the public every day than there are bad actors. But as with any organization staffed by employees, there are bad actors. Those who find themselves harmed by the IRS’s bad actors should take action. This includes suing the IRS for damages as in this case. It can also include reporting IRS misconduct to TIGTA.