Public interest organizations strongly support legislation introduced this week that would remove an unfair tax penalty against consumers. “For too long, taxpayers have been subject to unexpected penalties when they successfully hold unscrupulous businesses accountable in court,” the groups said in letters of support for the new bills introduced by Sen. Catherine Cortez Masto (NV) and Rep. Steven Horsford (NV-04).
Mr. B, a resident of Henderson, Nevada, was one such consumer and taxpayer who was blindsided by an unjust tax burden after winning a case against a credit card company. After decades with no issues, the credit card company suddenly began wrongfully reporting tens of thousands in corporate debt on Mr. B’s personal credit report. Mr. B attempted to the fix this serious error himself but the company continued to report inaccurate information, ruining his otherwise flawless credit. Frustrated, Mr. B hired an attorney to help him file a claim against the credit card company. After months of litigation, the company eventually agreed to pay Mr. B a small amount in damages and reimburse his legal expenses to compensate his attorney.
Though Mr. B’s case should have been open and shut at this point, he encountered an additional hurdle in early 2020 when he discovered that he was expected to pay income tax on the legal fees his attorney earned. The taxes on the fees, which Mr. B never received, would be enough to wipe out the damages he received from his case, leaving him worse off than before even though he won his case.
This week, Sen. Cortez Masto and Rep. Horsford introduced the End Double Taxation of Successful Consumer Claims Act (EDTSCCA), S.3913, H.R. 7171, which would provide much needed tax relief to Mr. B and consumers like him. The bill would create an above-the-line deduction for reimbursed legal fees in consumer protection cases. It would allow consumers who win claims against bad market actors to exclude the fees paid to their attorneys from their own income, thus eliminating the need to pay income tax on funds they never received.
Congress and other lawmakers have repeatedly recognized that treating consumers fairly is no small matter and that consumer abuses can inflict widespread harm on individuals and our society. For instance, the FCRA, which Mr. B successfully enforced, is intended to promote the fairness and accuracy of consumer credit reports. Inaccurate reporting like what happened to Mr. B could prevent a consumer from accessing credit, housing, employment, and more.
Lawmakers additionally recognized that private enforcement was a necessary part of a robust consumer protection framework. That is why the laws that protect consumers from credit reporting violations, debt collection abuses, predatory lending, and more allow consumers to take legal action when they are harmed and recover the expenses they accrue when doing so.
To impose tax penalties on consumers who successfully defend important rights undermines decades of legislative intent, and hobbles consumers’ ability to hold wrongdoers accountable.
The End Double Taxation of Successful Consumer Claims Act will remove a barrier to justice by ensuring consumers will no longer have to fear unjust tax consequences for winning claims. With this stumbling block gone, the fight for fair treatment of consumers can truly proceed.