Today we are going to talk about one of my favorite topics – attorney fees. Now I’m not talking about paying attorney fees to big firms that are selling billable hours. No no no that’s not what this is about. No, today we are going to talk about attorney fees being paid by the IRS! That’s right folks, there is a provision in the federal tax law that allows taxpayers to be reimbursed for their attorney and accounting fees by the IRS. The IRS is not too keen on people knowing about this law and they certainly are not happy about having to pay it, but I have been successful several times in the past and have collected quite a bit of money from the IRS – much to the joy and happiness of my clients!
So here goes.
In order to collect attorney fees from the IRS, there are several things that we must prove.
- Prevailing Party
We must first prove that we were the prevailing party. Now get this, it doesn’t mean that we have to actually win the case, only that we won the most significant issue. In a typical audit the IRS will raise several items against us. If we win on the most significant of those items, then we can be the prevailing party even if we were to lose the other items. The test can also be met if we lose the most significant issue but we prevail as to half of the overall amount.
The point of all of this is that to be a prevailing party can be satisfied in two different ways- we don’t have to win every issue.
- Substantially Justified
In the past, we had to prove that the IRS is position was not substantially justified. This was a heavy burden for a Taxpayer because he not only had to prove the government was wrong but also that it were unreasonable.
A few years ago, an El Pasoan took an important case to the Fifth Circuit. He successfully argued this was too heavy a burden. Congress saw that case and passed a brand new law that reversed this burden of proof. Now the IRS has the burden to prove that its position was reasonable both in law and in fact, relieving the taxpayer of this heavy burden.
Anyone who has dealt with the IRS knows that it may position periodically at various stages in the proceedings to strengthen its position. Thus it may argue one thing at the audit stage and something different at the Appeals stage and something different at the Tax Court stage. But for attorney fees purposes, the test of the reasonableness of its position is typically made at the date it sent their final notice from the appeals division or the Answer in Tax Court. The reason this is important is because the Appeals agents are typically accountants and in Court the IRS representatives are attorneys. It is not uncommon for them to take different points of view. I have been successful in using one against the other.
- Exhaustion of Administrative Remedies
It is important that the taxpayer cooperate with the IRS in resolving its case. This means that it we must meet with the IRS agents at every administrative stage and satisfy all the administrative requirements, we can’t just skip them and win in Tax Court because the government has never had a full understanding of the case.
- Unreasonable Delay.
The law requires that the taxpayer not unreasonably protract the proceedings. This means that Taxpayer must properly respond to requests for information timely and completely and not slow track the proceedings.
- Reasonable Litigation Costs
The federal tax law allows us to collect reasonable costs from the IRS. If the case is resolved administratively so then we can request legal and accounting fees at that time. If the case goes to the Tax Court, then we can request litigation costs then.
Also, the amount we can collect must be reasonable. The Code general limits the hourly rate for attorney fees to around $200 per hour. That amount can be increased if there are special circumstances, such as a limited availability of qualified tax lawyers, the issues were particularly difficult, etc.
And by the way, the amount requested is not related to the amount of taxes in dispute. For example, I have collected $75,000 in attorney fees on a case that only involved $8,300 in taxes.
Folks, I know it is hard to believe, but the truth is the IRS can be ordered to reimburse your litigation costs that you incurred fighting the IRS. Although it’s not simple or easy, I have been successful on several occasions in collecting money from the IRS. Th reimbursement can include not just the attorney fees but also accounting fees, witness fees, paralegal fees, etc. This is not a pipe dream.
So when you sit down and figure out whether you want to fight the IRS, you might keep in mind that there are special federal tax laws that allow you to collect not just the legal fees in the Tax Court proceeding but also the legal and accounting and related fees all through the entire administrative process.
And remember, you don’t have to actually prevail on all the issues in the case, just the most substantial one !
David Leeper is a Board Certified federal tax attorney with 38 years experience . He can be reached at 915-581-8748 or by email at email@example.com