TAXPAYER BILL OF RIGHTS 3: 1998 TAX LAW PART 3: ATTORNEYS' FEES AND DAMAGES FOR IRS ABUSES
CRS Report for Congress
Taxpayer Bill of Rights 3: 1998 Tax Law Part 3:
Attorneys' Fees and Damages for IRS Abuses
Marie B. Morris
American Law Division
This is one of a series of reports designed to analyze taxpayer protection and rights
provisions made by the Taxpayer Bill of Rights 3, enacted as Title III of the IRS
Restructuring and Reform Act of 1998, P.L. 105-206. This report discusses the
provisions expanding a court's authority to award attorneys' fees and costs in certain
cases and permitting a taxpayer to collect damages for negligent collection actions by
IRS agents. Specific statutory changes include an increase in the previous statutory cap
on attorney's fees, the provision of fees to accountants and enrolled agents, and the
authority to pay fees for successful pro bono representation. These provisions are found
in sections 3101 and 3102 of the statute and in IRC §§ 7430, 7433, and 7426.
The Taxpayer Bill of Rights 3, title III of P.L. 105-206, contains a number of
provisions designed to strengthen taxpayer rights in dealings with the Internal Revenue
Service. This report discusses the provisions expanding a court's authority to award
attorneys' fees and costs in certain cases and permitting a taxpayer to collect damages for
negligent collection actions by IRS agents. Section 3101 of the law liberalizes the rules on
attorneys' fees in Internal Revenue Code §7430, and section 3102 permits taxpayers and
third parties to collect damages for negligent actions of IRS collection agents under IRC
§§ 7433 and 7426.
Attorneys' Fees and Costs
Under prior law, any person who substantially prevailed in a tax case involving
determination, collection, or refund of taxes, interest, or penalties could be awarded
reasonable administrative costs (incurred after the earlier of the date the taxpayer receives
the notice of the decision of the IRS Office of Appeals or the date of the notice of
deficiency) and reasonable litigation costs. Only individuals with a net worth of $2 million
or less and corporations with a net worth of $7 million or less could be awarded costs.
The biggest component of reasonable costs is attorneys' fees, but reimbursement for
attorneys' fees was limited to $110 per hour (as adjusted for inflation). In certain cases,
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a court could award more than $110 per hour if the court found that a special factor
justified a higher rate. In no case could reasonable costs exceed the amount actually paid
or owed. Under prior law taxpayers could only be awarded attorneys' fees for services of
attorneys, although CPAs and enrolled agents are authorized to practice before the Tax
Court and the IRS. Only actual costs could be reimbursed, which meant that taxpayers
could not be awarded costs for representation by pro bono attorneys.
The Taxpayer Bill of Rights 3 made seven changes to IRC § 7430, the provision
dealing with awards of costs. First, although the statutory cap on attorneys' fees was
retained, judges are permitted to adjust the award of attorneys' fees upward based on the
difficulty of the issues presented in the case or on the local availability of tax expertise.
The hourly rate cap was raised to $125 per hour and will be adjusted for inflation.
Second, administrative costs can be awarded for fees incurred after the earliest of
three occasions: the two under existing law (i.e., the date of Appeals Office notice or the
date of notice of deficiency), or the date on which the first letter of proposed deficiency
which allows the taxpayer an opportunity for administrative review in the Internal Revenue
Service Office of Appeals is sent. This change should allow taxpayers to be reimbursed
for almost all administrative costs.
Third, fees for the services of CPAs and enrolled agents authorized to practice before
the Tax Court or before the Internal Revenue Service may be awarded to prevailing
taxpayers as if those individuals were attorneys. Fourth, the statute allows a court to
award appropriate attorney's fees to those who undertake pro bono representation of
taxpayers, providing the fee is paid to the attorney or the attorney's employer.
Fifth, in determining whether the position of the IRS was substantially justified, the
court is required to take into account whether the IRS has lost in courts of appeal for other
circuits on substantially similar issues. The Committee on Ways and Means report, H.Rept.
105-364, at 59, indicated that the court may also take into account whether the United
States has won in courts of appeal for other circuits. The Senate report, S.Rept. 105-174,
at 47, and the conference report, H.Rept. 105-599, at 243, are silent on this issue. This
provision presents courts with the decision of whether to punish the IRS for
inappropriately pursuing a lost cause or whether to tolerate an IRS attempt to obtain a
conflict between circuits in order to have the Supreme Court decide an issue.
Sixth, a taxpayer will be treated as having substantially prevailed if IRS wins, but the
judgment is for less than a qualified offer made by the taxpayer during the qualified offer
period. This provision does not apply to judgments issued pursuant to a settlement or to
proceedings when the amount of the tax liability is not in issue (e.g., declaratory
judgments, proceedings involving summons, actions to restrain disclosure under IRC §
6110(f)). The IRS will only be responsible for costs incurred on and after the date of the
qualified offer. Seventh, a taxpayer may be awarded attorneys' fees, in addition to
damages, if the taxpayer prevails in a case involving unauthorized inspection or disclosure
of a tax return or tax return information under IRC § 7431.
The net worth requirements were not amended. These changes apply to costs
incurred or pro bono services performed more than 180 days after July 22, 1998, i.e., after
January 18, 1999.
Damages for Disregard of the Law by IRS Employees
Under prior law, IRC § 7433, if an IRS officer or employee recklessly or
intentionally disregarded the law while collecting the taxpayer's taxes, the taxpayer could
sue the Government for the lesser of actual damages plus the costs of the suit or $1
million. Damages could be reduced if the taxpayer did not exhaust available administrative
remedies or if the taxpayer did not take reasonable steps to mitigate damages. Suit had
to be brought in a U.S. district court within two years of the cause of action accruing.
Under prior IRC § 7426, third parties whose property was wrongfully sold or levied on
by the IRS could sue the IRS for up to $1 million of damages if an IRS officer or employee
recklessly or intentionally disregarded the law while collecting a taxpayer's taxes.
The Taxpayer Bill of Rights 3 expanded the authority to pay damages to include cases
where the IRS causes a taxpayer or a third party economic damages because of negligent
disregard of the Internal Revenue Code or regulations while collecting a taxpayer's taxes.
Damages for negligence are limited to $100,000 and both taxpayers and third-parties
continue to have to exhaust available administrative remedies before a court can award any
In addition to damages for violations of the law in regular tax collection actions, IRC
§ 7433 was amended to permit a taxpayer in bankruptcy to petition the bankruptcy court
to recover damages against the IRS if an officer or employee of the IRS willfully violates
the automatic stay provisions or the effect of discharge provisions of the bankruptcy code
or bankruptcy regulations. Damages for violations of title 11 (the bankruptcy code) can
be awarded by a bankruptcy court.
These provisions apply to actions of officers and employees of the Internal Revenue
Service after July 22, 1998.