Court allows Sec. 7431 tax information disclosure claim to go forward

A district court allowed one of the many taxpayers who was a victim of Charles Littlejohn, who stole the tax returns and tax information of thousands of taxpayers including President Donald Trump, to proceed with his claim against Littlejohn’s former employer for unauthorized disclosure of tax information.

Background

Booz Allen Hamilton Inc. (Booz Allen) is a government contractor that, among many other things, provides services to the IRS. The company employed Littlejohn, who between 2018 and 2021 stole tax returns and tax information relating to Kelcy Warren, the executive chairman of Energy Transfer LP, and many other taxpayers from an IRS database. He disclosed some of the information to media outlets, including ProPublica and The New York Times. ProPublica published an article based on Warren’s tax information in December 2021.

In 2023, Littlejohn was criminally prosecuted for disclosing the tax return information of several individuals, including Warren. In that proceeding, Littlejohn pleaded guilty to the unlawful disclosure of confidential tax return information. His plea agreement described the steps that he undertook to circumvent Booz Allen’s security protocols and gain access to the sensitive tax information he disclosed to the media. In 2024, Littlejohn was sentenced to five years’ imprisonment for these crimes.

Warren’s lawsuit

In April 2024, Warren filed a lawsuit against Booz Allen in federal district court based on the unauthorized disclosure and publication of his tax returns and tax information. One of the claims in his complaint in the suit was that the company violated Secs. 6103 and 7431.

Warren alleged in the suit that Littlejohn used his access to IRS tax data in his work for Booz Allen to further his political and ideological agenda. To this end, Littlejohn conducted an elaborate scheme using his “specialized technical skills” to evade the IRS controls and protocols that could detect and prevent large downloads or uploads from IRS systems and devices, and he further evaded IRS controls and protocols by uploading the tax information he stole to a private website. Warren contended that Booz Allen willfully allowed Littlejohn and other Booz Allen employees unrestricted and unmonitored access to IRS databases and systems and that, because of the company’s lax security, Littlejohn was able to use his credentials to search for and download the tax returns and tax return information of Warren and thousands of other of the nation’s wealthiest taxpayers.

With regard to his Sec. 7431 claim, Warren contended that Booz Allen is a “person … who has or had access to [his] returns or return information” within the meaning of Sec. 6103(n), and that the company, both through its own actions and through Littlejohn, its employee, repeatedly violated Sec. 6103 by inspecting his confidential tax returns and return information and unlawfully disclosing that information to ProPublica.

Booz Allen moved to dismiss Warren’s complaint for failure to state a claim upon which relief can be granted under the Federal Rules of Civil Procedure, Fed. R. Civ. P. 12(b)(6), arguing that Warren had failed to state a claim under Sec. 7431. The company contended that (1) Warren’s claim was time–barred; (2) there could be no cause of action against the company under Sec. 7431; and (3) the company could not be held vicariously liable under Sec. 7431.

Warren countered that his Sec. 7431 claim should not be dismissed because (1) he discovered the facts regarding the disclosure of his tax returns and tax return information within two years of filing the complaint; (2) Sec. 7431 permits a suit against the employer of an individual who discloses tax information; and (3) the amended complaint sufficiently alleged that Booz Allen was vicariously liable under Sec. 7431.

Sec. 7431

Under Sec. 7431(a)(2), a taxpayer may bring a civil action for damages against any “person” who is not an employee of the United States and who “knowingly, or by reason of negligence, inspects or discloses any return or return information with respect to a taxpayer” in violation of Sec. 6103. Sec. 7431(d) limits the time within which a taxpayer can bring a claim for wrongful disclosure of tax information under Sec. 7431(a) to two years after the date of discovery by the taxpayer of the unauthorized inspection or disclosure. Thus, a two–year statute of limitation applies to claims brought under Sec. 7431.

The Fourth Circuit (the circuit in which the district court hearing Warren’s case lies) has held that a taxpayer’s claim of a violation of Sec. 7431(a) accrues when the taxpayer knew or had reason to know of the injury that is the basis of the action (Wood v. Virginia, 155 F.3d 564 (Table), 1998 WL 414019, at *2 (4th Cir. 1998)). Under this standard, “such inquiry notice must be sufficient to prompt an objectively reasonable person to investigate further into the surrounding facts of the actionable injury” (id.).

