IRS can’t be sued for negligent refund processing

Where the Internal Revenue Service, or IRS, negligently deposited a tax refund into a fraudulent account despite being warned in time to stop it, a taxpayer’s negligence suit was barred by sovereign immunity.

The government moved to dismiss on the grounds that issuing refunds is related to the “assessment or collection of taxes,” which is an exception to the immunity waiver in the Federal Tort Claims Act, or FTCA.

The plaintiff responded that such a policy “would perpetrate an injustice on the taxpayer.”

Judge Elizabeth K. Dillon of the Western District of Virginia broadly construed the FTCA exception as a bar to the alleged negligence and dismissed the suit.

Dillon’s March 4 opinion is Shreve v. U.S. (VLW 022-3-153).

The refund

In March 2019, David W. Shreve told his accountant to apply his 2018 refund to his 2019 tax liability and send him the excess. Three days later, Shreve learned his accountant had received a fraudulent email purporting to be from him with direct deposit instructions for the refund.

Unfortunately, his accountant had already forwarded the fraudulent deposit information to the IRS.

Shreve immediately contacted the IRS, and an agent told him, “she would put in a ticket to stop the deposit” and he would receive a paper check in late March.

One month later, however, Shreve learned the IRS had deposited his refund into the fraudulent account.

Shreve alleged the IRS later confirmed over the phone that “a code had been placed to flip the return from direct deposit to a physical check,” but the money was deposited anyway and “there was nothing else the IRS could do.”

In pleading negligence under the FTCA, Shreve alleged the IRS owed him a duty after being warned of the fraud in time, and that they breached that duty by failing to stop the direct deposit.

Sovereign immunity

Dillon noted that the U.S. “is immune from all suits absent an express waiver of its sovereign immunity.”

The FTCA provides a limited waiver of sovereign immunity for certain torts committed by federal employees acting within the scope of their employment.

“It is the plaintiff’s burden to show ‘an unequivocal waiver of sovereign immunity,’ [which] must be strictly construed in the United States’ favor,” the judge wrote.

According to the government, the FTCA’s immunity exception for the “assessment or collection of taxes” should be broadly construed in line with the 2nd U.S. Circuit Court of Appeals’ holding in Aetna Cas. & Sur. Co. v. United States, 71 F. 3d 475 (2nd Cir. 1995).

The plaintiff in Aetna argued that the payment of a refund was not the “assessment or collection of taxes” so the exception to the immunity waiver did not apply.

But the Second Circuit disagreed, reasoning that “‘the payment of refunds when due is an integral part of the government’s mechanism for assessing and collecting taxes.’”

Noting that the 4th U.S. Circuit Court of Appeals has not yet addressed the issue, Dillon found the holding in Aetna to be persuasive and dismissed Shreve’s complaint.

“As the United States notes in its memorandum, Shreve is not likely to be without a remedy for his stolen refund check,” the judge wrote, pointing to 31 U.S.C. § 3343(b), which provides a recourse for lost or stolen government checks.  “However, Shreve’s remedy is not a claim for negligence against the United States under the FTCA.”