Yes, You Can Make a Claim Against the Iowa Department of Revenue Under the Iowa Tort Claims Act for its Improper Collection Actions

The Iowa Department of Revenue (“Department”) enjoys immunity from lawsuits for “[a]ny claim arising in respect to the assessment or collection of any tax or fee.”  Iowa Code § 669.14(2).  However, such immunity is waived

if the director or an employee of the department recklessly or intentionally disregards any tax law or rule in the collection of any tax, or if the director or an employee of the department knowingly or negligently fails to release a lien against or bond on a taxpayer’s property. 

Iowa Code § 421.60(5). 

In such cases, a taxpayer may file a claim against the Department under the Iowa Tort Claim Act (“Act”).  Id. The damages are “limited to the actual direct economic damages suffered by the taxpayer as a proximate result of the actions of the director or employee, plus costs, reduced by the amount of such damages and costs as could reasonably have been mitigated by the taxpayer.”  Id.

So, what does this mean? 

A taxpayer cannot bring a claim under the Act against the Department for improperly assessing a taxpayer. A taxpayer’s claims are limited to the Department’s actions related to the collection of tax and failure to release a lien. 

Collection of Tax

“A mere assessment is not a collection action.” Miller v. United States, 763 F. Supp. 1534, 1543 (N.D. Cal. 1991).  A “notice and demand for payment constitute a collection action, as does the filing of a notice of tax lien.”  Id.  Other collection action could be garnishment of wages. 

When bringing a claim under the Act pursuant to Iowa Code section 421.60(5), a taxpayer must prove “the director or an employee of the department recklessly or intentionally disregard[ed] any tax law or rule in the collection of any tax.”  This language appears to have been taken from the federal statute 26 USC § 7433.

Iowa law has certain laws and rules the Department must follow when collecting tax.  Most relevant is Iowa Code § 422.26 which requires a be placed “upon all property and rights to property, whether real or personal, belonging to said taxpayer” “whenever any taxpayer liable to pay a tax and penalty imposed refuses or neglects to pay the same.”  Iowa Code § 422.26.  (emphasis added).  The Director is also required to “file with the recorder of the county, in which said property is located, a notice of said lien.” Id.  “’Taxpayer’ includes a person who is subject to” taxes.  Iowa Code § 423.1(60).  “’Person’ means an individual, trust, estate, fiduciary, partnership, limited liability company, limited liability partnership, corporation, or any other legal entity.” Iowa Code § 423.1(36).  Thus, the Department can only place a lien on property owned by the taxpayer against whom the Department has asserted liability. 

The most likely claim against the Department under the Act would arise when the Department disregards the requirement that the lien be placed upon property owned by (“belonging to”) the taxpayer and places the lien upon property owned, for example, someone other than the taxpayer.  This could occur when the Department has assessed a business for sales or use taxes but places a lien on the personal residence, or garnishes the wages, of the business owner. A taxpayer may also have a claim against the Department under the Act if the Department places a lien on property before it is fully determined the taxpayer is liable to pay tax. 

Failure to Release a Lien Against a Taxpayer’s Property 

There is no Iowa authority on the Department failing to release a lien against a taxpayer’s property.  However, similar to Iowa law, federal law (26 USC § 7432) allows a taxpayer to bring a claim against the federal government “[i]f any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer.”  Accordingly, case law interpreting the federal statute is helpful.

In Steffen v. US, 952 F.Supp. 799 (M.D. Fla. 1997), the court laid out the two prong test for proving that the IRS negligently released a lien:

1. Taxpayer must show that the taxing authority knew or should have known that assessment was fully satisfied or legally unenforceable at the time the taxpayer requested release of the federal tax lien; and
2. Taxpayer must show that relevant employees knowingly or negligently failed to release the lien within thirty days.

A taxpayer might be successful in its claim under the Act if (1) the Department’s assessment was for the wrong taxpayer (2) resulting in a lien being placed on that taxpayer’s property and (3) the Department refusing to cancel the assessment and remove the lien after being informed of the erroneous assessment.

Amount of Damages

Damages are “limited to the actual direct economic damages suffered by the taxpayer as a proximate result of the actions of the director or employee, plus costs, reduced by the amount of such damages and costs as could reasonably have been mitigated by the taxpayer.”  Iowa Code § 421.60(5).  This means that a successful taxpayer could be awarded the expenses incurred by the taxpayer in challenging the Department’s improper assessment and lien and other expenses incurred by the taxpayer as a proximate result of the Department failing to release the lien.  Additionally, if successful, the Act allows payment of reasonable attorney fees and expenses incurred in bringing the claim under the Act.  Iowa Code § 669.15. 

Conclusion

The ability of a taxpayer to bring a claim against the Department under the Act is limited, but underutilized. If the facts are right, this can be a powerful tool in resolving disputes with the Department. Taxpayers with tax liens on their property or wages being garnished by the Department should ensure the Department complied with all applicable statutes and rules before placing and recording those liens. Furthermore, if the Department has improperly placed a lien on a taxpayer’s property and refuses to release the lien, taxpayers should consider filing a claim under the Act.