There is no federal or state constitutional right to maintain the privacy of tax returns. However, California courts have interpreted state taxation statutes as creating a statutory privilege against the disclosure of tax returns. The purpose is to encourage voluntary filing of tax reporting of income and thus to facilitate tax collection.
The privilege is not absolute. It will not be upheld in three situations: when (1) the circumstances indicate an intentional waiver of the privilege; (2) the gravamen of the lawsuit is inconsistent with the privilege; or (3) a public policy greater than that of the confidentiality of tax returns is involved. This last exception is narrow and applies only “when warranted by a legislatively declared public policy.”
A court will not compelled disclosure of personal tax returns except in those rare instances where the public policy underlying the tax privilege is outweighed by other compelling public policies or where waiver principles apply. The fact that financial records are difficult to obtain, that a tax return would be helpful or enlightening, or the returns are the most efficient way to establish financial facts is not enough.
However, disclosure may be ordered where a defendant has been found liable and the party requesting disclosure establishes: (1) the defendant has refused to produce relevant nonprivileged financial records or has produced only meaningless and unreliable financial information; (2) the defendant has engaged in a pattern of improperly obstructing efforts to obtain financial records through means that do not implicate the privilege and it is reasonable to assume this pattern of conduct will continue; and (3) less intrusive methods to obtain the financial records have been unsuccessful.
A trial court’s order regarding the production of tax returns is reviewed under the abuse of discretion standard. In finding a strong public policy of preventing fraud against creditors, lenders, or the court, the appellate court in Li v. Yan determined the trial court did not abuse its discretion when it ordered the judgment debtor to produce his tax returns.
The judgment debtor had refused, at various judgment debtor examinations, to produce other relevant, standard financial documents from which the debtor’s financial condition could be ascertained and had engaged in other evasive and bad faith activities regarding financial matters, as if exempt from discovery rules.
The take-away: If you do not want to produce your tax returns at a judgment debtor examination or when subject to punitive damages, produce standard, meaningful nonprivileged financial records. Otherwise, it is likely you will be ordered to produce your returns. As an aside, judgment debtor Yan is an attorney. I am certain that fact did not help him. You know what they say about someone who represents himself before the court.
Mr. Daymude consults with clients and accepts cases involving privileges, including qualified privileges regarding proprietary financial information and tax returns. For other types of cases accepted, please scroll the Home and My Practice pages. If you are seeking a legal consultation or representation, call Michael Daymude at 818-971-9409.