A recent Order from the United States District Court for the Southern District of California in the case of Rimon Hanna v. Internal Revenue Service (IRS), Case No.: 3:24-cv-00515-RBM-KSC, provides a relevant reminder regarding the strict limitations of suing the government for damages under Internal Revenue Code (IRC) § 7433. This case, involving a pro se taxpayer challenging IRS actions related to amended returns and resulting balances, was dismissed by the Court for lack of subject matter jurisdiction and failure to state a claim. The Order highlights critical distinctions between tax assessment and collection activities and reinforces the principle of sovereign immunity.

Procedural Background

Mr. Rimon Hanna ("Plaintiff") initiated this action against the IRS and Doe defendants on March 18, 2024, by filing a Complaint. Alongside the Complaint, the Plaintiff filed a Motion for Leave to Proceed in Forma Pauperis ("IFP Motion") under 28 U.S.C. § 1915. The Court granted the IFP Motion on September 20, 2024, but simultaneously dismissed the Complaint without prejudice for failure to state a claim pursuant to 28 U.S.C. § 1915(e)(2). Given his pro se status, the Plaintiff was granted leave to file an amended complaint by October 11, 2024.

More than two months after this deadline, on December 18, 2024, Plaintiff filed a Motion requesting an extension to file his amended complaint by January 10, 2025. Notably, on January 9, 2025, before the Court ruled on the extension motion, Plaintiff filed his First Amended Complaint ("FAC").

The Court first addressed the Plaintiff’s Motion for Extension of Time. Under Federal Rule of Civil Procedure 6(b)(1)(B), a court may extend a deadline after it has expired for good cause based on excusable neglect. This standard is evaluated using the four-factor equitable test established in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 395 (1993), which considers: (1) the danger of prejudice to the opposing party; (2) the length of the delay and its potential impact; (3) the reason for the delay; and (4) whether the movant acted in good faith. Plaintiff stated he did not receive the Court’s prior order due to possible mail loss at an unsecured former address and that he promptly filed the motion after learning of the ruling. Applying the Pioneer factors, the Court found Plaintiff’s failure to be excusable neglect, noting no indication of willfulness or bad faith and that the delay was not great. Consequently, the Motion for Extension was GRANTED, and the FAC was deemed timely filed. The Court did caution the Plaintiff against future untimely filings.

Factual Background Alleged in the FAC

According to the FAC, Plaintiff amended his 2016, 2017, and 2018 tax returns (Form 1040X), which were mailed on April 17, 2020 (though the FAC stated 2021, exhibits show 2020), to reflect self-employment as an UBER driver, including increased earnings and self-employment expenses.

Plaintiff alleged that the IRS processed the 2016 and 2018 amended returns, issuing refunds of $815.29 and $2,557.00, respectively. For the 2017 amended return, he claims a refund of $1,069.00 should have been issued. Instead, the IRS allegedly withheld these refunds and applied them to a "(new) calculated balance" of $2,234.04 for the 2017 tax year. This balance, Plaintiff contends, resulted from the IRS disallowing a "genuine deduction". He further states he was "forced to issue a payment to the IRS in the amount of $1539.00 to keep his account in good standing with the IRS and to avoid collection".

Plaintiff claimed a local IRS manager reviewed his file and determined the 2017 amended return was timely filed and "all of the expenses and credits should have been allowed". A correction was promised by a supervisor in Fresno but never made. Plaintiff sent an "Appeal Request–Notice to Sue" letter on June 29, 2022, appealing the decision on his 2017 amended return, which the IRS rejected on November 22, 2022. The Court also noted an IRS second notice of balance due for 2017, dated June 7, 2021, for $2,234.04, requesting payment by June 17, 2021, to stop penalties and interest.

Taxpayer’s Claim for Relief

Plaintiff asserted a single cause of action for civil damages under IRC § 7433. He claimed the IRS violated 26 U.S.C. §§ 161, 162, "26 USC Part VI," and the "Taxpayer Bill of Rights". The requested relief included the "release" of the alleged refunds for 2016 ($815.29), 2017 ($1,069.00), and 2018 ($2,557.00), and the reversal of any penalties and interest charged.

The Court noted that "26 USC Part VI" is not a proper basis for a claim as it refers to numerous provisions, including §§ 161 and 162, and that the "Taxpayer’s Bill of Rights" is equivalent to § 7433 itself and thus cannot serve as an independent basis [23 fn 7]. Therefore, the core of Plaintiff’s § 7433 claim was based on alleged violations of §§ 161 and 162 [23 fn 7, 32].

Court’s Legal Analysis and Application

The Court performed a mandatory, sua sponte screening of the FAC under 28 U.S.C. § 1915(e)(2)(B) because Plaintiff was proceeding IFP. Such review requires dismissal if the action is frivolous, malicious, fails to state a claim, or seeks monetary relief against an immune defendant.

