Although some are unaware of the fact, taxpayers can recover fees and costs from the government if the IRS has taken an unreasonable position against them. The IRS may be responsible for fees due to unreasonable positions that it took during audit, on appeal, in connection with a refund claim or collection matter, or as related to a summons.
By Megan L. Brackney, JD, LLM (Tax)
(Note: As this article is from a website for CPA’s, some of the information might get a bit “dry” or confusing. If so, please feel free to CONTACT US to answer any questions you may have. – Chris Crabb)
Internal Revenue Code (IRC) section 7430 permits courts to award “reasonable litigation costs” and “reasonable administrative costs” to the “prevailing party” in any “administrative or court proceeding … brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty” under the IRC. These costs can include administrative fees, costs of analyses and studies “necessary for the preparation of the party’s case,” and attorney’s fees [IRC section 7430(a), (c); Treasury Regulations section 301.7430-4(a) & (b)]. Attorney’s fees may be awarded for the fees of any practitioner authorized to practice before the IRS, even if not an attorney [IRC section 7430(c)(3)(A)]. As CPAs are authorized to practice before the IRS (31 CFR. section 10.3), the fees of a CPA for handling an audit, appeal, refund claim, or collection matter, or for assisting with a Tax Court case or other litigation, may be awarded [Ragan v. Comm’r, 135 F.3d 329, 337 (5th Cir. 1998); Han v. Comm’r, T.C. Memo 1993-386].
Fee awards are currently limited to a maximum of $200 per hour, unless the court finds that a higher rate is necessary because of higher cost of living, or because of a “special factor,” such as limited availability of qualified practitioners [IRC section 7430(c)(1); Treasury Regulations section 301.7430-4(b)(2); Revenue Proceeding 2018-57]. Several courts have found a special factor permitting an upward adjustment in complex cases that required the services of a practitioner who specializes in tax cases [e.g., BASR Partnership v. U.S., 130 Fed. Cl. 286, 306 (2017)], but other courts have been skeptical of these claims on the ground that virtually all cases to which section 7430 applies will be handled by practitioners with “tax expertise” [e.g., Fitzpatrick v. Comm’r, T.C. Memo 2017-88; see also Treasury Regulations section 301.7430-4(b)(2)(iii) (example)]. Even if the fee award is capped at $200 per hour, being able to recoup some amount of fees helps remediate the damage when the IRS acts unreasonably.
In order to qualify for an award of reasonable litigation costs under IRC section 7430, a taxpayer must show that—
- the taxpayer meets the net worth requirements;
- the taxpayer substantially prevailed;
- the position of the United States was not substantially justified;
- the taxpayer exhausted administrative remedies; and
- the taxpayer did not unnecessarily protract the proceeding. [IRC section 7430(a)-(c)]
These elements are discussed below, but CPAs should keep in mind that even if each is satisfied, an award of fees is within the court’s discretion [Zinniel v. Comm’r, 883 F.2d 1350, 1355 (7th Cir. 1989)].
Net worth requirement.
To be eligible for an award of attorney’s fees, the taxpayer must be 1) an individual whose net worth at the time of the proceeding does not exceed $2 million; 2) a nonprofit organization or an agricultural cooperative, regardless of net worth; or 3) a partnership, corporation, association, local governmental unit, or the owner of an unincorporated business that, at the time of the proceeding, has a net worth of $7 million or less and no more than 500 employees [28 USC section 2412(d)(2)(B); Treasury Regulations section 301.7430-5(f)(1)].
The taxpayer must submit an affidavit to establish the net worth requirement. This is usually enough, particularly if the government does not challenge the issue nor submit evidence in opposition [Fletcher v. U.S., 2019 WL 763587 (N.D. Okla. Feb. 21, 2019); Estate of Lippitz v. Comm’r, T.C. Memo 2007-93].
The Treasury Department’s position is that net worth should be determined using the fair market value of the taxpayer’s assets because such a standard provides a “more accurate assessment of a taxpayer’s actual and current net worth as of the administrative proceeding date” [Proposed Treasury Regulations section 301.7430-5(g)(1), 74 Fed. Reg. 61589-01 (Nov. 25, 2009), Background and Explanation of Provisions].
The taxpayer is a “prevailing party” if he has…