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From Lindbergh to Nixon to Stegman – Fixing Information Flow in Identity Theft Cases

Posted on Mar. 19, 2015

Recently, the United States District Court for the District of Kansas in the case of Kathleen Stegman ruled that the IRS could keep from the taxpayer the return filed by someone using her identifying information.  The sad part here is that the administrative decision to withhold the returns from her and the Court’s decision sustaining the IRS refusal to turn over the information seems to correctly reflect the law as it stands.  The law should change and taxpayers should have the ability to access documents using their identifying information.

ID theft over the last decade has far outstripped other consumer issues as our biggest problem.  It creates issues outside the tax world but also creates major problems for taxpayers and the IRS as identity thieves use stolen information to file returns and obtain refunds.  When the IRS realizes that the refund it issued may have been inappropriate, it contacts the taxpayer with an audit notice.  Sometimes, because of the address the IRS has on the return, the taxpayer does not receive notice of the problem until it has entered the collection process.  At whatever point in the process the actual taxpayer, as opposed to the now long departed thief, hears from the IRS, the taxpayer has no knowledge of what happened yet must try to defend him or herself from an assessment of taxes.

What Gives Rise to the Problem: Nixon and Section 6103

In an effort to defend themselves, taxpayers request from the IRS the return filed, giving rise to the problem and the nightmare begins. If the taxpayer mentions to the IRS that they did not file the offending return and they are the victim of identity theft, the IRS refuses to provide them with a copy of the return taking the position that the disclosure laws prohibit the release of the information to the taxpayer since the taxpayer did not file the return.  The IRS position on turning over a copy of the return, based upon section 6103 and upheld in this recent decision, places the taxpayer in a Catch 22 situation.  The IRS does not back away from pursuing the assessment or collection of the tax from the true taxpayer because the taxpayer has invoked ID theft.  It just refuses to let the person know the basis for the action the person must defend.  Whether your mind wanders to the writings of Joseph Heller or Franz Kafka, the taxpayer sits in a bad spot having already suffered at the hands of the ID thief and now posed to suffer more.

How did we get here? Because it’s always nice to place blame on someone, we can place blame here on Richard Nixon.  President Nixon decided to go after his political enemies by having the IRS do the work.  He attempted to politicize the IRS and then Commissioner Donald Alexander became a hero by standing up to him.  Congress, where many of President Nixon’s enemies worked, did not take kindly to the President’s use of the IRS to attack his enemies and so Congress engaged in an extensive reform of the disclosure laws in order to prohibit such a thing from happening again.  I wrote about the history of the disclosure laws in an article designed to seek reform in the way we disclose the private collection of taxes if you have an interest in the history leading up to the changes in section 6103.  Famous aviator Charles Lindbergh gets mentioned in the title to this post because the kidnapping of his baby touched off a debate in the 1930s about the privacy of return information leading to return information mostly being private but giving the administration some discretion which President Nixon abused.

The changes to the disclosure laws brought about by President Nixon’s attempted abuse of the system improved the system greatly but occurred without thought to the explosion of ID theft that would occur several decades later. The interpretation of the disclosure laws to prohibit a taxpayer from obtaining documents that form the basis for proposed or actual assessments against them makes no sense except through the interpretation of a statute never designed to address this situation.  Working from a clean slate one can hardly imagine that we would design a system of information flow prohibiting a taxpayer in this situation from accessing the very documents that create the problem for the taxpayer.  Yet, here we are.

Proposed Solutions: Fixing Section 6103 and Changing the Rules on Burden

In 2012 I was chair of the ABA Tax Section Low Income Taxpayer Committee. The chairman of the Tax Section had the idea that Congress would soon reform the tax code and the Tax Section should get ahead of the process by having each committee create legislative proposals that would exist for Congress to use when it undertook the process of reform.  Great idea and one similar to Calvin Johnson’s Tax Shelf project started a few years earlier.  The only problem with these great ideas is that Congress and the Administration have not yet reached the point where they want to reach agreement on the long overdue reform process.  Anyway, my committee proposed a legislative fix to the ID Theft problem that would allow a taxpayer to access tax returns and return information submitted using the taxpayer’s identifying information.  If such a provision were added to Section 6103, it would provide a fix to the problem facing Ms. Stegman.  Some Congressional proposals on this issue also exist.