Subject Matter Jurisdiction and Sovereign Immunity:
- The Court emphasized that federal courts are courts of limited jurisdiction and must ensure they have subject matter jurisdiction. Lack of subject matter jurisdiction necessitates dismissal under Fed. R. Civ. P. 12(h)(3).
- Crucially, the federal government, as a sovereign, is immune from suit unless it has expressly waived that immunity by statute. Waivers of sovereign immunity must be strictly construed in favor of the sovereign.
- IRC § 7433 provides a limited waiver of sovereign immunity, allowing taxpayers to sue the government for damages if an IRS officer or employee recklessly, intentionally, or negligently disregards any provision of the IRC or regulations in connection with the collection of a Federal tax.
- The Court underscored that this waiver is strictly limited to conduct related to tax collection. It does not apply to the assessment or determination of tax liability, even if improper, because these activities are "not an act of collection".
- Application to Facts: The Court found that Plaintiff’s allegations primarily described actions related to the assessment and determination of his tax liability, not collection activities. The core complaint was that the IRS calculated a new balance for 2017 by disallowing a deduction. IRC §§ 161 and 162, which Plaintiff cited, define itemized deductions used in the assessment of taxable income, not collection procedures. While withholding refunds and applying them to a balance could involve collection aspects, the basis for the balance itself was the disallowed deduction, which falls under assessment. Plaintiff’s own statement that he paid to "avoid collection" also suggests the challenged actions were antecedent to collection. Since Plaintiff’s claims challenged conduct in connection with assessment, not collection, the Court concluded that the United States has not waived its sovereign immunity under § 7433 for these claims.
- Conclusion on Jurisdiction: Because the Plaintiff’s claim fell outside the scope of the § 7433 waiver, the Court lacked subject matter jurisdiction over the action. The FAC was therefore DISMISSED for lack of subject matter jurisdiction pursuant to § 1915(e)(2)(B)(ii), which requires dismissal when the action seeks monetary relief against an immune defendant.
Failure to State a Claim:
- Although the jurisdictional defect was dispositive, the Court additionally addressed whether the FAC stated a claim under § 7433. A complaint must contain a "short and plain statement of the grounds for the court’s jurisdiction" and sufficient factual matter to state a claim that is "plausible on its face".
- To state a plausible § 7433 claim, a plaintiff must allege a violation of an IRC provision or regulation in connection with tax collection. Collection actions typically include notice and demand for payment and filing tax liens. Assessment and collection are distinct: assessment challenges involve why taxes are owed, while collection challenges involve how the IRS attempts to acquire assets.
- Application to Facts: While the IRS notice of a balance due arguably constitutes "notice and demand for payment," which is a collection action, the Court found that Plaintiff did not allege a deficiency in the IRS’ collection procedure. The FAC did not plausibly allege that the IRS failed to follow prescribed methods of acquiring assets or acted with intentional/reckless disregard during collection. Plaintiff’s allegations focused entirely on the disallowance of a deduction and the resulting balance, which the Court characterized again as issues of assessment, not collection activities.
- Conclusion on Stating a Claim: As Plaintiff’s allegations did not plausibly describe an unauthorized collection action, the Court found that the FAC failed to state a claim under § 7433.
Improper Defendant:
- The Court pointed out another fundamental issue: IRC § 7433 states that a taxpayer "may bring a civil action for damages against the United States". The IRS is an agency of the United States, but it is not an entity subject to suit under § 7433.
- Conclusion on Defendant: The IRS was therefore DISMISSED from the action as an improper defendant.

Conclusion of the Order

Based on the analysis, the Court GRANTED Plaintiff’s Motion for Extension and DISMISSED the FAC pursuant to § 1915(e)(2) for lack of subject matter jurisdiction and failure to state a claim. The IRS was also dismissed as an improper defendant.

Despite the significant deficiencies identified, particularly concerning jurisdiction and the assessment vs. collection distinction, the Court granted Plaintiff a second opportunity to amend his FAC. The Plaintiff must file any second amended complaint by June 13, 2025. The Court warned that failure to respond adequately by this deadline may result in the dismissal of the entire action with prejudice.

Key Takeaways for Tax CPAs:

This case underscores the critical importance of correctly identifying the type of IRS conduct being challenged when considering potential litigation against the government, particularly under § 7433.

Sovereign Immunity: The U.S. government is generally immune from suit. Waivers, like § 7433, are limited and strictly construed.
Assessment vs. Collection: IRC § 7433 provides a damages remedy only for unauthorized actions in connection with tax collection. It explicitly does NOT cover improper assessment or determination of tax liability.
Pleading Standard: Even when alleging collection activity, the complaint must plausibly allege a disregard of law or regulation specific to the collection procedures. A challenge to the underlying validity of the tax (i.e., the assessment) is not actionable under § 7433.
Proper Defendant: Suits under § 7433 must name the United States as the defendant, not the IRS.

When advising clients who feel aggrieved by IRS actions, it is crucial to analyze whether the dispute arises from how the tax liability was determined (assessment) or how the IRS is attempting to obtain payment (collection). If the core issue is a disallowed deduction, an audit adjustment, or other matters impacting the calculation of the tax due, § 7433 is likely not the appropriate remedy. Other avenues, such as challenging the assessment in Tax Court or pursuing a refund claim after payment, may be necessary, depending on the procedural posture.

This Order serves as a salient reminder that procedural requirements and jurisdictional limits, particularly sovereign immunity waivers like § 7433, are applied rigorously by the courts.

Prepared with assistance from the NotebookLM.