Information contained in income tax returns can be relevant to various types of disputes. Therefore, parties may seek to “discover” the other party’s tax returns. However, courts generally do not require the disclosure of tax returns —even when the returns may be relevant—due to their private and confidential nature. Instead, courts apply a strict standard to determine whether the tax returns should be disclosed.
In most cases, a party (or non-party) from whom returns are sought will claim confidentiality and refuse to produce returns. That means if a party wants returns produced, he/she has to ask the Court to require disclosure of the returns. In making this determination, courts assess whether the party who seeks disclosure has demonstrated:
- A “strong necessity” for the returns to prove its cause of action or defenses; and
- The information in the returns is not available from other sources.
Strong necessity for the tax return
A party may claim that the tax returns are necessary to prove (or disprove) damages or will provide important circumstantial evidence regarding alleged fraud. Some examples include the following:
- Plaintiff claims that Defendant’s wrongdoing has resulted in lost earnings for a certain period of time. Plaintiff may be required to produce income tax returns for that period so Defendant can ascertain whether Plaintiff’s earning capacity was affected by the alleged wrongdoing.
- Insured seeks payment from insurer for fire damage to the insured’s building. Insurer claims that the fire was a result of arson by the insured. Courts have allowed tax returns to be disclosed in order to prove the financial condition of the insured and provide circumstantial evidence of fraud.
- Plaintiff claims that Defendant stole precious goods in order to sell the same to cover gambling losses. While the Defendant admits he had gambling losses, he claims that his income at the time was sufficient to cover the losses. Disclosure of his tax returns may be required in order to show his income.
Another common reason that parties seek tax returns is for purposes of impeachment. This comes up when a party may be taking a position now which contradicts a prior position he/she took that is reflected on the tax return. For example, Plaintiff claims that business property was destroyed and seeks damages. The Plaintiff claims property was worth a certain amount of money, but the Defendant suspects that this amount is inflated and wants to know what value was reported by Plaintiff on its tax return. This may be a sufficient reason if the value of the destroyed/damaged property is integral to the case and there is no other source of evidence to establish the value of the property. However, it should be noted that Courts have not allowed disclosure of returns for purposes of impeachment if it involves an issue collateral to the case.
Information not available from other sources
Disclosure of tax returns is not allowed when the information needed is available elsewhere. For instance, tax returns are not necessary if a plaintiff is trying to put together an accounting of monies owed and can do so based upon other financial records. Similarly, if a party needs to determine the value of property and there are other sources for that information besides the tax return, disclosure will not be required.
Courts generally disfavor allowing access to tax returns. However, if this is an issue in your case, discuss your options with a qualified attorney.
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