As tax professionals, we are acutely aware of the potential for disputes between taxpayers and the Internal Revenue Service. While procedural safeguards exist, taxpayers sometimes seek recourse through litigation, particularly under 26 U.S.C. § 7433, which waives sovereign immunity for damages caused by reckless, intentional, or negligent disregard of the Internal Revenue Code or regulations in connection with the collection of federal tax. A recent Opinion and Order from the District of New Jersey, Manuel Lampon-Paz v. United States of America et al., No. 23-cv-02248 (MEF)(AME) (D.N.J. May 6, 2025), provides valuable insight into how courts interpret the critical phrase "in connection with any collection of Federal tax" and its implications for taxpayer claims.

The case involved a plaintiff, Manuel Lampon-Paz, who, acting pro se, filed a lawsuit against the United States, the Department of Justice, and the IRS seeking damages under 26 U.S.C. § 7433. The Court assumed familiarity with the background but summarized the relevant allegations from the Amended Complaint.

Key Allegations:

The plaintiff’s allegations stemmed from events following his receipt of correspondence (a CP-11 notice) about taxes owed due to a correction on his return. The core allegations included:

During a call to the IRS after receiving the tax correspondence, an IRS employee provided incorrect information about how to challenge the assessment and made "willful false statements" that deprived him of the opportunity to challenge the IRS’s position.
The IRS ignored his attempts to request a hearing to dispute the assessment.
The IRS did not mail necessary notices of intent to levy before collecting certain taxes.
The IRS is alleged to have made "material false statements" and withheld evidence in a previous trial and the current litigation.

Based on these allegations, the Plaintiff filed suit. The Defendants (United States, Department of Justice, and IRS) filed a motion to dismiss, arguing primarily that the Court lacked subject-matter jurisdiction because the Plaintiff’s claim was barred by sovereign immunity.

Sovereign Immunity and the Section 7433 Waiver:

The Court began its analysis by addressing the jurisdictional question, noting that jurisdiction is "the ’first and fundamental question’". It explained the principle of sovereign immunity, which shields the federal government and its agencies from suit absent a waiver. Congress can waive this immunity via statute, and 26 U.S.C. § 7433 is the relevant waiver statute in this case.

26 U.S.C. § 7433(a) permits a civil action for damages against the United States if:

An IRS officer or employee
recklessly, intentionally, or by reason of negligence
disregards any provision of Title 26 or regulations promulgated thereunder,
in connection with any collection of Federal tax with respect to a taxpayer.

The statute specifies that this civil action is the exclusive remedy for recovering damages from such actions, except for actions regarding failure to release a lien under Section 7432. Crucially, the Court noted that a waiver of sovereign immunity must be strictly construed in favor of the sovereign. If the plaintiff’s allegations fall outside the scope of Section 7433, the waiver does not apply, and the court lacks jurisdiction.

The Court proceeded to analyze the Plaintiff’s three basic claims to determine if they fell within the scope of the Section 7433 waiver.

Claim 1: Incorrect Information and Misleading Statements During a Helpline Call

The Plaintiff alleged that after receiving a CP-11 notice about corrections to his tax return and resulting tax owed, he called the IRS to request a hearing but was misled by an employee regarding the process to challenge the assessment.

The Defendants argued this allegation was outside Section 7433’s scope because the employee was not taking affirmative steps to recover money, but merely explaining how to respond to the notice.

The Court agreed with the Defendants. The key phrase in Section 7433 is "collection of Federal tax," which the Court interpreted, consistent with persuasive circuit court authority, as implying affirmative steps taken by federal officials to collect taxes.

The Court found the Sixth Circuit’s interpretation in Agility Network Servs., Inc. v. United States, 848 F.3d 790, 794 (6th Cir. 2017), persuasive. In Agility, the Sixth Circuit held that an IRS agent conducting a hearing to challenge a tax lien and levy notice was not acting in connection with collection because the hearing "does not help the IRS collect on a tax debt, but in fact impedes collection, at least temporarily". The Sixth Circuit rejected a broader interpretation where "any IRS agency action involving a person who owes a tax debt [is] ’in connection with tax collection’".

