March 2022 Digest

Spring has arrived and the Tax Court has resumed in-person sessions for many locations. In Denver, we have our first in-person calendar call on Monday. I’m looking forward to it, but also need figure out if any of my suits still fit. PT’s March posts focused on issues with examinations, IRS answers, and more.

A Time Sensitive Opportunity

Loretta Collins Argrett Fellowship: The Loretta Collins Argrett Fellowship seeks to support the inclusiveness of the tax profession by encouraging underrepresented individuals to join and actively participate in the ABA Tax Section and Tax Section leadership by providing fellowship opportunities. More information about the fellowships and how to apply are in the post. Applications are due April 3.

Taxpayer Rights

The 7th International Conference on Taxpayer Rights: Tax Collection & Taxpayer Rights in the Post-COVID World: The virtual online conference is from May 18 – 20 and focuses on the actual collection of tax. The agenda and the link to register are in the post. Additionally, the Center for Taxpayer Rights is hosting a free workshop called The Role of Tax Clinics and Taxpayer Ombuds/Advocates in Protecting Taxpayer Rights in Collection Matters on May 16 and a link to register is also in the post.

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 1: Correspondence exams now account for 85% of all audits, up from about 80% in the previous two years. This post looks at data on correspondence audits and identifies a disproportionate emphasis on EITC audits which burden and harm low income taxpayers. 

How Did We Get Here? Correspondence Exams and the Erosion of Fundamental Taxpayer Rights – Part 2: This post considers the long-term goal of audits, along with recommendations for how the IRS can improve correspondence exams. Such recommendations include utilizing virtual office audits; using plain language, tailored, and helpful audit notices; and assigning the audit to one specific person at the IRS. Making correspondence audits more customer friendly could fall under the purview of the newly created IRS Customer Experience Office.

read more…

Opportunities for Improving Referrals by VITA Sites to LITCs: Taxpayer rights could be better protected if VITA sites better understood when a referral to an LITC may be necessary and how to make such a referral. This post explores opportunities to improve this process, including a training initiative begun by the Center for Taxpayer Rights.

Tax Court Updates and Information

Tax Court is on the Road Again: The Tax Court officially resumed in-person calendars on Monday, February 28, but select calendars are still being conducted remotely. Practitioners who have recently attended in-person calendars share more information about what it’s like to be back.

Ordering Documents from the Tax Court: A “how to” on ordering documents from the Court. Phone requests are currently the only way, but in-person requests may resume once the Court reopens to the public. Both options come with a per page or per document fee.

Tax Court Proposed Rule Changes: The Tax Court has proposed rule changes which are largely intended to clean up language or more closely conform the Tax Court rules to the Federal Rules of Civil Procedure. It invites public comments on the proposals by May 25, 2022.

Tax Court Decisions

Tax Court Takes Almost Five Years to Decide a Dependency Exemption Case: Hicks v. Commissioner highlights the procedures required to claim a qualified child as a dependent when the child does not reside with the taxpayer. The case is noteworthy for the length of time it took the Court to issue an opinion, especially because there were no continuances or other reasons for a delay.

Jeopardy Assessment Case Originating in the Tax Court: The opinion Yerushalmi v. Commissioner is rare because the Tax Court reviews whether jeopardy exists in the first instance, rather than following a district court decision. The post looks at the case, the standard of review, and the facts that can be relevant to the Tax Court when it must decide whether the IRS’s jeopardy assessment was reasonable.

Tax Court Answers

Tax Court Answers: There are issues caused by requiring the IRS to file answers in small tax cases. It delays a review of the case on its merits, the process is slow and impersonal, and there are risks that a taxpayer won’t understand what the answer says. The Court should consider conducting an empirical study, engaging with taxpayer representatives, or forming a judicial advisory committee to identify best practices.

Making the IRS Answer to Taxpayers…By Making the IRS Answer: In the first of a three-part series looking at issues with IRS Counsel answers, Caleb looks at the case of Vermouth v. Commissioner. The case emphasizes the importance of the administrative file during the pleading stages of litigation. Cases involving bad answers and their impact on the burden of proof and burden of production are also discussed.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire: Tax Court Rule 33(b) requires a signer of a pleading to reasonably inquire into the truth of the facts stated therein. To what degree are IRS Counsel attorneys required to reasonably inquire when filing an answer? This post explores that question and sheds some light on the Court’s expectations.  

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two): Continuing the discussion of the IRS’s responsibilities under Rule 33(b), this post looks closer at the consequences to the IRS when a bad answer is filed. Caleb examines the Court’s response in cases where an administrative file was excessively lengthy or not available quickly enough and shares the lessons to be learned.

Circuit Court Decisions

Naked Owners Lose Wrongful Levy Appeal: Goodrich et. al. v. United States demonstrates the interplay of state and federal law upon lien and levy law under the Internal Revenue Code. The 5th Circuit affirmed that a taxpayer’s children had a claim against their father’s property, but only as unsecured creditors according to state law. As a result, the children’s interests were not sufficient to sustain a wrongful levy claim.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…: In Dang v. Commissioner the parties debated the starting point in which reasonable administrative costs are incurred in the context of a CDP hearing. The IRS argued it’s after the notice of determination. Petitioners argued it’s after the 30-day notice which provides the right to request a CDP hearing. The Court decided no costs were incurred before the commencement date of the relevant proceeding without deciding when that date was. The case provides another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy: The concurring judge in Dang demonstrates that he understands the entire argument and finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute. 

Oh Mann: The Sixth Circuit Holds IRS Notice Issued in Violation of the APA; District Court in CIC Services Finds Case is Binding Precedent: The decision Mann v. United States is binding on CIC Services and is examined more closely in this post. In Mann, the Sixth Circuit found that the IRS notice at issue was invalid because the public was not provided a notice and comment opportunity. The case is significant because it is another circuit court opinion that applies general administrative law principles to the IRS.

You Call That “Notice”? Seriously?:  General Mills, Inc. v. United States involves refund claims that were made within the two-year period under section 6511, but outside of the six-month period which starts when a notice of computational adjustment is issued to partners. The Court seemingly concluded that notices, unless misleading, need only to comport with statutory requirements regardless of due process considerations. The post also evaluates and discusses the adequacy of common notices in relation to the notice of computational adjustment.

No Rehearing En Banc for Goldring: Is Supreme Court Review Possible?: The issue in Goldring was how underpayment interest should be computed on a later assessed deficiency when a taxpayer elects to credit forward an overpayment from an earlier filed return. The government’s rehearing en banc petition was denied leaving in place the circuit split. IRS Counsel has advised that there are thousands of similar cases, which could result in refunds of multiple millions of dollars, so it is yet to been seen if the government will petition the Supreme Court.

Challenging Levy Compliance: In Nicholson v. Unify Financial Credit Union the Fourth Circuit affirmed the dismissal of a suit to stop a levy brought by a taxpayer against his credit union. The law requires a third party to turn over the property to the IRS and then allows the taxpayer whose property was wrongfully taken to seek the return of that property from the IRS, so suing the credit union is not an effective avenue.

Offers in Compromise

Suspension of Statute of Limitations Due to an Offer in Compromise: The statute of limitations on when the IRS can bring suit to reduce a liability to judgment is at issue in United States v. Park. An offer in compromise suspends the collection statute and can give the IRS more time than a taxpayer would expect. It’s good idea to consider the risks before submitting an offer.

Public Policy and Not in the Best Interest of the Government Offer in Compromise Rejections: Cases where the IRS rejects an offer in compromise based on public policy or for not being in the best interest of the government are reviewed to better understand the reasons for such rejections. The IRS may look at past and future voluntary compliance and criminal tax convictions. The IRS should make offer decisions easily reviewable to provide more transparency in this area.

Correction on Making Offers in Compromise Public: Keith has learned that the IRS has updated the way in which the public can inspect accepted offers. It is by requesting an Offer Acceptance Report by fax or mail. The report, however, only contains limited and targeted information, so FOIA is still the only way to receive broad and general information.

Bankruptcy and Taxes

General Discharge Denial in Chapter 7 Based on Taxes: In Kresock v. United States, a bankruptcy court’s denial of discharge was sustained by an appellate panel due tothe debtor’s bad behavior in connection with his tax debts. It is seemingly unusual for a general discharge denial to occur where the basis for denial is tax related.


