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Tuesday, June 17, 2014

IRS: "sorry, can't produce" or a bad example of hiding the ball?

Last week, the IRS stated that it lost numerous emails from Lois Lerner concerning the targeting of conservative groups for tax exempt status because her computer crashed.  And this week, the IRS is now revealing that it has lost numerous additional emails from key IRS officials.  Politics aside, it is interesting to think how this discovery issue involving electronically stored information (ESI) would be addressed in a federal court under the Federal Rules of Civil Procedure (FRCP).

The facts surrounding this issue almost read like a law school exam hypothetical.  The IRS received a subpoena to produce emails between key IRS officials and other government agents that might suggest targeting.  The IRS knew months ago, in February, that it could not produce the emails, but failed to inform Congress that the emails were lost until just the last few days.  The IRS has taken the position that the emails were lost during a computer crash in 2011 but that the IRS has made a "good faith" effort to find them having spent $10 million dollars (of tax payer money) to deal with the investigation including the cost to piece together what could be found.  The IRS does not deny that the recipients, other government officials, may still be in possession of the emails.  The IRS, however, maintains that because the subpoena was only directed at the IRS, not other government agencies, the non-IRS recipients of the emails are not required to produce them.

If this issue arose in federal court, under FRCP 26, parties are required at the outset to submit a "discovery plan" that includes how ESI will be retained and exchanged in order to prevent unnecessary expense and waste.  The FRCP requires the parties to take reasonable steps to preserve relevant ESI (a litigation hold) or face possible sanctions.  Under Rule 37's so-called safe harbor provision, however, "absent exceptional circumstances, a court may not impose sanctions ... for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system."  The IRS is hanging its hat on this safe harbor rule by arguing that, despite a good-faith effort, the emails were lost.  Did the IRS, in fact, make a good faith effort?

While there is confusion among the courts on how to apply the good faith standard, there is precedent for a court to monetarily sanction the IRS if the court found that the IRS acted negligently when it lost the emails.  The court would also have the authority to issue an adverse inference instruction (inferring that the lost evidence would have negatively impacted the IRS's position), if it determined that the IRS acted grossly negligent or willful. 

An important fact which will probably be discussed during the next few hearings is whether the IRS violated its own electronic information retention policy.  The IRS was put on notice of the investigation last year, and so had a duty to put a litigation hold on the emails at that time (the very essence of what "good faith" means).  It seems that the general IRS retention policy of ESI was six months (although now it is longer), but emails of "official record" had to have a hard copy which would never be deleted.  Whether these emails constituted an "official record" is hard to determine since Lerner won't testify to their content. 

Even assuming the emails were lost before a litigation hold could be placed (or despite a litigation hold being in place), at the very minimum, it seems "good faith" means that the IRS should have notified Congress in February that it lost the emails.  Rule 26 would have required Congress to do so.  Indeed, such notice would have brought this issue to the forefront and could have saved a lot of money - the money it apparently has already cost to piece together some of the emails, and the money it will cost as the parties argue over whether the IRS negligently or willfully destroyed evidence.  If the IRS had been upfront from the beginning, then subpoenas could have been issued months ago to other agencies who, as employers of the lost email recipients, might have copies of the missing emails.

If this discovery issue had arisen in federal court, the IRS would have likely been subject to monetary sanctions and possibly an adverse inference instruction.  Shouldn't the IRS be held to these standards?

 

Posted by Naomi Goodno on June 17, 2014 at 06:03 PM in Civil Procedure, Current Affairs, Information and Technology, Law and Politics, Tax | Permalink

Comments

The linked-to story says that the $10 million cost is for the entire discovery effort, not just the part related to recovering the lost emails.

Posted by: Gregg | Jun 18, 2014 8:09:22 AM

Good point. Thanks for the clarification. Waiting for months to inform Congress that the emails were lost undoubtedly created unnecessary waste of time and cost (and more now since it has created much attention, such as the call for a special prosecutor by some members of Congress). If this issue arose in a federal court, a judge would likely sanction the IRS for discovery abuse accordingly.

Posted by: Naomi Goodno | Jun 18, 2014 10:49:46 AM

Time to go to the tape. The IRS Director has been up to Capitol Hill half a dozen times this year. Most of the time he spent complaining about the difficulty and expense of satisfying these subpoenas. Now in all that time talking about dollars and man hours and other difficulties, how can it possibly be that he didnt think to mention that this search is long and expensive because THE EMAILS DONT EXIST ANYMORE IN THEIR ARCHIVES WHERE THEY SHOULD BE? If you're looking for some slack from Oversight, how does it not occur to you to mention that? That time lapse in informing congress is the key issue right now, because apparently the IRS actually was negligent enough in their procedures to actually lose (or allow to be destroyed) those records. And ALL of their records pre 2014.

Posted by: Mark Buehner | Jun 19, 2014 12:48:53 PM

Hi Mark, You are right. The time lapse is the big, big problem. If a party would have behaved like the IRS in federal court, the judge would have questioned the party's integrity for failing to be forthright and would have heavily sanctioned.

Posted by: Naomi Goodno | Jun 19, 2014 4:16:58 PM

I'm not sure I agree a court would impose sanctions for spoliation of evidence in this case. If the data was lost in a 2011 hard drive crash, and the subpoena was not issued until years afterwards, why would a court punish the Service for a discovery violation for conduct (to the extent the hard drive failure is "conduct" attributable to the IRS) that preceded the subpoena in question?

Now, if you think the IRS is just lying about the hard drive failure, or that it only previously kept email records for six months, then that's a different question and, of course, lying about document production is sanctionable. But a litigant who thinks his opponent is lying about document production has the burden of proving that claim. I haven't seen that proof if it exists (perhaps others have). I am persuaded, though, that a hard drive failure in 2011 is not proof of discovery abuse regarding a 2013 subpoena. The federal government has lots of power, but not yet the ability to travel in time.

Posted by: Cullen Seltzer | Jun 20, 2014 5:00:39 PM

These are good points. The issue that I think is sanctionable is that the IRS made the misrepresentation in February that it would produce the documents when at that time the IRS knew it could not comply. As the previous commentator pointed out, it is the "lapse of time" that is most problematic, and, created a lot of waste. As far as proving that IRS destroyed the evidence - there are some interesting facts. The emails that are missing/destroyed just happen to be written during the most relevant time frame involving the six key players. Was it wilful spoliation? That might be hard to prove. But negligent? There are red flags since all copies, not just those on the crashed computer or back-up tapes, are gone. Although the courts are split as to what standard to apply in spoliation cases, there are some bad facts for the IRS. While the IRS can't turn back time, it could've at least stopped the clock in February when it knew the emails had disappeared.

Posted by: Naomi Goodno | Jun 20, 2014 6:06:12 PM

The notion that a user hard drive crash would have any bearing on the users mailbox is a red herring. Local copies on user hard drives may be kept, but are by no means necessary. Mail is stored on a....wait for it....mail server. Mailserver data != local machine data. I have adminned windows networks since NT 5.5, currently we use Windows Server 2008 R2 and Exchange 2010. There must be a lot of dirt in those emails....

Posted by: Kirby | Jun 23, 2014 10:42:51 AM

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