## Facts

- The IRS opened an audit and then a criminal tax investigation into Metro Denver Maintenance Cleaning, Inc. (MDMCI), a janitorial services company, and its owner, Anthony F. DiAndrea, based on multiple “badges of fraud,” including inconsistent financial statements and suspected improper deductions.
- During the criminal investigation, an IRS special agent issued summonses for MDMCI’s books, bank statements, and related financial records.
- The agent also sent a form “circular letter” to MDMCI’s customers requesting information about payments made to MDMCI, including any cash payments.
- The letter identified MDMCI, stated the IRS was conducting a criminal tax investigation, and indicated the recipient had transacted with MDMCI.
- The investigation was later closed without criminal charges; the IRS was able to reconcile discrepancies using financial records.
- DiAndrea and MDMCI sued the United States, alleging the customer letters unlawfully disclosed confidential “return information” in violation of I.R.C. § 6103 and seeking damages under I.R.C. § 7431.
- The district court ruled for the taxpayers and awarded damages, reasoning the IRS lacked sufficient preexisting evidence of unreported cash payments before sending the letters.
- The United States appealed.

## Issues

1. Whether the circular letters disclosed “return information” protected by I.R.C. § 6103(b)(2), including the fact of an investigation and the taxpayer’s identity.
2. Whether the disclosures in the letters were authorized under I.R.C. § 6103(k)(6) as necessary investigative disclosures made in connection with tax administration.
3. Whether the district court improperly imposed an evidentiary threshold (proof of suspected cash payments) as a prerequisite to using third-party letters.
4. Whether damages were available under I.R.C. § 7431 absent an unlawful disclosure under § 6103.

## Decision

- The Tenth Circuit reversed the district court’s judgment and held for the United States.
- The court held the IRS circular letters did not violate I.R.C. § 6103.
- Even assuming the letters conveyed “return information,” the disclosures were authorized by § 6103(k)(6) and implementing regulations as part of an official criminal tax investigation to obtain information not otherwise reasonably available.
- Because there was no unlawful disclosure under § 6103, the taxpayers could not recover damages under § 7431.

## Legal Principles

- I.R.C. § 6103 broadly protects tax returns and “return information,” including the fact that a return “was, is being, or will be” examined or investigated.
- I.R.C. § 6103(k)(6) permits IRS employees, in connection with official duties relating to tax administration (including criminal investigations), to make limited disclosures necessary to obtain information not otherwise reasonably available, subject to regulations.
- Courts will not read § 6103 to bar routine third-party investigative contacts that are reasonably related to tax enforcement and fit within statutory exceptions.
- A § 7431 damages claim requires a predicate unlawful disclosure of returns or return information in violation of § 6103.

## Conclusion

The Tenth Circuit held that the IRS’s customer circular letters were permissible investigatory disclosures under § 6103(k)(6), so the taxpayers could not establish an unlawful disclosure under § 6103 and therefore could not recover damages under § 7431.


DiAndrea v. United States, 968 F.2d 1049 (10th Cir. 1992)