The Passing of Michael Mulroney: Les and Keith share remembrances of Michael Mulroney, an emeritus professor at Villanova Law School.

Congress Should Make 2022 Donations to Ukraine Relief Deductible in 2021: In order to encourage taxpayers to make donations in support of Ukraine, this post recommends that Congress create a deduction similar to the one permitted for the Indian Ocean Tsunami Act, which allowed deductions made in the current tax year to be claimed on the prior year’s return.

Confusion Over Attorney’s Fees in Ninth Circuit Stems from Statute and Regulation…

Today we welcome back Maria Dooner.  Maria is a practitioner-in-residence at the Janet R. Spragens Federal Tax Clinic at American University’s Washington College of Law.  She returns to help us understand the 9th Circuit’s recent decision regarding attorney’s fees.  Keith

As Keith discussed here, the Ninth Circuit recently issued its opinion on Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150. By finding the plaintiffs ineligible for an award of administrative and litigation costs, the court brought closure to the Dangs’ final pursuit of attorney’s fees. Yet, in doing so, it created some confusion (in its majority opinion) and clarity (in its concurrence) and provided another reason why the statute and regulation involving the recovery of administrative costs from administrative proceedings should be changed.


The Ninth Circuit’s Majority Opinion…

When explaining the Dangs’ ineligibility for administrative costs from the collection dispute, the court states the following:

…they are ineligible because no costs were incurred before the commencement date for the relevant administrative proceeding.

However, the parties were not simply disputing whether costs were incurred before the commencement datefor the relevant proceeding, which was a Collection Due Process (CDP) hearing. Rather, the parties were debating the definition of reasonable administrative costs – they were specifically disputing the starting point in which reasonable administrative costs were incurred, if at all, in the context of a CDP hearing. For example, the government argued that the starting point was the notice of determination, which is the conclusion of the administrative proceeding in a collections matter. According to the government, the Dangs were ineligible for administrative costs because no costs were incurred after the issuance of the notice of determination. 

In contrast, the Dangs argued that the commencement date for administrative costs in a collections matter was the 30-day letter, which allowed the taxpayer the opportunity for administrative review in the Internal Revenue Service Office of Appeals. The Dangs proclaimed that when Congress altered the definition of the commencement date within IRC § 7430(c)(2) to include the first letter of proposed deficiency (a 30-day letter)under the IRS Restructuring and Reform Act of 1998 this also encompassed a 30-day letter that provided an administrative review to a CDP hearing.

Unfortunately for the Dangs, this argument not only failed to resonate with the court, but it also confused them. The court felt the Dangs were contesting administrative costs in a former examination dispute and included the following in its opinion:

To the extent that they seek administrative costs for their examination dispute with the IRS, their request is untimely, and they were not the prevailing party.

But, at no point in the Dangs’ brief did they argue that they were entitled to administrative costs from the examination dispute. And, at no point did the government rebut this. The statement of issues was confined to the administrative and litigation costs related to the collection proceeding. (By way of background, the IRS erred in this proceeding and this was recognized by IRS Counsel as well as Judge Armen in the U.S. Tax Court.)

Within its majority opinion, the court missed an opportunity to define administrative costs and explain why the Dangs were ineligible to recover them. The court stated that the Dangs had not incurred any costs prior to the commencement of the relevant proceeding, but what was its opinion on the time (and costs) incurred during the CDP Hearing, which occurred after its commencement? Or, did the court agree with the government that the starting point was the notice of determination and that no costs were incurred after the notice of determination? 

Judge O’Scannlain’s Concurrence

Some clarity is provided within Judge O’Scannlain’s concurrence, which addresses the timing rule and the validity of the regulation (26 C.F.R. § 301.7430-3).

Judge O’Scannlain states that the regulation (26 CFR § 301.7430-3), which the government relies upon in its brief,is not a “permissible construction” of IRC § 7430. Though Judge O’Scannlain agrees with the government’s interpretation of the hanging paragraph, which precludes the recovery of administrative costs in collection hearings, he states that the regulation, which excludes collection hearings from the definition of administrative proceedings, contradicts the plain language of the statute.

Confusion over the recovery of attorney’s fees stems from the statute itself (IRC § 7430) and regulation (26 C.F.R. § 301.7430-3)

First, the statute is confusing with respect to the recovery of administrative costs from collection proceedings. The statute begins by stating that a prevailing party may be awarded administrative costs from an administrative proceeding (see IRC § 7430(a)(1)). Then, it proceeds to eliminate most administrative costs from collection proceedings due to a timing rule (see hanging paragraph of IRC § 7430(c)(2)). But then, it reiterates that administrative proceeding means any administrative proceeding (see IRC § 7430(c)(5)).

Second, taxpayers struggle to make sense of a confusing statute and tackle the timing rule.  For instance, the Dangs emphasized the statute’s broad coverage of administrative proceedings and how it explicitly includes the recovery of costs related to the collection of any tax (see IRC § 7430(a)(1)). To satisfy the timing rule, the Dangs stated that it is not the notice of determination that is relevant but the first letter of proposed deficiency because this is synonymous with any 30-day letter, which opens the door to an administrative proceeding. So rather than conflating a collection proceeding with a deficiency one (which may have been the belief of the court), the Dangs were essentially making a substance over form argument that if embraced by the court would have facilitated the recovery of the administrative costs from the CDP hearing.  

Third, the government places significant reliance on a regulation (26 C.F.R. § 301.7430-3) that redefines “administrative proceeding” and excludes most collection proceedings from this definition. As Judge O’Scannlain articulates in his concurrence, the regulation is not aligned with the statute. (Remember, this conflicts with the statute that defines administrative proceeding as any administrative proceeding and specifically references the collection of tax.) So, in addition to the statute, the regulation is also a source of confusion in these cases.  

This confusion is heightened by one of the regulation’s exceptions – it recognizes a CDP hearing, which specifically disputes the validity of the tax assessment under IRC § 6330 and IRC § 6320, as an administrative proceeding. (IRC § 6330(c)(2)(b) provides the opportunity for a taxpayer to contest the validity of the tax liability if the taxpayer “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”) Here, the regulation changes the fundamental nature of a CDP hearing to fit its definition of an administrative proceeding. Under the regulation, a CDP hearing that involves a dispute over the underlying tax liability is considered an administrative proceeding (and not a collection action) whereas one that involves a pure collection dispute is not an administrative proceeding. This does not make logical sense because regardless of whether the taxpayer is disputing the underlying tax or providing a collection alternative within a CDP hearing, the taxpayer is still very much in the heart of a collection proceeding. The taxpayer is ultimately contesting a notice of intent to levy or notice of federal tax lien, has only 30 days (not 90 days) to petition to the U.S. Tax Court and still receives a notice of determination (not a notice of deficiency) at the end of the matter. IRC § 6330(d)(1).

Though the above exception is favorable to the taxpayer, there is also the question of how this exception satisfies the timing rule within IRC § 7430(c)(2). Ironically (for the Dangs), the IRS appears to be embracing a substance over form interpretation of the hanging paragraph of IRC § 7430(c)(2) and is viewing the notice of intent to levy or notice of federal tax lien as a notice of deficiency for those who did not have an opportunity to dispute their underlying tax under IRC § 6330(c)(2)(b). However, if taxpayers, such as the Dangs, attempt to raise this argument in their favor, such as viewing a 30-day letter, which provides an opportunity into a collection proceeding, as a first letter of proposed deficiency, they will most likely confuse the court.

The regulation (26 C.F.R. § 301.7430-3) should be altered…

While the government may believe it is simplifying (and perhaps streamlining) the law by relying on a regulation that eliminates most collection actions from the definition of administrative proceeding, the government’s reliance on this regulation only compounds the confusion that already stems from the statute. Since it is an inaccurate interpretation of the statute (as Judge O’Scannlain conveys in his concurrence), it forces an unnecessary dispute over the definition of an administrative proceeding when the real dispute should be over what constitutes reasonable administrative costs due to a timing rule.

