ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – CAN YOU SUE THE IRS FOR MISAPPLYING YOUR REFUND?
By Robert S. Schriebman
There are several articles on this website that reflect the IRS’ concern about identity theft and the precautions and steps necessary to prevent it. Most of these warnings are directed toward professionals, such as CPAs and Enrolled Agents. Until now there have been no court cases discussing a taxpayer’s remedy when he/she becomes the victim of refund theft. The case of David W. Shreve illustrates what can happen when professional files have been hacked. This article will discuss the Shreve case and the frustrations experienced by Mr. Shreve when he found out his income tax refund had been stolen by thieves. Shreve went after the IRS for misapplying his refund. Let’s see what happened.
The Case of David W. Shreve
David W. Shreve v. US, (US District Court, W.D. Virginia; 6:21-cs-00050, March 31, 2022).
In early March 2019, Shreve received a call from his accountant that his 2018 tax refund was available. He instructed his accountant to apply the refund to his 2019 tax liability and refund to him any excess. Three days later his accountant notified Shreve that he had received a fraudulent email, purporting to be from Shreve, instructing the accountant to send the refund into a Wells Fargo bank account instead. The accountant did so.
On that very day when Shreve found out his refund was stolen, he contacted the IRS by phone, and was assured that the refund would be stopped from being deposited in the crook’s account. The IRS would issue a ticket to stop the deposit. He was informed that he would receive a physical paper check. A few days later, Shreve called the IRS again, and learned that his refund had been deposited in the crook’s account and that there was nothing the IRS could do to cure the situation. The stop-ticket was too late. Shreve took the IRS to Federal Court using The Federal Tort Claims Act alleging the IRS’ actions and omissions caused him damages equivalent to the amount of his tax refund. The case was heard by the US District Court in Virginia.
Shreve Goes After the IRS for Negligence in Misapplying His Refund
There is an old maxim derived from English common law that the king can do no wrong and because of that maxim the sovereign is immune from lawsuits. In this country, the United States also maintains sovereign immunity against all lawsuits except where there is a specific statute allowing a claim against the government. When it comes to the IRS, we see this rule in action allowing a taxpayer to sue the IRS for a refund, and the award of professional fees and costs when the taxpayer prevails in tax litigation. There are also limited circumstances where the IRS can be sued for violating specific rights including Fourth Amendment violations. (See Bivens vs. Six Unknown Agents of the Federal Bureau of Narcotics 403 US 388 (1971))