Originally published on Forbes.com May 2nd, 2014
People who argue that wages are not taxable income generally do not fare well when they make those arguments in federal court. Having one of them win a damage claim against the IRS for fumbling a levy is something worthy of note. The case of Laurie L. Music v United States of America was recently decided in the United States District Court for the Northern District of Georgia (Sorry can’t find a free link). It’s not much of a win for the tax deniers, but it is a win. It will be interesting to see what they will make of it.
The Ruling
On April 1, 2014, the court held a bench trial and received evidence from both parties. After a careful review of the record and the testimony presented, the court finds that plaintiff is entitled to judgment in her favor. The IRS failed to exercise “reasonable diligence” in ascertaining plaintiff’s “last known address.” However, plaintiff’s victory is somewhat pyrrhic; the entirety of her requested damages were not proximately caused by the IRS’ negligence and even if they were, she could have reasonably mitigated the damages.
Although plaintiff has not requested it, the court will take judicial notice that plaintiff paid a $350 filing fee to file this action and award that cost as damages. Therefore, plaintiff is entitled to judgment in her favor against defendant for $350.
The Story
Ms. Music went fifteen years without filing an income tax return. The last time she filed she listed her address as Summerfield, FL. Around 1998 she moved to Blue Ridge, GA.
Plaintiff’s continued abstention from filing income tax returns piqued the IRS’ interest. Sometime in August, 2005, the IRS sent a letter to plaintiff’s Summerfield address stating that the IRS had no record of receiving her tax returns for the 2001–2003 tax years. Sensibly, the IRS sent the letter to Summerfield, Florida, because that was plaintiff’s last known address. The IRS did not receive a response to its inquiry, so the IRS searched for an alternate address to send a follow-up letter. Plaintiff’s W-2 listed an address in Blue Ridge, Georgia, and the IRS used that address for a follow-up letter dated September 3, 2005. Plaintiff received the Blue Ridge letter and responded that she was not required to file a tax return; under her (extremely flawed) reading of the tax code, she did not have any income. She also claimed that she had not received any letters from the IRS other than the letter dated September 3, 2005.
In late 2005, plaintiff moved from Blue Ridge, Georgia to Epworth, Georgia. She did not leave a forwarding address with the Post Office, and she did not inform the IRS that she moved.
In 2007 Ms.Music had some correspondence with the IRS. She argued that she was exempt from withholding and wanted her W-4 to be honored. The IRS sent a response to her Florida address, but when that was returned, they sent a follow-up to her Epworth address. So somebody at the IRS knew she was living in Epworth.
When it came time to send her a notice of deficiency for not filing her returns for the years 2004-2006, it was sent to her Florida address. She did not respond to the notice and the IRS followed through with a levy, the notice of which was sent to her old Florida address. The levy reduced her pay to $779.17 (The case does not say per what) leaving her not enough to pay her living and commuting expenses. So she quit.
The Stakes
The United States may be liable for taxpayer damages incurred due to the intentional, reckless, or negligent disregard of any provision of Title 26 by an IRS officer or employee in connection with the collection of a taxpayer’s federal tax. As a preliminary matter, the taxpayer must show that she has exhausted her administrative remedies. 26 U.S.C. § 7433(d)(1). If she has done so, then she must demonstrate that the IRS intentionally, recklessly, or knowingly disregarded a provision of the Internal Revenue Code in connection the collection of federal tax with respect to the taxpayer. If the court finds that the taxpayer established liability, then the taxpayer is entitled to damages.
The statute caps damages at $1,000,000 if the conduct was intentional or reckless and $100,000 if the conduct was merely negligent.
IRS Was Negligent
The Court found that the IRS was negligent in executing a levy after sending the notice to an address where previous correspondence has been returned undelivered.
Moreover, any concerns initially raised by a history of undelivered mail would have been confirmed by a cursory glance at plaintiff’s file. Plaintiff’s employer was located in Georgia, and plaintiff responded only to IRS correspondence sent to Georgia addresses. Despite these clear indications that plaintiff no longer lived at her Summerfield address and almost certainly lived outside Florida, the IRS sent the notice of intent to levy to plaintiff’s Summerfield address. Every piece of evidence points to the IRS’ blind reliance on the master file’s “last known address” despite obvious indications that plaintiff no longer lived at that address.
The “But It Was The Computer That Handled It” Defense
Defendant also asks the court to draw a distinction between cases handled by the IRS’ Automated Collection System (“ACS”) and cases handled by IRS agents. Since plaintiff’s potential tax liability was relatively small, her case was handled by the computer driven ACS rather than assigned to a revenue officer. Defendant argues that reasonable diligence “cannot be assessed in a vacuum” and that the court should distinguish between cases handled by the ACS and those handled by revenue officers.
The Court did not buy it.
In other words, defendant asks the court to vary the IRS’ “reasonable diligence” obligation based on whether the case is handled by an IRS officer or the ACS. The court will not do so. Defendant’s position has no statutory or regulatory support, and it is contrary to the procedural due process rights extended by Congress to taxpayers in § 6331.
No Damages
The Court did not find that Ms. Music suffered any of her claimed damages as a result of the IRS misdirected levy.
Plaintiff’s damages were not the proximate result of the IRS’ negligent actions. Plaintiff would have suffered the same “damages” even if she received the notice of intent to levy. Plaintiff claims that she does not need to file a tax return because her “wages” are not considered “income” under the tax code. Her position is patently frivolous.
Plaintiff mistakenly equivocates the validity of the levy with the validity of the assessment giving rise to the levy. Even though the levy did not comply with a statutory notice requirement, plaintiff still owes back taxes. All the IRS needs to do to effect a procedurally compliant levy is to provide notice thirty days before reimposing the levy. Accordingly, plaintiff’s damages are, at most, the sum of the prelevy paychecks she would have received in the thirty days after the levy went into effect.
Even drastically reduced, plaintiff’s remaining damages were not foreseeable. Plaintiff’s quitting her job is not a natural and probable consequence of an incorrectly addressed letter.
But She Does Get Her $350 Back
The IRS violated § 26 U.S.C. § 6331 by sending notice of its intent to levy to an address where previous correspondence had been returned undelivered. By doing so, the IRS failed to satisfy its obligation to exercise “reasonable diligence” to determine plaintiff’s last known address. Plaintiff is entitled to her actual, direct economic damages plus the costs of the action. The IRS’ negligent conduct did not proximately cause any actual, direct economic damages to plaintiff, but plaintiff incurred $350 in “costs of the action” damages by filing her complaint. The court finds that plaintiff is entitled to judgment in her favor against defendant for $350. The Clerk of Court is DIRECTED to enter judgment accordingly.
Seriously This Is Disturbing
There are a significant number of people out there who argue that most ordinary Americans are not subject to income tax. Although they always lose on those arguments, and Ms. Music is no exception, when there is actual litigation, this case is evidence that they may be swamping the system. Ms. Music went 15 years without filing. The strains on the IRS budget make it more likely that more of them will be able to slip through the cracks. The courts, quite rightly, will require the IRS to dot all its i’s and cross all its t' s, as they are doing in this case. Nothing is requiring Congress to provide them with the resources to do that.
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