Instead of defining the administrative proceeding as one that excluded most collection proceedings, the IRS should address the impact of statute’s timing rule within the regulation’s definition of administrative costs (26 CFR § 301.7430-4). By addressing it within “administrative costs,” the regulation would be more aligned with the statute.  Again, there is no limitation on the definition of administrative proceeding in the statute – in fact, the statute states any (see IRC § 7430(c)(5)). Further, it is the subsection on administrative costs (IRC § 7430(c)(2)) where the hanging paragraph on the timing rule resides.

But better yet, Congress should change the statute to encompass the recovery of administrative costs from collection proceedings…

Without a modification to the timing rule within the statute, it seems nearly impossible to recover administrative costs related to the collection of tax.

While a notice of proposed levy may be viewed as notice of deficiency when a taxpayer is disputing the validity of the tax in a collection proceeding (and did not have the opportunity to do so earlier), taxpayers (like the Dangs) who are purely disputing the proposed collection action (and not the underlying tax) will face an uphill battle when trying to convince a court that the first letter of proposed deficiency in the law should be viewed as any 30-day letter into a collection proceeding. 

Again, Congress could incorporate language, such as “the date of receipt by the taxpayer of a right to a Collection Due Process (CDP) hearing” into the hanging paragraph of IRC § 7430(c)(2). Though taxpayers will continue to face challenges related to the prevailing party rules and “substantial justification” exception for the government, this will at least facilitate an opportunity to recover administrative costs, such as in the Dangs’ case.

As a final reminder, the Dangs asked for a levy on their retirement, which would have paid the tax in full. While the IRS is cautious with levying retirement accounts as a matter of policy, resistance to it as a collection alternative (when a taxpayer specifically requests it) is at odds with its intention to collect taxes as efficiently as possible. The agency needs additional incentives to follow published guidance in collection due process hearings, and by not allowing the recovery of administrative costs, Congress may not only harm taxpayers but also the IRS. By allowing for the recovery of administrative costs from a CDP hearing, Congress may see an added benefit that goes beyond just discouraging overreaching and abusive actions by the IRS it may just enhance the efficiency of tax collection – a core purpose of the agency.

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire (Part Two)

Lately I’ve been obsessing over how to remedy “bad answers” from the IRS). In my last post, I detailed how IRS counsel’s failure to “reasonably inquire” under Rule 33 before filing a “bad answer” may make them more susceptible to awards of litigation costs under IRC § 7430. Of course, litigation costs come at the end of the ligation process, so that might not seem like a useful remedy for more quickly resolving a case when the IRS files a “bad answer.”

Fortunately, the consequences for failing to reasonably inquire before filing an answer include more than just the heightened possibility of litigation costs. Indeed, far more immediate consequences may ensue. Read on for two more examples, from two more Tax Court orders.


Remedies for Bad Answers: Motion for More Definite Statement

There are a great many lessons that can be gleaned from the case of Patrick McCabe and Zine Magubane v. C.I.R. (Dkt. # 23862-05). I sincerely hope that the Tax Court considers returning to the practice of issuing “designated orders” at some time in the future. I have no idea if the order I am about to cover in detail was “designated” by Judge Panuthos when he issued it in 2006… but it is exactly the sort of order that practitioners would benefit from reading.

For everyone else, the Readers Digest version is as follows:

Petitioners were audited for Schedule C income and deduction issues. The petitioners engaged in the audit process, providing (they allege) adequate substantiation for each issue that ended up on the Notice of Deficiency. Importantly, they alleged that they had adequately substantiated everything and complied with the audit as part of their petition to the Tax Court. Keep my earlier discourse on the limits of burden shifting under IRC § 7491 in the back of your mind…

IRS Counsel asked for more time to file its answer because they didn’t have the administrative file. No one objected, and more time was granted.

Days passed. Again, the IRS can’t find a way to get the administrative file to IRS Counsel. At this point the facts are fairly similar to Vermouth v. C.I.R., 88 T.C. 1488 (1987).

Only now the parties diverge. Rather than file another motion asking for additional time to answer, IRS Counsel decides they’ll just file a “bad answer” instead. In response to all the facts alleged by petitioner, IRS Counsel “denies for lack of sufficient information or knowledge.”

Judge Panuthos and the petitioner are not impressed. Everything from my prior two posts now comes full circle… The interplay of Vermouth and responsive pleadings under Rule 36, as well as the post on reasonable inquiry requirements under Rule 33(b). What a payoff!

Petitioners file a “Motion for More Definite Statement” under Tax Court Rule 51. In that motion, they argue that the IRS’s answer is too vague to allow a reply and that the burden of proof should shift under IRC § 7491.

Note that this burden shift is critical to the Rule 51 motion. You really can’t argue “I need more clarity in order to reply!” (i.e., Rule 51) if a reply doesn’t make sense in the first place, because the burden is on you to prove something you affirmatively alleged. That is your prototypical deficiency case: petitioner alleges facts needed to show no deficiency, etc. When IRS Counsel denies those facts, you do not have to (indeed, shouldn’t) file a “reply.” If there was something more at play than IRS Counsel just saying, “we deny those facts, please uphold the deficiency,” however, Rule 51 might come in handy. From my look over the Tax Court orders, this most often arises with the assertion of fraud, but it could be any number of things (see, e.g., Rule 39). Here, it appears that the only way petitioners can get to Rule 51 is if there is a burden shift for the deficiency.

Whether or not a Rule 51 motion is appropriate in the McCabe/Magubane case isn’t really touched on – though Judge Panuthos seems to think Rule 51 isn’t the way to go in a footnote (that is, no “reply” is needed in this case). In any event, Judge Panuthos is willing to entertain the general notion that the IRS’s answer is deficient. And IRS Counsel’s argument for why the answer is fine is… not impressive. 

In a nutshell, IRS Counsel thinks they should be able to deny everything for lack of sufficient information because they still can’t find the administrative file. Not their fault that someone else at the IRS isn’t doing their job. And this mistake from some other person at the IRS is the reason they (truthfully) don’t have “sufficient information or knowledge.” Things should just be left at that.

But Judge Panuthos doesn’t leave things at that. Instead, he (literally) underscores the requirement of Rule 33(b) that provides the signer’s knowledge or belief should be “formed after a reasonable inquiry.”

And here things go an important step further. It isn’t enough to just say “I don’t have the file, and it’s not my fault it can’t be found.” Judge Panuthos writes:

“The Commissioner’s knowledge includes that of the revenue agent and other IRS personnel involved in the examination in this case. Thus, although the absences of the administrative file may be a direct impediment to the filing of a proper answer, counsel for respondent must avail himself of the other sources of information that would allow him to prepare a proper responsive pleading.”


This is, I think, a fair position to take. Note that it isn’t quite “imputing” full knowledge from one disparate wing of the IRS to another. Rather, it is something of a middle road: if you know that some other wing of the IRS has information/knowledge of the issues at hand, you have to reasonably inquire of those sources.

Similarly, I’d say Judge Panuthos’s ultimate ruling on the motion is also a fair position. He grants the motion, but with (for the time being at least) a less severe remedy than what was asked for by petitioner: the burden doesn’t shift, but the IRS has to file an amended (better) answer in less than a month.

Note that Judge Panuthos’s analysis was squarely on Rule 33, the violation of which allows for a range of sanctions. In other words, you need not go the route of “Motion for More Definite Statement” if the IRS answer has the type of shortfalls outlined above. More thoughts on other options at the conclusion of this post.

So How Far Does an Inquiry Need to Be for it to be Reasonable?

Ultimately, and perhaps unhelpfully, the “test” of reasonable inquiry is one of facts and circumstances. The Supreme Court has said as much with regards to FRCP 11, which is very similar to TC Rule 33. (For the Supreme Court take on Rule 11, see Business Guides, Inc. v. Chromatic Communications Enterprises, Inc., 498 U.S. 533 (1991).

At one extreme, IRS counsel failing to do much of any inquiry after failing to timely receive the administrative file is not good enough. To see something of the opposite extreme, it may be instructive to review the case of Wilmington Partners, L.P., v. C.I.R., Dkt. # 15098-06.

Wilmington was a TEFRA case involving a 65-page petition and 48-page IRS answer. The attorneys in Wilmington didn’t much appreciate that the IRS frequently denied portions of their meticulously laid-out petition for “lack of sufficient information or knowledge.” In particular, they were of the opinion that many of the facts were known to the Commissioner in some capacity or another, over the lifespan of the many exams and hours spent on the myriad partners comprising the case. Since IRS Counsel would have known these facts if they “reasonably inquired,” their denials (“lack of sufficient information”) should be stricken… or perhaps less dramatically, IRS Counsel should have to provide a more definite response.

