When Congress enacted consumer protection laws like the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, they included fee-shifting provisions intended to encourage consumers to privately enforce the laws. However, an illogical tax code glitch is subverting Congress’ intentions and leaving consumers worse off for enforcing their rights.
Paying for an attorney can be prohibitively expensive for many consumers and may discourage them from bringing important cases after their rights are violated. Lawmakers specifically addressed this issue by including fee-shifting provisions in most consumer protection laws which allow consumers’ attorneys to recover their legal fees from the losing party when they bring a successful case. This allows harmed consumers to seek legal help even if they cannot afford an attorney upfront.
However, under the current tax code, consumers are expected to pay taxes on the entire amount awarded, including the funds that are paid to their attorney even though they never receive them, are not entitled to them, and never have any control over them. Additionally, the attorneys who receive the funds also pay income tax on them. The result is an unfair and illogical double tax that is borne by consumers.
In some instances, a consumers’ final tax burden may exceed the amount that they are awarded in damages. These consumers end up losing money despite having brought successful cases to enforce important consumer protection laws. Because of the risk of ending up in the red, some consumers may end up not pursuing claims even when they have experienced a violation of their rights while bad corporate actors are able to go unpunished, leaving the congressional intent behind consumer protection law unfulfilled.
The reason consumer tax burdens can sometimes eclipse consumer recoveries is primarily due to two factors: 1) the relatively low dollar amounts at stake in many consumer protection cases; and 2) the amount of work by attorneys needed to successfully prove a consumer claim.
To illustrate, the FCRA and FDCPA both cap statutory damages at $1,000. These are the maximum damages a consumer can receive if they cannot show that they suffered any other economic loss from the harm. Often, consumers who bring and win cases under the FDCPA or FCRA only receive a $1,000 statutory damages award.
However, a low damages award does not mean that the case was simple or that the harm done was insignificant. Consumer cases are often fact-dependent and require many hours of work by an attorney to fully untangle. As a result, the amount a court awards to a consumer’s attorney can eclipse the amount the consumer recovers due to the amount of work needed to prove the case. Even when a consumer receives a large damages award, above the statutory damages award cap, the complexity of their case can result in even larger legal costs and tax burdens.
For example, Oregon consumer Mr. S was awarded six figures in damages by a jury after a major bank failed to fix his credit report for over a year after his identity was stolen. Mr. S repeatedly contacted the bank with evidence of the identity theft to no avail and was only able to have the issue resolved after he sought help from an attorney. The case took close to two years to fully litigate and as a result, the amount awarded to fairly compensate Mr. S’s attorneys grew. Ultimately, Mr. S was expected to pay more in taxes on funds that he was never entitled to than he received in damages.
Legal assistance was necessary to obtain justice for Mr. S who had been attempting to fight the bank on his own for many months already, and to ensure that the bank would pay for its negligence. Congress envisioned scenarios much like this one when it passed the FCRA and specifically allowed for fee-shifting. But the tax code has thrown reality out of whack with congressional intent by mistakenly putting consumers on the hook for funds that belong only to their attorneys.
The End Double Taxation of Successful Consumer Claims Act would realign the tax code with consumer protection laws by creating a new deduction for consumers who successfully stand up for themselves. It would make sure that no consumer would have to lose money bringing a winning case against illegal conduct, no matter how small their award is or how complicated the case becomes.