Other ways exist to fix this problem when it gets into the courts and the taxpayer seeks to contest the liability imposed as a result of a return filed by someone else. The situation has many similarities to that facing Mr. Portillo.  Congress reacted to the problem raised in Portillo by enacting section 6201(d) placing the burden on the IRS of proving the correctness of third party returns filed with the IRS providing information about the taxpayer.  The vast majority of these third party returns such as Form W-2 and Form 1099 contain correct information about the taxpayer listed and enable the IRS to easily monitor the correctness of returns filed by taxpayers but some of these third party forms contain incorrect information.

The IRS position concerning these returns leading up to Portillo and the enactment of section 6201(d) was to rely on the ordinary burden of proof rules. The IRS would get the third party information, question the taxpayer why the taxpayer did not report the third party information and when the taxpayer said they did not know anything about the third party information the IRS would say prove it – and, by the way, you have the burden of proof.  Taxpayers faced with the difficult if not impossible circumstance of proving a negative ran into a stonewall within the IRS but eventually persuaded courts, and Congress, that ordinary burden of proof rules designed to place the burden of proof on taxpayers who controlled the records should not apply when the taxpayer does not control the records.

That same type rule should apply here as well. In addition to changing the disclosure laws to allow the taxpayer to know the basis for the IRS assertion of additional liability, a taxpayer raising ID Theft as a defense to a liability in a credible way should shift the burden of going forward to the IRS.  If the burden shifts to the IRS, it will have to come forward with the information in its file in order to prove that the real taxpayer actually does owe the liability.

Stegman and the Crime Victim’s Rights Act

The Stegman case highlights problems that occur in ID Theft cases; however, she attacked the problem in an unconventional way – at least unconventional for a tax lawyer. She did not bring suit against the IRS seeking a release of information under Section 6103 but rather under the Crime Victim’s Rights Act.  Under that provision of the penal section of the United States Code she sought to obtain the return filed fraudulently using her identity.  The IRS and Department of Justice refused to provide the fraudulent return to her under that provision – at least at the point in time this case occurred – and the District Court agreed with the Government dismissing her case for failure to state a claim on which relief can be granted.

Ms. Stegman learned of the identity theft when contacted by an IRS special agent. She asked the special agent to see the 2012 and 2013 returns which allegedly contained a fraudulent use of her ID and made her the victim of a crime and he refused to provide them to her but told her to go to an IRS walk in office where she could get them (apparently he was not familiar with IRS procedures and its interpretation of 6103.)  She actually found a walk in office that was open, waited 40 minutes to see someone (not a bad wait time) and was told that she could not see these returns (queue the IRS position on 6103 which may be a correct interpretation of the current statute.)

Instead of letting the matter drop, she brought suit as a crime victim. The problem with this approach is that the statute requires that someone be charged with a crime.  At the point in time the special agent notified her of the ID theft and at the time she brought suit, no charges had been brought.  Without the existence of an accused person, Ms. Stegman could not successfully use Crime Victim’s Rights Act to pursue relief by obtaining information about the crime.  This aspect of the act reasonably protects persons from an “unbridled gallop to any and all information in the government’s files.”

Conclusion: What to Do If You Face the Problem

Given the current state of the disclosure law in the ID Theft area if you have a client who you suspect is the victim of ID Theft do not mention that fact to the IRS until you get the tax information in their account from the IRS. Once you get the information, then you can raise this defense but until the law changes, seek the information first and raise the defense later.  The National Taxpayer Advocate has written many times on the ID Theft issue.  The IRS has not necessarily addressed the problem in the best manner for taxpayer but is struggling itself to keep up with the amount of ID Theft in the face of staffing shortages.  While allowing taxpayers to see the material submitted by the thief will not fix all of the problems in this area, it will make it much easier for victims and the IRS to talk about the problem and work toward a resolution.  Using the inspirational literature of Heller and Kafka as well as the earlier legislative actions to fix the problems caused by President Nixon and facing Mr. Portillo, Congress should step up and enact an amendment to section 6103 allowing victims to get the information submitted with their tax identifying information.  This may be one of the easiest reforms to enact.

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