To this, Judge Carluzzo said “no.” IRS Counsel contended that it reviewed literally thousands of pages contained in the administrative file before filing its 48-page answer. This might be enough to be considered a “reasonable inquiry,” but Judge Carluzzo doesn’t want to go too far down the road of defining that term (and resolves the matter without doing so).

Nonetheless, wading through over a thousand pages of administrative file is likely to be a reasonable inquiry – or at least enough to keep the Tax Court from imposing tough sanctions like striking an allegation. But simply throwing up your hands when the administrative file doesn’t come your way is not.

Moving Forward: Lessons Learned

I hope you’ve enjoyed these last few posts at least as much as I’ve enjoyed writing them during my spring break… We’ve covered a lot of ground, to the extent that I think some recap is in order. For me, the lessons I’ve pulled and plan on incorporating in my practice are as follows:

First and foremost, engage with the IRS during the administrative phase (i.e., exam), even if you are not sanguine on your prospects for success at that level. You cannot expect IRS Counsel to have knowledge of information you allege in your (eventual) petition if you haven’t sent it to the IRS exam or Appeals previously. You also can’t possibly expect to either burden shift or get attorney’s fees if you come late to the game.

Second, and relatedly, think strategically in crafting the facts portion of your petition. Can you allege facts that the IRS should be well aware of from information previously provided? Can you make a case for a burden shift? Can you phrase things in a way that would make it awkward for the IRS to “deny for lack of sufficient information?”

In deficiency cases, there are times where I allege and reference facts that should clearly be in the administrative file (e.g., “Taxpayer responded to the IRS CP2000 Notice on [x] date by sending a letter.”) But these are generally relevant to penalty issues only. (In the above example, it is relevant under IRC § 6751 and Walquist’s take on IRC § 6662 as being “automated” which I take issue with.) I have yet to argue for a burden shift in the petition, though that may change someday soon.

Third, emphasize when the administrative file is directly relevant (perhaps dispositive) to the issue at play in the petition. This is very easily done in most collection cases. Frankly, in my opinion the IRS shouldn’t file an answer to an “abuse of discretion” collection issue before at least reviewing the administrative file. I am almost certain to push back on any answer that denies for “lack of sufficient information” facts that are (1) directly relevant to the merits of the case and (2) necessarily found in the administrative file. The IRS has (indeed, created and maintains) the administrative file that is directly on point for those issues. It really just delays dispositive motion practice to answer a petition before reviewing that file.

Fourth, and finally, genuinely try to work with IRS Counsel before filing some sort of motion in response to a “bad answer.” It is important to keep things collegial before burning bridges, and moving for sanctions is a great way to poison the well (please hold all your “mixed metaphor” comments until the end). Respecting the things that are truly beyond IRS Counsel’s control means suggesting (and freely agreeing to) motions for additional time to file an answer. And although the Tax Court frowns on submitting “exhibits in the nature of evidence” with a petition, there is no reason why you cannot send documents directly to IRS Counsel supporting your petition after you’ve filed and they’ve been served. This isn’t to say that area Counsel will accept those documents… but it can’t hurt.

There are ways to be pro-active, and ways to have a “bad-answer” haunt the IRS. The increased chance of an attorney’s fees award is certainly one negative incentive for the IRS to do better. But another thought is to speed up the discovery process. Petitioners can be the ones to send (and initiate) the Branerton conference. Informally asking IRS Counsel to admit to the obvious facts previously listed on the petition can put them in an awkward space: do they deny and then deal with more formal admissions requests thereafter? Or do they admit to the facts alleged in the petition, thereby essentially conceding that they should have never denied in their answer to begin with?  (Note that this would not come after the IRS had received additional information not already available to them at the answer stage.)

The point of all of this isn’t to catch IRS Counsel on a technicality or punish them for other branches of the IRS failing to send them the administrative file. The point is to make litigation more efficient. The pleading stage should narrow down issues and agree on facts to the greatest extent possible. Presently, at least in low-income cases, it is little more than a perfunctory “I Allege” and “We Deny” dance.

While many low-income cases involve thorny questions of fact, just as often they resolve on documentary evidence that both parties would agree to, if only they looked it over. I have had precious few cases where I’ve ultimately relied on the finder of fact (i.e., Tax Court judge) to make a determination based on testimony. I dream of a day that one of my deficiency cases may be ripe for summary judgment because both parties properly engaged before the case was set for trial…

Making the IRS Answer to Taxpayer Inquiries…By Making the IRS Reasonably Inquire

In my last post, I piqued your interest by mentioning ways to remedy “bad answers” from the IRS – the sorts of answers where IRS Counsel blandly denies every factual allegation for lack of sufficient information. Then, I proceeded to discuss instances where the IRS either doesn’t answer at all or doesn’t answer sufficiently on instances where it has the burden of proof.

What gives?

I maintain that it wasn’t a bait-and-switch, but rather a delectable and necessary build-up to today’s post. In particular, it was important to showcase the need for the administrative file (that is, facts IRS Counsel should have access to) and the distaste the Tax Court has shown for “bureaucratic inertia” as an excuse for Counsel failing to ascertain facts known by the IRS more broadly. Today, I promise to (actually) discuss remedies to the ubiquitous “deny for lack of sufficient information” answers plaguing the low-income taxpayer docket.


When I file a petition, Tax Court Rule 33 ensures that I can’t just allege facts without reasonably inquiring into their veracity. It stands to reason that if I am bound by Rule 33 in alleging facts, the IRS is bound by Rule 33 in denying knowledge of those same facts. Of course, as the taxpayer/petitioner, I generally have both the burden of proof and better access to the “facts alleged” than the IRS. And because the IRS (usually) need only respond to my factual allegations, they usually deny and move on.

The question is how much of a “reasonable inquiry” IRS Counsel needs to do before they can throw up their hands and say, “we deny that fact for lack of sufficient knowledge or information.” For example, can IRS Counsel in Minnesota “deny for lack of sufficient knowledge” what IRS Appeals in Utah knows fully well about the case?

It is an issue of how much knowledge should be imputed from one area of the IRS to another. But it is also an issue of how much effort IRS Counsel must expend in actually trying to learn what IRS Appeals or Exam already knows. The first issue is with regards to knowledge. The second issue is with regards to effort.

Knowledge and Effort: You’ve Got to Try to Learn the Facts

Let’s begin with the lesson from my last post. IRS Counsel cannot just blame the “bureaucratic inertia” of other IRS functions (e.g., Appeals) for its failures to act in a timely manner. Recall the case of Vermouth v. C.I.R., 88 T.C. 1488 (1987). While Vermouth dealt with the IRS’s failure to timely file an answer (rather than timely filing a “bad” answer) under Tax Court Rule 36, it should remain relevant under Rule 33 concerns.

Exactly how hard IRS Counsel needs to try for the effort to be a “reasonable inquiry” may be subject to debate. At a minimum, I’d say that if the IRS (somewhere) has access to the facts alleged, IRS Counsel can’t (or shouldn’t) be able to just lamely deny for “lack of sufficient knowledge” because that other function hasn’t been on the ball in sending the information to IRS Counsel.

But you don’t have to take my word for it…

The Importance of the Answer: Litigation Costs

In perusing the US Tax Court’s orders, I came across the interesting case of Dudley Joseph & Myrna Dupuy Callahan v. C.I.R., Dkt. # 6999-09. One particular order caught my eye, which granted the pro se petitioners litigation costs for their troubles… generally a sign that the IRS didn’t do a great job in the case.

My suspicions proved correct.

In this case, the petitioners received a CP2000 Notice for their 2006 taxes for (allegedly) failing to report gambling winnings, social security, and $27 in interest. The problem was that the petitioners did, in fact, report all those things (except the interest, which they denied receiving altogether). They just didn’t report all those things in exactly the place the IRS AUR computer wanted them to.

Most of the confusion boiled down to the treatment of the gambling winnings. Petitioners did, in fact, report their winnings, but as Schedule C (i.e., self-employment/business) income. Generally, one could dispute that tax treatment, but in petitioner’s case they had already been audited on exactly that issue in the past, and apparently the IRS had agreed it was Schedule C income.

