In a recent ruling, the U.S. District Court for the Eastern District of Tennessee reversed its prior decision requiring the IRS to return all documents illegally collected by the IRS under Notice 2016-66. Instead, the IRS was ordered to return only documents that it illegally collected from our firm, CIC Services.
After carefully reviewing the law and despite clearly wanting to deprive the IRS of any benefits of its illegal conduct, the court concluded that it was regrettably powerless to order the return of the illegally-obtained documents to every taxpayer and material advisor as a remedy in our case. Importantly, the court did *not* rule that these other taxpayers aren’t entitled to also have their documents returned, only that ordering the return of documents to persons not a party to our lawsuit was not legally permissible under the facts of our lawsuit. In other words, the court ruled that anyone wanting their documents returned must bring a lawsuit of their own against the IRS or else participate in a class action lawsuit for this purpose.
While CIC Services disagrees with the court’s conclusion and is considering future options, it ultimately respects the judge’s careful and thoughtful analysis and fair treatment of the parties throughout this process.
Though this decision deprives persons not a party to our lawsuit of the right to get their documents returned by virtue of *our* lawsuit, it’s important to remember that they continue to benefit from our lawsuit in other ways. Most importantly Notice 2016-66 remains *vacated* by the court. This means (according to our understanding) that the IRS can presently no longer legally enforce that notice against any taxpayer or material advisor anywhere in the country. We believe that the IRS’s continued illegal conduct has been stopped by our lawsuit and that taxpayers therefore need not continue to make additional filings under the notice. That is significant.
Also, the court’s recent order all but invites other affected taxpayers and material advisors who also want their documents returned to them to bring lawsuits of their own, potentially even a class action lawsuit on behalf of the entire industry. Such lawsuits are in our opinion likely to be effective and should perhaps even be a mere formality since the substantive issue of the illegality of Notice 2016-66 has already been resolved in our case.
We hope that lots of taxpayers and material advisors accept the court’s invitation to bring lawsuits demanding the return of their illegally obtained information. The IRS should not be allowed to retain and continue using against taxpayers information that it illegally extorted from them, and it is up to each taxpayer to stop them.
We also hope that taxpayers and material advisors presently under audit or investigation by the IRS, or in litigation with it, will demand that the IRS specifically identify the extent to which any information it illegally obtained about the audited taxpayer via Notice 2016-66 has informed its audit, investigation and litigation strategy against that taxpayer or material advisor. As a general principle of law, illegally obtained information may not be introduced by the government as evidence against a person and may not inform the government’s future conduct. Affected taxpayers therefore may consider actively resisting the government’s attempts to use illegally-obtained information against them in any audits, investigations, or litigation. If our litigation experience proves anything, it is that courts are perhaps likely to be sympathetic to these arguments.
Sean King, JD, CPA