The Court also noted consistency with the Third Circuit’s unpublished decision in Robertson v. United States, 147 F. App’x 308, 310 (3d Cir. 2005), which held Section 7433 did not apply where the IRS denied a refund request and sent correspondence, because the IRS was not engaged in collection activities. District courts in the Third Circuit similarly interpret Section 7433 narrowly, applying it only to affirmative collection activities.

Applying this standard, the Court concluded that the Plaintiff’s call to an IRS number (likened to a helpline), which he made to challenge an assessment, was not an affirmative effort by the IRS to collect taxes. It was, "if anything, the opposite". Therefore, the Section 7433 waiver did not apply to this claim.

Conclusion for Claim 1: The Court lacked subject-matter jurisdiction over this claim.

Claim 2: Withholding Evidence and Making False Statements in Litigation

The Plaintiff also alleged that the Defendants withheld evidence and made false statements in a prior trial and the current litigation.

The Court held these allegations are not covered by the Section 7433 waiver. The prior trial, initiated by the Plaintiff to stop tax collection, was not an IRS-initiated lawsuit to affirmatively collect taxes. The current case is also taxpayer-initiated, seeking damages related to collections, which cannot be treated as an affirmative IRS collection effort.

Therefore, Section 7433 is not applicable to the allegations regarding conduct in litigation. The Court also noted that the Section 7433 waiver is limited to actions by an "officer or employee of the Internal Revenue Service," and most of the litigation-related allegations did not specify involvement of such individuals.

Conclusion for Claim 2: The Court lacked subject-matter jurisdiction over this claim.

Claim 3: Failure to Provide Notice of Intent to Levy

Finally, the Plaintiff claimed the Defendants failed to provide him with a notice of intent to levy before collecting taxes.

The Court acknowledged the legal requirement under 26 U.S.C. § 6331(d)(1) that the IRS must notify a person in writing of its intention to levy property for unpaid tax. The Defendants themselves acknowledged that a failure to properly provide such notice "may subject the IRS to a Section 7433 damages claim".

However, the Defendants argued this was irrelevant because notices were sent, and the Plaintiff’s counter-argument that the proof of mailing was a forgery was resolved against him in the prior trial.

This argument hinges on the doctrine of collateral estoppel (issue preclusion), which bars relitigating an issue if:

The identical issue was decided in a prior adjudication.
There was a final judgment on the merits.
The party against whom the bar is asserted was a party to the prior adjudication.
The party against whom the bar is asserted had a full and fair opportunity to litigate the issue in question.

The Court found some elements clearly satisfied, such as the parties being the same in both the prior and current cases. However, the Court found it less clear whether the "identical issue" (specifically, the forgery claim regarding the notices) was definitively decided in the prior adjudication. The prior ruling stated that the notices for tax years 2015 and 2016 "were mailed on February 11, 2019," but the Court questioned if this amounts to a "deci[sion]" fully at odds with the Plaintiff’s current forgery claim.

Because of this ambiguity regarding the application of collateral estoppel, the Court determined it required a more detailed factual presentation and legal briefing from the Defendants on this point.

Conclusion for Claim 3: The Defendants’ motion to dismiss this claim was denied without prejudice, allowing it to be renewed later.

Overall Outcome:

The Defendants’ motion to dismiss was granted in part (as to claims 1 and 2 due to lack of subject-matter jurisdiction under Section 7433) and denied in part without prejudice (as to claim 3, pending further briefing on collateral estoppel).

Key Takeaway for Tax CPAs:

This case reinforces a critical limitation of the Section 7433 waiver of sovereign immunity. The phrase "in connection with any collection of Federal tax" is interpreted narrowly by the courts. It generally applies only to the IRS’s affirmative steps to collect taxes. Actions by IRS personnel that are not part of affirmative collection efforts—such as providing incorrect information on a helpline call or conduct during litigation—will likely fall outside the scope of Section 7433, meaning a court may lack jurisdiction to hear a damages claim based on those actions. However, direct failures related to specific collection procedures, such as providing required notices of intent to levy (26 U.S.C. § 6331(d)(1)), can still potentially give rise to a valid Section 7433 claim, provided the taxpayer can overcome potential defenses like collateral estoppel. Understanding this narrow scope is crucial when advising clients contemplating litigation against the IRS under this specific statutory waiver.

Prepared with assistance from NotebookLM.