After being unable to resolve the issue by responding to the CP2000 (surprise!) petitioners received a Notice of Deficiency (NOD). They took the belt-and-suspenders approach by both petitioning the tax court and replying (again) to the IRS office in Philadelphia that had issued the CP2000.

Somewhat surprisingly, this time the CP2000 response worked. The IRS issued a “CP2005” closing letter agreeing with the return as filed. The closing letter went so far as to say, “If you have already filed a petition, the Office of the District Counsel will contact you on the final closing of this case.”

And yet, here we are in Tax Court. What went wrong?

Basically, IRS Counsel didn’t really look into things. Rather than conceding the case, they filed an answer that continued to assert the full deficiency as well as an accuracy penalty for good measure. When they were (eventually) presented with the CP2005 closing letter the IRS conceded… but by then significant time and effort had been wasted. Enough so that the Tax Court found that the petitioners should be awarded the costs of their tax court filing fee and mileage for driving to court.

For present purposes I want to focus on whether the IRS’s position (as framed in its answer) was substantially justified. If it was, then under IRC § 7430(c)(4)(B) no award of fees would be forthcoming. Here is where Judge Gale hits on that Rule 33 requirement I began with:

“Respondent has not asserted, and there is no evidence to support, the proposition that respondent undertook any investigation before filing his answer of petitioners’ claim that the disputed gambling and social security income had in fact been reported. We believe that only a modest amount of investigation of the averments in the petition would have confirmed petitioners’ claims and/or revealed the existence of the Closing Notice, issued more than 3 months before the answer.” (Emphasis added.)

Judge Gale then drops a footnote to Rule 33(b). It is in no small part because of the failure to really investigate the facts that the position of the IRS was not, in this case, substantially justified. 

Of course, this was all in an order and is not part of a precedential opinion. Nonetheless, it is worth noting that Judge Gale’s position could open up a lot of opportunity for litigation costs if the IRS doesn’t start doing a better job with its answers. Usually, practitioners need to rely on the “qualified offer rule” (IRC § 7430(g)) to get fees because the “substantially justified” exception is such a low bar for the IRS to meet. But maybe not, if the IRS doesn’t meet its Rule 33(b) requirements when filing an answer.

As far as remedies go, my bet is that the awarding of litigation costs would be enough to get IRS Counsel’s attention next time they have to file an answer. But the fun doesn’t stop with the greater potential for litigation costs. In my next post, I’ll cover still more possible remedies for answers that do not appear to meet the requirements of Rule 33(b).

Attorney’s Fees Cases in the Ninth Circuit and Requesting a Retirement Account Levy

Two cases we have written about previously in which the taxpayers won after the IRS took positions that were hard to justify have recently been appealed to the Ninth Circuit seeking attorney’s fees.  As we have discussed before, getting attorney’s fees is extraordinarily difficult in a tax case.



In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150, blogged here, oral argument before the Ninth Circuit took place on February 8, 2022.  You can listen to it here.  You can read the opening brief here, the government’s responding brief here, and the reply brief here.  Steve Milgrom, the Dangs’ pro bono representative, argued for both administrative and litigation costs.  As Maria Dooner points out in her post on this case, if someone in the Dangs’ circumstances cannot obtain attorney’s fees, it’s time to revisit the statute. That time may have come, because, unfortunately for the Dangs, the Ninth Circuit rendered a swift, and very brief, rejection of their claims for attorney’s fees and affirmed the Tax Court’s denial of the motion for costs. You can read the Ninth Circuit’s opinion here

The silver lining in the opinion is the recognition by Judge O’Scannlain in a concurring opinion that the regulation “is invalid because it is not ‘a permissible construction of’ 26 U.S.C. 7430.”  He finds that the exclusion of collection action from the definition of administrative proceedings is contrary to the plain language of the statute.  Specifically, he states that the IRS argument:

disregards the fact that what constitutes an administrative proceeding is relevant, not only to administrative costs, but to litigation costs as well. Subsection (c)(2) specifies that accumulation of costs is triggered by the earliest of notice of decision, notice of deficiency, and letter of proposed deficiency. Because the only document relevant to collection hearings is the notice of decision—received at the end of such a hearing—no administrative costs accumulate.


In Jacobs v. Commissioner, T.C. Memo 2021-51, blogged here, Mr. Jacobs filed his opening brief here and the tax clinic at Harvard filed an amicus brief here.  The responding brief for the government was originally due on February 25, 2022, but the government requested an extension to March 11, 2022, which was granted by the Court.  As we have reported in the blog posts linked above, only a miniscule number of cases receive attorney’s fees in the Tax Court.  We’ll see if this case can help to push that percentage upward, but the result in the Dang case makes me less optimistic.

Levy Action to Avoid IRC 72(t) Excise Tax

The Dang case involved an effort to get the IRS to levy on a taxpayer’s retirement account in order to allow the taxpayer to pay the outstanding liability without incurring the 10% excise tax for early withdrawal from such an account.  The revenue officer and the appeals officer exhibited little sympathy for the taxpayer’s argument requiring that the taxpayer withdraw the money in order to avoid – drumroll – a levy.  Ultimately, the Tax Court, after one remand made it clear that the IRS position was not reasonable.  I have a nearly identical case pending in which the Settlement Officer took the same position that the IRS would not levy on the client’s retirement account in order to avoid the excise tax on early withdrawal even though I provided the settlement officer with the Dang case.  Maybe the tax clinic at Harvard will soon get its own chance to pursue attorney’s fees, but with the Dangs’ failure, this seems unlikely.

Perhaps it’s time to take a harder look not only at the way the attorney’s fees statute is working but at the way the statute designed to allow taxpayers to avoid the 10% excise tax on early withdrawal is working out.  The IRS employees don’t want to levy on retirement accounts because they must get approval from higher levels.  IRM provides the procedure for levying on retirement accounts and subsection (10) requires the IRS employee to secure approval of the Form 668-R, Notice of Levy on Retirement Plans, from the SB/SE Director in the Collection Area. On the other side, taxpayers may want the IRS to levy on their retirement account in order to avoid the 10% excise tax on early withdrawal (such levies are exempt from the 10% tax under IRC 72(t)(2)(A)(vii)). The IRM provision providing this exemption is contained in IRM The manual could be changed to allow levy in a situation in which the taxpayer requests a levy.  While changing the results in obtaining attorney’s fees in tax cases may, at this point, require legislation, the ability to change the result to cause the IRS to levy on someone’s retirement account when they are requesting that the IRS do so should not be that hard.

Another Case Denying Attorney’s Fees; TAS Tries to go to Appeals

The case of Jacobs v. Commissioner, T.C. Memo 2021-51 (see the 39th doc on the docket) demonstrates once again how difficult it is to obtain attorney’s fees in Tax Court cases.  Maria Dooner and Linda Galler, the authors of the excellent chapter on attorney’s fees in the 8th Edition of Effectively Representing Your Client Before the IRS coming out this month and available for order now, wrote a post for us earlier this year in which they displayed the results of a FOIA request showing how infrequently petitioners succeed in obtaining attorney’s fees from the Tax Court.  Their data suggests that out of the approximately 25,000 petitioners each year who file a petition in the Tax Court about 10 will receive attorney’s fees or about .004%. 

I was glad for their research because the other clinics at the Legal Services Center at Harvard routinely obtain attorney’s fees in their litigation with the government, but I have not obtained attorney’s fees since my arrival.  Even though I have explained to them the difficulty of obtaining attorney’s fees in Tax Court cases, my colleagues no doubt simply consider me a slacker.  Maria and Linda provided me with some empirical cover to avoid the slacker label.  This post will not get into the disparity in the ability to win attorney’s fees in Tax Court versus other venues, but it is something to think about.  It’s now been almost a quarter century since Congress last tweaked IRC 7430 adding, among other things, the qualified offer provisions in the Restructuring and Reform Act of 1998 yet petitioners in tax cases still get almost no traction in seeking attorney’s fees.  Is the IRS this good compared to other agencies?


Professor Jacobs, a former Department of Justice attorney turned professor, author and private attorney, claimed a number of deductions for items related to his various professional pursuits.  The IRS audited his 2014 and 2015 returns via its wonderful correspondence exam process.  Unlike a high percentage of the individuals audited via correspondence, Mr. Jacobs responded and seems to have provided the IRS with quite a lot of documentation regarding his claimed expenses. 

