Payne v. United States

Jerry Payne (plaintiff) owned a business that was being audited by the Internal Revenue Service (IRS) (defendant). During the audit, the IRS came to suspect fraud and began a criminal investigation. Initially, IRS criminal investigators believed that Payne would cooperate with the investigation. But the investigators also contacted third parties seeking financial information about Payne. The criminal investigators later conceded that they could have obtained the same information from Payne without prejudicing the investigation. While contacting third parties, the investigators disclosed that Payne was under criminal investigation for potential revenue-code violations. Payne was not convicted of the tax crimes for which he had been investigated. Payne then sued the IRS for its actions during the investigation under an Internal Revenue Code (code) provision that created a private cause of action if a federal official knowingly or negligently violated the confidentiality provisions of the code. Specifically, the code made return information confidential, subject to limited exceptions. “Return information” was broadly defined to include a taxpayer’s identity and whether the taxpayer was under investigation. The matter went to a bench trial, and the district court found for Payne. The United States (defendant) appealed, claiming that the disclosure to third parties was authorized and necessary in order to corroborate information provided by Payne.