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.
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.