In response, in December 2016, Mr. Jacobs submitted a letter of explanation with 28 pages of documentation…. 

In February 2017, the Memphis Correspondence Exam office informed Mr. Jacobs by letter that the information he had provided was insufficient to substantiate his expenses. On April 3, 2017, the Commissioner issued to Mr. Jacobs a notice of deficiency for the 2014 tax year, which disallowed all the deductions Mr. Jacobs had claimed on Schedule C. Both the letter and the notice were sent to the wrong address.

The April 3, 2017, notice was subsequently rescinded after the Taxpayer Advocate Service (“TAS”) opened a case on Mr. Jacobs’ behalf (and at his [*7] request). The TAS assisted Mr. Jacobs in arguing successfully that he had not been given the opportunity to present further substantiating documents.

Mr. Jacobs then made a new submission to the Memphis Correspondence Exam office. That submission included 24 pages of annotated monthly credit card statements. Most of these pages had been provided previously in Mr. Jacobs’ December 2016 submission, but the annotations were new and were intended to replace highlighting in the prior submission that had not been visible to the Memphis Correspondence Exam office because of the way the materials were submitted. The new submission also included several pages of credit card statements that were not part of the December 2016 submission. After reviewing the additional documents, the Memphis Correspondence Exam office determined once more that the information was insufficient to support Mr. Jacobs’ claimed deductions.

He was in California corresponding with an examiner in Memphis.  When the examiner denied the deductions despite his documentation and written explanations, he protested the denial and appears to have been assigned to the Appeals Office in Memphis.

It should be noted that Mr. Jacobs appears not to have been pleased with the customer service he received from the Memphis correspondence unit:

In January 2018, Mr. Jacobs filed a formal request with the U.S. Treasury Inspector General for Tax Administration (“TIGTA”) for an investigation into alleged misconduct by examiners in the Memphis Correspondence Exam office. The request alleged that the Memphis Correspondence Exam office had made unnecessary and “increasingly burdensome” requests for documentation, had threatened to issue an unwarranted deficiency notice, had summarily rejected Mr. Jacobs’ claimed deductions despite the documentation he had provided, and had “stonewalled” for five months Mr. Jacobs’ request for a managerial conference call. TIGTA opened an active investigation into the Memphis Correspondence Exam office and tracked the status of Mr. Jacobs’ case by initiating correspondence with upper-level management of that office.

Mr. Jacobs was perhaps frustrated with his pen pal relationship with the IRS and sought to meet with an actual person.  In a case with lots of documents this can be especially important as keeping a multitude of documents straight over the phone is challenging.

I digress here for a brief mention of my only encounter with the Memphis Appeals Office which occurred more than a decade ago and involved a Collection Due Process case rather than an examination issue.  The Settlement Officer set a time for the telephonic hearing.  The correspondence was a bit unclear because the conference was set at 10:00 CST for a hearing in June when daylight savings time was in effect but I assumed the SO meant 10:00 CDT and called at that time.  No one answered and I got a generic voice mail message saying that the SO was “away from her desk or on the phone.”  I left a detailed message about the hearing and waited for a call back which did not come.  I was covering for a student who could not attend the hearing due to a bar prep session.  She eventually got through to the SO and set up the hearing for the same time one week later.  I called again at 10:00 the following week, received the same generic voice mail message.  I waited a couple hours and did not receive a call back.  I found this very frustrating.  Even more frustrating is the fact that I had no idea who the person’s manager was or how to reach that unknown person.  I happened to know the director of Appeals from having worked together with her at the Chief Counsel’s office and sent her an email message describing my frustration.  That did cause the SO to reach out to me rather promptly, and we were able to conduct the CDP hearing.  I don’t know if Ms. Jacobs’ experience with the Appeals Office in Memphis mirrored mine but it seems he was frustrated with the remote hearing experience.

Meanwhile, the IRS decided to audit Mr. Jacobs for 2015 and this time did so using the correspondence examination unit in Brookhaven.  This exam started four months before he submitted his request to TIGTA regarding the 2014 exam.  It’s not clear why the IRS would audit the same person with essentially the same issues for the subsequent year at a different location but it did and the audit again resulted in him submitting lots of documentation and the correspondence examiner rejecting his explanation.  After some back and forth which no doubt involved detailed explanations from the correspondence exam unit regarding the legal and factual basis for its determination, he requested a hearing with Appeals regarding the 2015 year as well.

Mr. Jacobs succeeded in having his Appeals case assigned from Memphis to Los Angeles.  He provided the AO with a detailed memo and lots of exhibits.  The AO decided that, in keeping with the judicial role of Appeals, she should not evaluate the factual nature of the evidence but send it back to the correspondence examiners in Memphis.  How wonderful for Mr. Jacobs yet he seemed disappointed with this opportunity for more interaction with the correspondence examiners and requested Appeals assign a new AO or at least send his material to an examiner in LA.  Appeals denied his request.  His material went back to Memphis.  The correspondence unit there surprisingly upheld its earlier decision.  An in person meeting was finally set with the AO in LA who by now also had his 2015 year and lots more correspondence from Mr. Jacobs.

This part of the case is interesting because Mr. Jacobs sought to bring his case advocate from TAS to the Appeals conference.  Appeals said no.  The day before the scheduled in person conference with Appeals the case was reassigned to a new AO.  The Court provided this explanation of the discussion regarding TAS attending the conference:

On November 16, Appeals Officer Guerrero was instructed not to schedule a conference with Mr. Jacobs until after management at IRS Appeals had determined a course of action in response to demands from the TAS to be present at Mr. Jacobs’ conference. As best we can tell, this new course of action was attributable to a memorandum the TAS sent to IRS Appeals on November 7, 2018. That memorandum asked that IRS “Appeals should refrain from holding Mr. Jacobs’ hearing until Appeals’ policy is modified” to permit a TAS representative to attend. Discussions between IRS Appeals and the TAS on this topic ensued.

The case does not get any further into the topic of TAS attending the Appeals conference.  I have never thought of bringing someone from TAS into any conference with the IRS but now I am a little intrigued by what happened here and how the issue was resolved.  I would welcome any comments from readers who have brought TAS representatives to Appeals or to other conferences and what role TAS played in those conferences and whether the TAS presence was helpful.

Meanwhile, because the statute of limitations was drawing close, the new AO requested a waiver of the statute of limitations before he would schedule a hearing based on Appeals policy of not working case too close to the statute date.  It’s possible that Mr. Jacobs was frustrated at this point because he declined to extend the statute of limitations causing the issuance of a notice of deficiency, the filing of a Tax Court petition and the resending of his case to Appeals after the IRS answered.

The AO with whom Mr. Jacobs met after filing his Tax Court petition conceded most of the issues and the Chief Counsel attorney promptly conceded the rest.  So, he had a complete victory after a long an arduous process.  Mr. Jacobs then sought attorney’s fees which is all that this case and this blog post is really about.  The Tax Court said no.  He was not a prevailing party within the meaning of IRC 7430.  Why?  Because all of the problems he had prior to filing his petition really did not matter.  The IRS was still justified in not conceding before the petition because it had never met with him and received a detailed explanation of his justification for the positions he took and, therefore, the IRS was substantially justified in issuing the notice of deficiency.  After the filing of the petition, the IRS relatively promptly conceded the case.  The Court noted:

As the Supreme Court has observed, substantially justified means ‘more than merely undeserving of sanctions for frivolousness.’” United States v. Yochum (In re Yochum), 89 F.3d 661, 671 (9th Cir. 1996) (quoting Underwood, [*26] 487 U.S. at 566). The Commissioner’s position may be substantially justified even if incorrect “if a reasonable person could think it correct.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443 (quoting Underwood, 487 U.S. at 566 n.2). Courts have found that the Commissioner’s position was substantially justified in cases that involve primarily factual questions. See, e.g., Bale Chevrolet Co. v. United States, 620 F.3d 868 (8th Cir. 2010). The fact that the IRS loses a case or makes a concession “does not by itself establish that the position taken is unreasonable,” but is “a factor that may be considered.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443.

