This is the first article in a series dedicated to recovering administrative costs and legal fees from the Internal Revenue Service (IRS). This article is a starting point for making a claim for administrative costs and legal fees as it describes the basic requirements.
On occasion, the Internal Revenue Service (IRS) or one of its representatives take an unjustified position regarding a determination, collection, or refund of tax, penalties, or interest. This situation is often frustrating for the taxpayer when the IRS loses the case or backs off of an unjustified position as the taxpayer spent time, effort, and funds to defend their position. If they spent funds on a representative in this situation, they might be able to recover from the IRS a reasonable amount of the funds they spent on administrative costs or legal fees.
Internal Revenue Code (IRC) Section 7430 allows a taxpayer to recover administrative costs and legal fees, including attorney fees and expert witness fees paid, when the taxpayer meets certain requirements. The burden of proof is on the taxpayer to establish they are entitled to recover administrative costs and legal fees. The taxpayer must prove:
- They are the “prevailing party.” IRC § 7430(a).
- The administrative or litigation costs they are claiming are “reasonable.” IRC § 7430(a).
- The administrative or litigation costs are in connection with a determination, collection, or refund of any tax, penalty, or interest. IRC § 7430(a).
- They exhausted all available administrative remedies. IRC § 7430(b)(1).
- The costs are allocable to the IRS and not to any other party. IRC § 7430(b)(2).
- They meet the “net worth” requirements of United States Code (USC) 28 Section 2412 (d)(1)(B) or 2412(d)(2)(B). IRC § 7430(c)(4)(A)(ii)
The taxpayer cannot recover fees:
- For any portion of the proceeding during which the taxpayer “unreasonably protracted the proceeding.” IRC § 7430(b)(3).
- If the IRS proves it was “substantially justified” in its position. IRC § 7430(c)(4)(B).
This is a brief outline of the requirements for recovering administrative costs and legal fees. These requirements have many nuances and the taxpayer must meet specific deadlines to successfully recover administrative costs and legal fees. Please watch for future blog articles explaining these nuances and deadlines.