Fed. R. Civ. P. 12(b)(6) — motion to dismiss for failure to state a claim

To survive a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), a plaintiff’s complaint must allege enough facts to state a plausible claim for relief. A claim is plausible when “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged” (Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). When evaluating the sufficiency of a plaintiff’s claims for these purposes, a court must accept the factual allegations in the complaint as true and construe them in the light most favorable to the plaintiff.

The district court’s decision

The district court denied Booz Allen’s motion to dismiss with respect to Warren’s claim of a violation of Secs. 6103 and 7431. It held that Warren had plausibly alleged that he discovered the disclosure of the tax return information within two years of bringing his action and that the allegations in his complaint were sufficient to state a claim under Sec. 7431 based on a vicarious–liability theory.

In his amended complaint in the case, Warren alleged a Sec. 7431 claim against Booz Allen arising from the unauthorized disclosure of his tax information in 2021. Warren filed his original complaint in his case on April 29, 2024, which was more than two years after his tax information was disclosed in the Dec. 7, 2021, ProPublica article that summarized, among other things, his tax returns. Thus, if the ProPublica article’s publication date was accepted as Warren’s discovery date, the court found that, under Sec. 7431(d), Warren’s Sec. 7431 claim would be untimely because it had been brought more than two years after his discovery of the disclosure of his tax returns.

However, Warren alleged that he was not aware that Littlejohn was the source of the unauthorized disclosure of his tax information until Sept. 29, 2023, when he learned about the criminal indictment returned against Littlejohn in the District of Columbia. He also alleged that, after becoming aware of these criminal charges, he diligently sought to identify the person responsible for the unauthorized disclosure of his tax information. Therefore, the court found that if Warren’s allegations were true, his Sec. 7431 claim did not accrue until Sept. 29, 2023, making it timely.

The court noted that the Fourth Circuit had held that a district court may resolve the issue of the accrual date of a cause of action at the motion–to–dismiss stage if the facts presented provide a clear basis for the resolution of the issue. However, the court found that a factual dispute existed regarding this issue and there was not a clear basis for the court to determine when Warren discovered the unauthorized inspection or disclosure of his tax returns. Accordingly, because, in evaluating Warren’s claims for purposes of Booz Allen’s motion to dismiss, it was obliged to accept Warren’s factual allegations regarding his discovery of the unauthorized disclosure as true, the court declined to dismiss Warren’s Sec. 7431 claim as untimely.

The court also rejected Booz Allen’s argument that it should dismiss the Sec. 7431 claim because Warren could not successfully bring a Sec. 7431 claim against the company based on a vicarious–liability theory. The court found that the question of whether Warren could ultimately prevail on this claim would largely depend upon whether he was able to establish that, when Littlejohn disclosed Warren’s tax information, Littlejohn was acting within the scope of his employment. The court observed that Warren alleged in his amended complaint that Littlejohn was acting within the scope of his employment with Booz Allen and that Littlejohn’s actions benefited the company. Again, the court was obliged to take these allegations as true, so it found that Warren’s allegations were sufficient to state a claim against Booz Allen under Sec. 7431. Consequently, the court also denied Booz Allen’s motion to dismiss the Sec. 7431 claim for this reason.

Reflections

Although the IRS had initially stated that Littlejohn had exposed the information of more than 70,000 individual and business taxpayers, the Service admitted to the House Judiciary Committee that the number was approximately six times greater — more than 405,000 taxpayers. However, out of that total number of taxpayers, the IRS claimed that 89% are business taxpayers (Nelson, “IRS Admits Anti-Trump Taxman Leaked Data on 405K filers — Six Times More Than Previously Known,” New York Post (Feb. 25, 2025)).

Warren v. Booz Allen Hamilton, Inc., No. 24–cv–01252–LKG (D. Md. 2/21/25)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser‘s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.