This case does not break new ground it simply demonstrates again why only .004% of petitioners obtain attorney’s fees in Tax Court cases.  One could argue that he should have made a qualified offer earlier in the case to knock out the substantial justification argument, but Mr. Jacobs seems to have responded at every turn with substantial evidence.  Does the fact that the IRS correspondence examiners were not equipped to process his arguments mean he should not be compensated for the many hours he spent trying to resolve his case. 

Maybe it’s time for a fresh look at the standards for obtaining attorney’s fees in Tax Court cases.

IRS erred in CDP hearing, but taxpayers have no chance to recover administrative costs… absent help from Congress

We welcome first-time guest blogger Maria Dooner to Procedurally Taxing. Maria is the Director of Tax Controversy Services at She chairs the Board of Directors of Community Tax Aid in Washington D.C. and she is a co-author of the chapter, “Recovering Fees and Costs When a Taxpayer Prevails” in the forthcoming edition of Effectively Representing Your Client Before the IRS. Today Maria examines a recent Tax Court opinion denying costs to taxpayers who successfully appealed their CDP determination. Bryan Camp also wrote an excellent post on the case which you can find here. Christine

An award of reasonable administrative and litigation costs under section 7430 was designed to promote effective tax administration by preventing abusive actions and overreaching by the Internal Revenue Service (IRS). But to be effective, a taxpayer must actually recover costs when the government’s position was not substantially justified. A recent Tax Court decision not only continues to expose the challenges faced by taxpayers in recovering reasonable administrative and litigation costs from the IRS, but it also spotlights the need for potential Congressional action.

In Tung Dang and Hieu Pham Dang v. Commissioner, T.C. Memo. 2020-150 (Nov. 9, 2020), the Tax Court held that 1) the petitioners did not incur any reasonable administrative costs as defined by section 7430, and 2) the petitioners were not entitled to an award of reasonable litigation costs since the United States’ litigation position was substantially justified. The court focused almost exclusively on timing — it evaluated when the government’s position was or was not substantially justified and when costs were incurred. Previous PT blog posts have highlighted the difficulties in proving that the government’s position was not substantially justified (see here and here). This post primarily focuses on the challenges with recovering administrative costs due to the timeframe in which they are incurred.


Facts of Dang

Dang involved a tax collection case where a Revenue Officer denied the taxpayers’ request to levy their individual retirement account (IRA) to pay their outstanding tax liability – a request that would avoid the additional tax on early distributions and the potential sale of other assets. When declining the request, the Revenue Officer stated that the taxpayers had access to alternative sources of funds and she subsequently issued a notice of federal tax lien and notice of intent to levy. In response, the Dangs filed a request for a Collection Due Process (CDP) hearing, but the Settlement Officer sustained the IRS collection actions, stating that a levy is not a collection alternative considered by Appeals. (As an aside, the irony of this case cannot be overlooked – while the taxpayer is contesting the notice of intent to levy, the Appeals Office says “no” to the taxpayer’s specific levy request.)

After receiving an unfavorable notice of determination, the Dangs filed a petition to Tax Court where IRS Counsel conceded the issue in his answer, stating that a substitution of assets (via a levy) is a valid collection alternative, and the Appeals Office abused its discretion. Against the desires of the Dangs who wanted an order to levy their IRA, Special Trial Judge Armen remanded the case back to the Appeals Office to promptly hold another administrative hearing, correct its flawed reasoning and reconsider the taxpayers’ request to levy the IRA. Keith blogged about the remand order on PT here (the taxpayers unsuccessfully argued a remand was unnecessary).

After the Appeals Office concluded that the levy on the IRA was appropriate, and settlement was reached in Tax Court, the taxpayers filed a motion for approximately $13,000 in reasonable administrative costs and approximately $70,000 in litigation costs. The administrative costs claimed by the Dangs included the time spent preparing and participating in the CDP hearing. The litigation costs claimed by the Dangs included all the work that was performed after receiving the Notice of Determination from the Appeals Office. This included time spent preparing the Tax Court petition and work performed while the taxpayers were in Tax Court, including the time spent on the case during the supplemental CDP hearing when it was remanded back to the Appeals Office.

Was the government’s position substantially justified, and when were costs incurred?

To successfully recover costs, the taxpayer must have exhausted administrative remedies with the IRS, have not unreasonably protracted the proceedings, have claimed reasonable costs, and have ultimately prevailed (as well as have satisfied a net worth requirement). Under section 7430(c)(4)(B)(i), a taxpayer cannot be a prevailing party if the United States was substantially justified in their position. When determining whether the government was substantially justified in its position in Dang, Judge Marvel applied a bifurcated analysis.  This involved determining whether the government’s position was substantially justified in 1) its notice of determination in the administrative proceeding, and 2) its answer in the judicial proceeding.  However, before the first question was evaluated, Judge Marvel questioned whether any permissible costs were in fact incurred during the administrative proceeding.

Pursuant to section 7430(c)(2), administrative costs are those incurred by the taxpayer on or after the earliest of: (1) the date of the receipt by the taxpayer of the notice of decision by the IRS Independent Office of Appeals, (2) the date of the notice of deficiency, or (3) the date of the first letter of proposed deficiency that allows the taxpayer to appeal to the IRS Independent Office of Appeals. Because Dang involved a CDP hearing, the only relevant date was the date the taxpayers received the Notice of Determination, which is essentially the notice of decision referenced in the law. So, on or after the notice of determination, the taxpayers could recover any costs incurred from that point forward within an administrative proceeding.

Unfortunately, the notice of determination is probably the worst date to start accruing administrative costs as it concludes a collection case at the administrative level. (The ideal date from a taxpayer’s perspective would be the date the Dangs received a right to a CDP hearing.) But upon receipt of the notice of determination, the Dangs have no move to make in which they could possibly recover any administrative costs. Their only task at hand is to prepare for litigation by reviewing the notice of determination and filing a petition to the Tax Court — time that the Dangs appropriately classified as litigation costs.

Since there were no “administrative costs” (within the scope of the statute) to be awarded, the Tax Court solely evaluated whether the government’s position was substantially justified in the litigation proceeding, relying on Huffman v. Commissioner, 978 F.2d 1148 (1992). Because the IRS promptly conceded its error and moved to remand the case back to the Appeals Office, Judge Marvel found that the IRS’s position was substantially justified. Therefore, no litigation costs could be awarded to the Dangs.

Did the decision to remand create additional administrative costs that could be awarded?

While this case is exceptional in more ways than one, additional costs associated with a supplemental CDP hearing (via a remand) add another twist. Bryan Camp suggests in his post that these costs were incurred after the notice of determination and as part of an administrative proceeding, so there could be an argument that there are administrative costs to be awarded.

This is an interesting point that was not addressed by the Tax Court, which was likely due to the fact these costs were classified as litigation costs by the Dangs. In the Dang case, the supplemental CDP Hearing was held at the direction of the Tax Court, and the hearing was very much connected to the court proceeding, which ultimately concluded the case. (In his order to remand the case back to the Appeals Office, Special Trial Judge Armen still retained jurisdiction over the case.) Thus, it appears that the time spent preparing, traveling, and participating in the remanded appeals hearing was appropriately classified as litigation costs under section 7430(c)(1)(b)(iii).

Why does the definition of “administrative costs” in section 7430 fail to encompass most costs incurred within administrative collection due process proceedings?

Judge Marvel did not analyze whether the government’s position was or was not substantially justified in the administrative proceeding, but we can assume that the position was not substantially justified. (The IRS went against published guidance (i.e. Treas. Reg. 301.6330-1(e)(3)), and this was recognized by IRS Counsel who immediately conceded the issue as well as Special Trial Judge Armen who remanded the case back to the Appeals Office for a do-over.)The question then becomes: why should the Dangs be unable to recover costs for time spent preparing and participating in the original CDP Hearing, which clearly went wrong and did not serve its intended purpose?

