When a taxpayer approaches me about a possible representation of them against the IRS in an audit or tax appeal where the taxpayer believes he or she has been wronged by the IRS, I am often asked if the taxpayer can recover his or her attorney fees against the IRS. The answer: a definite maybe. How difficult: a definite not easy. But it is possible under several circumstances. One such circumstance is under Internal Revenue Code § 7430(a), awarding of costs and certain fees for the prevailing party. Section 7430 has other special grounds for an award of legal fees that are not discussed herein.[1] The taxpayer is urged to discuss with tax counsel to determine if other grounds may exist for an award of legal fees.
Internal Revenue Code § 7430(a) allows a taxpayer to cover reasonable attorney fees and costs in an administrative (such as IRS Appeals) or court proceeding against the federal government brought in connection with the determination, collection, or ruling of any tax, interest, or penalty imposed under the Internal Revenue Code.[2]
There are numerous prerequisites to the taxpayer receiving an award of attorney fees and costs. Meeting each of the prerequisites is not an easy task. The prerequisites are: (i) the taxpayer must be the prevailing party, (ii) must have exhausted administrative remedies, (iii) must not have unreasonably protracted the litigation, (iv) the IRS is unable to establish that its position was substantially justified, and (v) the taxpayer does not exceed statutory net worth requirements.
Another limitation is that legal fees are capped by statute at $210 per hour[3], which is adjusted annually, unless the court finds good cause for exceeding that rate. Even in Montana, that amount is woefully low.
Legal fees under IRC § 7430(a) were at issue in a recent Tax Court case, Dennis v. Commissioner of Internal Revenue, T.C.M. 2020-098. In Dennis, a husband and wife, pro se, contested tax collection through a collection due process hearing. The Tax Court concluded that the taxpayers were not entitled to recover their legal fees despite having substantially prevailed on the tax litigation because (i) a collection due process hearing is not considered an “administrative proceeding” for purposes of legal fees unless the underlying tax liability is at issue (and not just the collection of tax),[4] and (ii) pro se taxpayers who do not pay or incur legal fees are not entitled to recover legal fees for their own time in handling the case.[5]
Dennis v. Commissioner demonstrates that even the taxpayer who prevails in tax litigation will have a difficult, recovering legal fees and costs from the IRS. However, recovering legally fees is possible. We recommend discussing with tax counsel.
Jared M. Le Fevre is a Partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] For example, IRC § 7430(4)(E), when the taxpayer makes a qualified offer of Judgment.
[2] Dennis v. Commissioner of Internal Revenue, T.C.M. 2020-098.
[3] Revenue Procedure 2019-44.60.
[4] Dennis at p. 10.
[5] Dennis at p. 11.