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Recovering Administrative Costs in Tax Appeals

At the end of the Tax Appeals process, many taxpayers wonder if they will be able to recoup certain costs incurred in dealing with the IRS. Although it may not be easy, it is actually possible to obtain administrative costs, including attorney’s fees, following an Tax Appeals process. By filing a well-timed administrative claim for administrative costs or a “qualified offer,” the taxpayer may be able to do so.

How to Obtain Administrative Costs Following Tax Appeals

Prior to 1998 it was extremely difficult for taxpayers to obtain administrative costs because the taxpayer had the burden of showing that the IRS’s position was unreasonable. In 1998, Congress enacted the IRS Restructuring and Reform Act of 1998, which significantly changed the taxpayer’s options with respect to obtaining administrative costs. Under the Reform Act, the burden now lies upon the IRS to show that its position was “substantially justified.” With this change, taxpayers are much more likely to be able to obtain administrative costs following the Tax Appeal process.

IRC § 7430(a) contains the primary code section for obtaining administrative costs from the IRS after Tax Appeals. It states as follows: “In any administrative or court proceeding which is brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty under this title, the prevailing party may be awarded a judgment or a settlement for (1) reasonable administrative costs incurred in connection with such administrative proceeding within the Internal Revenue Service, and (2) reasonable litigation costs incurred in connection with such court proceeding” (1).

With the positive changes in the Reform Act also comes a limitation on the administrative or litigation costs that can be obtained. The limitation comes in IRC § 7430(b), which requires that all administrative remedies be exhausted and the prevailing party cannot have protracted the proceedings. Also, only costs allocable to the United States can be obtained (2).

What are the Requirements for Obtaining Administrative Costs?

Obtaining administrative costs in Tax Appeals follows a similar process to obtaining tax litigation costs, but there are some differences. Specifically, in order to obtain administrative costs following the Tax Appeals process, the taxpayer must show the following:

  • The taxpayer was the prevailing party in an administrative action;
  • In connection with the determination, collection, or refund of tax, interest or penalty;
  • The administrative costs that the taxpayer incurred in prevailing over the IRS were reasonable;
  • The administrative costs were the result of actions or positions that the IRS took during the administrative action;
  • The position taken by the IRS was not substantially justified;
  • The taxpayer did not protract the proceeding.

Although these requirements might seem simple and straightforward, in reality they are potentially subject to substantial issues and questions. In particular, what are reasonable costs, what constitutes a proceeding, the question of whether the taxpayer protracted the proceeding, the identity of the prevailing party in Tax Appeals, and whether the IRS was “substantially justified” can be open for debate.

What are Reasonable Administrative Costs?

For the purposes of IRC § 7430(a), reasonable administrative costs include the following: administrative fees or charges imposed by the IRS; expenses, costs, and fees for expert witnesses; costs of study analyses or reports and tests necessary for the taxpayer’s case; and the costs of attorneys and other representatives assisting in the proceeding. Litigation costs are not considered reasonable administrative costs, but they can be included in a request to the court for reasonable litigation costs. Reasonable administrative costs are deemed to only occur after the “administrative proceeding date,” which is the earliest of the following: the date of receipt of a notice of decision from the Tax Appeals Office, the date of the notice of deficiency, or the date on which the IRS sends the 30-day letter to the taxpayer (3).

In determining whether fees or other costs are reasonable, the IRC imposes certain limitations. If the taxpayer wants to recover fees for amounts paid to expert witnesses, those amounts are limited to the hourly rate that the IRS pays to its own witnesses. Similarly, lawyers’ fees and fees paid to other representatives may also be limited. Specifically, recoverable attorneys’ fees must be consistent with the prevailing market rate for the kind and quality of services rendered. There is a statutory hourly rate which is typically applied in these cases, but special factors might warrant the use of a higher hourly rate.

What is Considered an Administrative Proceeding?

When attempting to recover administrative costs from the IRS following an Tax Appeals process, it is important to keep in mind that only “costs incurred in connection with [an] administrative proceeding” are recoverable (4). Under Section 7430, an administrative proceeding is broadly defined as any procedure or action in front of the IRS, but some types of proceedings are excluded from this definition (5). The administrative proceeding date is defined as the earliest of one of three dates, as described above. In most cases, the earliest of the three options will be the 30-day letter. Note, the administrative proceeding date is not the same as the date to be used in determining whether the IRS’s position was substantially justified. The IRS can change its position over the course of the proceeding; if it does change to a substantially justified position, then the taxpayer will not be able to recover administrative costs even if the IRS’s initial position was not substantially justified.

How a Tax Attorney Can Help with Administrative Costs Following Tax Appeals

If you think that your tax situation might make you a candidate for an Tax Appeals process, you should consult with a knowledgeable IRS tax attorney. San Diego tax attorney William D Hartsock, Esq. has been successfully helping clients with Tax Appeals since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Tax Law References:

  1. IRC § 7430(a).
  2. IRC § 7430(b).
  3. IRC § 7430(c)(2).
  4. IRC § 7430(a)(1).
  5. Reg. § 301.7430-3(a).

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.