As explained above, Judge Marvel’s decision hinges on the definition of “administrative costs” in section 7430(c)(2), which incorporates a timing rule that effectively excludes CDP hearings from consideration. But Regulation § 301.7430-3(a)(4)  appears to go even further, providing that a CDP hearing is not an administrative proceeding for which reasonable administrative costs can be recovered. In their brief, the Dangs argued that this regulation should be disregarded as inconsistent with the statute. The Dangs note, “there is simply no statutory authority for eliminating CDP hearings from the cost recovery regimen.” In their brief, the Dangs emphasize the very first sentence of section 7430, which states that the prevailing party may be awarded reasonable administrative costs in any administrative proceeding in connection with the collection of any tax. They also explain how Regulation § 301.7430-3(a)(4), which precludes most collection actions, particularly a CDP hearing (“the quintessential collection administrative hearing”), from the definition of an administrative proceeding for purposes of section 7430, does not align with the first sentence of section 7430. But despite this being true, it does not change the outcome of the case. Unfortunately, it is the dates that triggered these costs, listed in section 7430(c)(2), that preclude and will continue to preclude the award of administrative costs in most CDP hearings. The dispute over the regulation is a red herring.

Why then did Congress enact a seemingly contradictory statute? An interesting explanation for these dates lies within a small footnote in the Tax Court opinion, indicating that it was Congressional intent to preclude an award for administrative costs arising from a collection action:

In 1988, when Congress amended sec. 7430 to include recovery for administrative costs in addition to litigation costs, the legislative history of the amendment acknowledged that the dates triggering costs precluded an award for administrative costs arising from a collection action. See H.R. Conf. Rept. No. 100-1104, at 226 (1988), 1988-3 C.B. 473, 716 (“Thus, with respect to a collection action, only reasonable litigation costs are recoverable under * * * [sec. 7430].”).

Ironically, a deeper dive into the Technical and Miscellaneous Revenue Act of 1988 shows that its amendment to section 7430 did not even facilitate the recovery of administrative costs for most taxpayers in deficiency proceedings. As passed, this law classified administrative costs as those incurred on or after the earlier of the date of receipt of the notice of the decision of the Appeals Office or the date of the notice of deficiency. Though the Senate bill included a third date, the date of notice of proposed deficiency (often known as the “30-day letter” into the Appeals Office), this was not incorporated into the 1988 Act. Therefore, the 1988 Act added the words “administrative costs” to section 7430, but it failed to provide meaningful impact to taxpayers pursuing administrative costs in deficiency proceedings. By not providing for the effective recovery of administrative costs in proceedings involving both the assessment and collection of tax, the inclusion of “administrative costs” was in many ways meaningless. 

It was not until the passage of the Internal Revenue Service Restructuring and Reform Act of 1998 that Congress approved the award of administrative costs incurred on or after the date of a notice of proposed deficiency. After that, taxpayers were able to recover administrative costs from the moment they received the notice of proposed deficiency and onward. Simultaneously, the 1998 Act created taxpayers’ rights to a CDP hearing — an independent review of a notice of intent to levy and notice of federal tax lien, culminating in a notice of determination and the right to judicial review.

Although we do not know the exact intent of Congress regarding the award of administrative costs in CDP hearings, the legislative history suggests that Congress either lacked an understanding of when these costs were incurred or was not fully committed to awarding them. For example, the fact that Congress did not facilitate the recovery of administrative costs associated with a collection proceeding in the 1998 law could have been an oversight when they were simultaneously creating a collection hearing that did not yet exist. Or maybe more likely, Congress did not understand the dates that triggered these costs. Remember, it took them approximately 10 years, after the law was amended to award administrative costs, to finally incorporate a provision that facilitated the recovery of these costs in deficiency proceedings.

This leads to what may be the main significance of Dang… a successful recovery of administrative costs by taxpayers requires a better understanding of when these costs are actually incurred and a more serious commitment to award them by Congress. The resources exerted in the Dang case where volunteer attorneys spent hours providing financial information, preparing for a CDP hearing, filing motions and briefs, preparing for a second CDP hearing, etc. (all to get back to an answer originally granted by the first Revenue Officer who approved the levy but was replaced by a second Revenue Officer who did not) show the importance of passing a law that allows for the effective recovery of costs and fees when the administrative process goes wrong. 

As a start, Congress could incorporate “costs incurred on or after the date of receipt by the taxpayer of a right to a CDP hearing” into section 7430(c)(2) for the sake of theDangs and thousands of taxpayers in collection cases. By making section 7430 more meaningful, Congress will make it more important for the IRS to follow published guidance in administrative collection due process hearings and will help the IRS achieve its mission in providing top quality service. Ultimately, the purpose of these awards is not to penalize but rather enhance effective tax administration, and to do this, more taxpayers must actually recover costs when the IRS errs.

Attorney’s Fees Following Bad Faith Action by IRS

In True the Vote v. IRS, No. 1:13-cv-00734 (D.D.C. 2020) one of the issues in the most recent opinion regarding this case concerns the calculation of attorneys’ fees.  This case began in 2013, because the IRS denied exempt status to True the Vote.  At that time numerous cases existed based on the allegedly intentional actions of the IRS to deny tax exempt status by improperly characterizing certain groups as political groups who did adhere to certain norms.  You can read about the earlier decisions in this case at True the Vote, Inc. v. Internal Revenue Serv. (“True the Vote I”), 71 F. Supp. 3d 219, 223-25 (D.D.C. 2014) (Walton, J.), aff’d in part, rev’d in part and remanded, 831 F.3d 551 (D.C. Cir. 2016), and the procedural history of this case in its Memorandum Opinion issued on May 30, 2019, see True the Vote, Inc. v. Internal Revenue Serv. (“True the Vote II”), Civ. Action No. 13-734 (RBW), 2019 WL 2304659, at *2 (D.D.C. May 30, 2019) (Walton, J.)

In many ways it seems like peanuts for the government to argue about the attorney’s fees because the issue in this case, and other similarly situated cases, caused the IRS to lose about 20% of its budget over the past decade.  That’s a gross simplification of the situation, but little doubt exists that the IRS paid dearly for the mistakes made by the exempt organization sector of the organization.  Because of the severe budget cuts and their impact on the IRS’s productivity, it could be argued that we have all suffered due to the downturn in government revenue as a result of these events.  Viewed in another light, perhaps we have all benefited.  In any event the amount of attorney’s fees at issue pales in comparison to the true cost to the IRS brought about by this case and other similarly situated cases.


Here, the court faces a motion for reconsideration by the IRS of the award of attorney’s fees to plaintiff’s attorneys.  The court found the IRS acted in bad faith and, as a consequence, granted fees at the market rate rather than the must less generous rate provided by the Equal Access to Justice (EAJA) act.  Note that most attorney’s fee’s fights with the IRS would occur using IRC 7430 which provides a basis for fees quite similar to EAJA but not identical.

Relying on the Supreme Court precedent set in Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178 (2017), the IRS argues that granting the attorneys a market-based fee because of bad faith should only occur during the period of bad faith.  It points out that the bad faith ended in 2013 when the IRS granted tax exempt status to the organization. 

In Goodyear, the Supreme Court explained:

[A] sanction [of attorneys’ fees], when imposed pursuant to civil procedures, must be compensatory rather than punitive in nature. In other words, the fee award may go no further than to redress the wronged party for losses sustained; it may not impose an additional amount as punishment for the sanctioned party’s misbehavior. . . . [A] sanction counts as compensatory only if it is calibrate[d] to [the] damages caused by the bad-faith acts on which it is based. A fee award is so calibrated if it covers the legal bills that the litigation abuse occasioned. But if an award extends further than that — to fees that would have been incurred without the misconduct — then it crosses the boundary from compensation to punishment.

The court agrees.  It determines that its prior decision did not take into account the decision in Goodyear and it should not have granted the fees based on bad faith beyond the point at which the IRS acted in bad faith and agreed that the bad faith action stopped in 2013 with the granting of the exempt status request.  So, it reverses the prior award giving full market rate for attorney’s fees only to the point of the granting of exempt status and EAJA based fees thereafter.

The change in the fee rate based on the end of the bad behavior is the primary issue in this case.  The case has several other fee issues which it addresses and may be worth reading for anyone engaged in fee litigation and looking for a further discussion of the types of issues that can arise in these cases.

Perhaps the IRS feels good to get a least a partial win out of this situation.  As the cases stemming from the misadventures of the exempt organization sector of the IRS slowly come to an end, it can only hope that this chapter is behind it and better days — and better budgets — lie ahead.  For those of us who would like to see the IRS staffed to meet the challenges on all of the issues it faces this will be good as well.