California is one of the few states that holds tax returns may be privileged and not subject to discovery during civil litigation, except under certain circumstances. The privilege applies to both state and federal tax returns. The privilege, however, only applies to California state court cases or cases in federal court based on California law, not the IRS.
California allows a privilege against forced disclosure of tax returns in civil discovery proceedings. Consequently, California tax authorities may not disclose tax returns, unless an exception to this general rule applies. As stated by one California court, the public policy behind such a law “is to facilitate tax enforcement by encouraging a taxpayer to make full and truthful declarations in his return, without fear that his statements will be revealed or used against him for other purposes.” By encouraging taxpayers to make truthful disclosure, the intended effect is to facilitate tax collection by government agencies.
Exceptions to Withholding Tax Returns
There are, however, certain exceptions to the general rule where the privilege is waived or does not apply. These include:
- There is an intentional relinquishment of one’s right to withhold tax returns;
- The gravamen of the lawsuit is inconsistent with the privilege, which compels the disclosure of the tax returns; or
- A public policy greater than that of confidentiality of tax returns is involved.
If a court decides one of these exceptions apply then tax returns may not be withheld from production. A recent California appellate decision is instructive on the issue of when tax returns are privileged or subject to disclosure