Hollow Taxpayer Victory When IRS Unlawfully Discloses Taxpayer Information to Japan

By law, the U.S. is not permitted to disclose false return information, even if the release of false return information is authorized by law and treaty. Code Section 7431 imposes liability on the U.S. if it discloses return information, the information is false, and the U.S. knew the information was false.

A recent case addressed the application of this Code provision in regard to disclosure of return information by the U.S. to Japan. It makes for interesting reading – one doesn’t read too much about Code Section 7431.

In the case, the U.S. was found liable for violating Code Section 7431 when it made up figures for unreported income in preparing a Simultaneous Examination Proposal that sought to have a joint examination of taxpayers with Japan. The U.S. argued that the estimate was not “return information.”  It also argued that an estimate of unreported income cannot be false because it is only an estimate. The appeals court disagreed and found the U.S. violated the statute.

Code Section 7431(c) provides the damages for a violation. The taxpayers sought an award of $52 million in actual damages, consisting of $47 million in economic damages and $5 million in attorneys’ fees in a successful defense of Japanese tax assessments (although these damages included damages for other disclosures which were found not to violate Code Section 7431). Code Section 7431(c) does allow for actual and punitive damages. However, the appeals court was not convinced that the disclosure caused any damages to the taxpayer, since the taxpayers could not prove that “but for” the false information, Japan would not have otherwise audited the taxpayer. That is, the taxpayers did not meet their burden of proof that Japan would not have audited if they had not received this information – the court noted that there was other information that could have triggered the audit.

In the absence of actual or punitive damages, the statute provides for $1,000 per incident statutory damages. Finding three violations, the appellate court awarded $3,000 in damages. Thus, the taxpayers won their case for liability, but were unable to prove any material actual damages. The taxpayers surely did not pursue this matter solely for $3,000 in damages.

The taxpayers may still be able to get their attorneys fees paid – that issue has not yet been decided.

ALOE VERA INC v. U.S., 115 AFTR 2d 2015-XXXX, (DC AZ), 02/11/2015