What happens when a taxpayer goes into a tailspin following mistakes that the IRS makes in connection with trying to collect taxes? Wrhel v. United States is a district court opinion out of Wisconsin where a taxpayer sought over $34 million in damages for the IRS’s wrongful collection actions. The case caught my attention because it requires the courts to consider the limits of responsibility when someone’s life goes off kilter as a result of what the court framed as relatively minor IRS mistakes.
I will summarize the facts to get to the heart of the case. Mr. Wrhel timely filed his 2010 tax return and received a refund. Unfortunately for Mr. Wrhel he neglected to include on the return about $1,100 in gambling winnings from a casino run by the Ho-Chunk Nation.
IRS issued an automated underreporting (AUR) notice and eventually a stat notice. The problem with those notices was that they were sent to a prior address of Wrhel’s in Iowa, and not to the Wisconsin address that was on his 2010 tax return. IRS wound up assessing $287 tax on the unreported gambling winnings. IRS then sent multiple collection letters to his old Iowa address; eventually IRS updated its records and sent collection letters to Wrhel at his Wisconsin address. Wrhel sent in a payment for the bill and also had about $100 of his state refund taken as a result of the assessment.
Because Wisconsin was his last known address for tax purposes, when Mr. Wrhel petitioned the US Tax Court, the Tax Court eventually concluded that the stat notice (and thus the assessment) was invalid, leading the IRS to abate the assessment and issue a refund. Wrhel refused to cash the refund check because he believed that the IRS had miscalculated the amount he was owed. Part of the current dispute included Wrhel’s claim that he was entitled to a greater refund, and the consequences of his failing to cash the check that the IRS had sent him. I will skip that part but basically the court said he was not entitled to a greater refund and provided some information as to how Wrhel could get a replacement refund check.
The 2010 tax dispute led to problems in future years. Following the 2010 tax situation, Mr. Wrhel did not timely file his next three years’ tax returns. That inspired a visit to Mr. Wrhel’s home from a friendly revenue officer who left “literature” and information about the IRS collection process. While Mr. Wrhel eventually filed the returns, Mr. Wrhel did not take kindly to the visit, and he believed that it violated Section 6304, which provides that IRS employees should not engage “in any conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of any unpaid tax.”
This takes us to Section 7433, which provides that taxpayers may recover the “costs of the action” and “actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent actions of the [IRS] officer or employee.”
What were the actions that Wrhel claimed were improper? The first related to the home visit from the revenue officer which he believed amounted to harassment. The second stemmed from the collection notices that were erroneously issued to his wrong address that also generated the improper seizure of his small state tax refund. All of this business with the IRS seemed to really upset Mr. Wrhel. His distress is apparent from his filings:
I have suffered unnecessary anxiety, unnecessary unrest, unnecessary depression which caused me an inability to effectively operate my pepperidge farm business. This was unnecessary and not fair to pepperidge farm. . . . It further has wrecked all trust, faith, and belief in the United States Internal Revenue Service.
I have no desire to continue living in this country as a direct reckless disregard by the IRS and the subsequent seizure that took place.
Part of Wrhel’s unhappiness stemmed from being contacted directly and personally by a revenue officer, which Wrhel alleged was improper. The government fought hard on this point. Its first argument was that the revenue officer visit was not collection action as it was in connection with securing the filing of tax returns and only improper collection actions are within Section 7433. While the case law narrowly defines collection action, the opinion noted that the revenue officer left information about the collection process so it concluded that the revenue officer visit was collection activity. But the visit was not improper. An improper action would occur if, for example, the agent cursed or verbally abused the taxpayer or if the IRS bypassed a representative to visit the taxpayer. The opinion notes that there was no harassment, and without a Form 2848 on file there was no need for IRS to contact a representative about its house call. So the court found that there was no 7433 violation stemming from the visit. (BTW IRS has a brief info page on its website detailing when an IRS may make a visit—an important issue in today’s world of scammers).
For purposes of its motion for summary judgment, the government conceded that the IRS’s sending of the collection notices to the old Iowa address was a negligent improper collection action. This takes us back to Section 7433, which provides for a capped recovery for “actual, direct economic damages”, as well as reimbursement for costs of the action. The cap is $100,000 for negligent violations and $1M for reckless or intentional violations. The regulations also forbid recovery for emotional distress unless the distress leads to pecuniary damages. In the lawsuit, Wrhel tried to connect his emotional distress to actual economic damages. He alleged that the improper IRS actions led to his depression, substantial medical bills, repossession of his car and his ultimate sale of his business. For good measure, there was an affidavit from a psychiatrist who corroborated Wrhel’s distress being tied to his dealings with the IRS:
“[Wrhel] does perseverate somewhat on the belief that the Federal Government has stolen money from him. . . . I am somewhat uncertain about the nature of this perseveration on the government having taken money from him. It does certainly have a certain delusional quality to it, but at the same time, Mr. Wrhel denies any other psychotic symptoms, and notably as well his concerns are somewhat rooted in truth.”).
The court though pushed back on the damages issue, essentially saying that Wrhel’s desire for substantial damages was not reasonable in light of the IRS’s minor misconduct:
So what the § 7433 claim boils down to is Wrhel’s reaction to the notices sent to the wrong address, the levy of $94 from his state income tax refund, and the IRS’s bill for about $400, all for taxes on gambling winnings that Wrhel knew that he had avoided and that he would have had to pay if not for the IRS’s mistake. No one would be happy to learn that the IRS had been trying to recover taxes and had violated its own mailing rules in doing so, but again, this was not a completely fabricated bill: Wrhel indeed failed to disclose his gambling winnings. Put another way, I take Wrhel to be contending that he should be able to recover at the very least thousands of dollars in damages because the IRS sent mail to the wrong address and then recovered about $500 from him before reimbursing him.
To consider the issue of the appropriate amount of damages , the opinion circles back to tort law, and cites the Restatement (Third) of Torts, which provides that for allegations of negligent conduct inflicting emotional harm
“the actor’s conduct must be such that would cause a reasonable person to suffer serious emotional harm. . . . Objectively, an unusually susceptible person may not recover if an ordinary person would not have suffered serious emotional harm.” (emphasis added)
The court accepted that Wrehl in fact was suffering deeply, and that the evidence suggested that the IRS conduct contributed to his suffering. Yet that did not justify substantial damages as it was unreasonable to connect the alleged harm with the relatively minor misconduct:
Wrhel’s medical records provide some support for his position that he has suffered substantial mental distress from the interactions with the IRS [citing to the psychiatrist affidavit]…. And his many filings in this court underscore his anger at the IRS. He has repeatedly said that he has lost faith in the government and that he intends to move to another country. But the substantial harm that he says he suffered is simply not the type of harm that could reasonably be expected to be caused by the IRS’s violations in this case. So I conclude as a matter of law that Wrhel is not entitled to any damages flowing from emotional distress.
At the end of the day, the court awarded Mr. Wrhel $400, which was the filing fee for his district court action. The opinion concluded by recognizing Mr. Wrhel’s anger and his sense that the IRS conduct was tied in part to some sort of conspiracy relating to his father. But, as the opinion notes, IRS collection notices stem from an automated process, and it was not clear why the system failed in his case:
[T]here is no evidence to support this [conspiracy] theory, and the government maintains that its system is automated and it does not know why the system failed in this case. Hopefully in addition to his admittedly meager $400 judgment, Wrhel can take away from this case the knowledge that the IRS is as capable of making mistakes as taxpayers are.
I doubt that Mr. Wrhel will take solace in the closing words of the opinion.