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

March 23, 2022 by Leave a Comment

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.

read more...

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.

Filed Under: Attorney's fees, Collection Due Process, Levy Tagged With:

Why More Taxpayers Should Pursue Attorney’s Fees through Qualified Offers

March 4, 2021 by 1 Comment

Today we welcome back guest bloggers Maria Dooner and Linda Galler, who in this post urge representatives use the qualified offer provisions more often. Statistics that Maria and Linda received though FOIA show that surprisingly few cases result in attorneys fees given the volume of Tax Court litigation. Regular readers will be familiar with some of the reasons why this may be the case – we have discussed the hurdles to winning fees in many posts (e.g. here, here, and here). Taxpayers in the Ninth Circuit may have a slightly easier time thanks to the Knudsen precedent, but the road is not easy. However, as Maria and Linda explain, there are benefits to submitting a qualified offer even if it does not result in the government paying fees. Christine

Over the past decade, advancements in data collection and analytics at the Internal Revenue Service (IRS) have led to better insights into the world of federal tax administration. The agency has significantly relied on data to enhance both criminal investigation and civil enforcement.  The ability to access and analyze IRS data also can be valuable to practitioners who desire a better understanding of the use and impact of certain procedural provisions that benefit taxpayers.

As the authors of Chapter 18 in the upcoming 8th edition of Effectively Representing Your Client Before the IRS, we requested and obtained data from the IRS regarding the pursuit and recovery of attorney’s fees through IRC 7430.  This blog post summarizes that data and offers our observations and thoughts on using qualified offers (“QOs”) for strategic, rather than monetary, purposes.

read more...

What the data show (and do not show)

There is very little data on the pursuit and recovery of attorney’s fees in tax disputes because the IRS only partially tracks it. For example, the IRS does not track the total number of cases in which recovery of administrative or litigation costs is sought under the general provisions of IRC § 7430. Nor does the IRS track or maintain any information on QOs (e.g., number of QOs submitted, number of QOs that resulted in settlement of the underlying case, number of QOs that resulted in an award, or whether an award was for administrative or litigation costs). Such information would be useful both to the government and to practitioners, and we were surprised to learn how little the IRS knows.

The IRS does track the number of cases in which the Office of Chief Counsel (Procedure and Administration) processed a payment of an award from the General Judgment Fund, which includes all cases in which attorney’s fees are awarded in cases before the U.S. Tax Court:

YearNumber of Cases
20158
201613
20177
201810
Attorneys’ Fee Awards in Tax Court Litigation

To place this data in context,  Chief Counsel reported approximately 25,000 cases for fiscal year 2018, 27,000 cases for fiscal year 2017, 30,000 cases for fiscal year 2016, and 32,000 cases for fiscal year 2015 in the U.S. Tax Court.  Consequently, the extremely low number of cases that resulted in an award of fees suggests that practitioners may be overlooking the ability to pursue an award of attorney’s fees and, we suspect, are greatly underutilizing QOs.

What is a qualified offer?

A QO is essentially a written offer made by the taxpayer to the government in a case involving the validity of a tax liability or refund. The taxpayer offers a specific amount (tax liability or refund) to resolve the taxpayer’s case. If the government rejects the offer and there is a court judgment that is equal to or more favorable (to the taxpayer) than the offer, the taxpayer can be awarded attorney’s fees. Thus, for those serious about recovering attorney’s fees, the amount detailed in a QO (which can be a dollar amount or a percentage of the adjustments at issue) should be a realistic estimate of what the taxpayer truly believes to be the correct liability or refund. Though it may be tempting, submitting an offer that is too favorable to the taxpayer (in terms of merit) will likely result in a quick rejection by the IRS and can be a waste of time for all parties.

In terms of timing, a taxpayer can submit a QO any time after they receive a notice of proposed deficiency (i.e., “30-day letter”), which provides rights to administrative review in Appeals.  While a taxpayer can submit a QO up until 30 days before trial begins, a taxpayer should submit a QO as soon as practical. (Under Reg. § 301.7430-7(a), a taxpayer is entitled to recover only fees incurred subsequent to the offer.) A QO is open for acceptance or rejection by the IRS for 90 days or until the date the trial begins, whichever is earlier. For QOs to be successful, taxpayers must exhaust all administrative remedies with the IRS and not unreasonably protract the proceedings, as well as satisfy a net worth requirement. 

What are the benefits of submitting a qualified offer?

As compared to pursuing costs and fees under the general provisions of IRC § 7430, QOs do not require proof that the government’s position was not substantially justified.  Proving a lack of substantial justification is often the main challenge in recovering attorney’s fees.  Therefore, a taxpayer who submits a QO (and receives a court judgment that is equal to or better than the offer), can expect a more straightforward path toward receiving an award.

The benefits of submitting QOs go beyond monetary compensation; a major benefit is quick case resolution. (The Internal Revenue Manual explicitly instructs Appeals Officers to expedite QOs.)  Efficient case resolution is equally important to LITC/pro bono and compensated attorneys.  For example, given the challenges facing the IRS at the moment, even cases with a predictable outcome can take a long time to make their way through the administrative process.  For clients of LITCs or pro bono counsel, refunds can be held up for lengthy periods, causing financial difficulties to taxpayers who ultimately will prevail.  Moreover, these cases take up unnecessary time and resources for tax professionals on both sides.  Indeed, LITCs and nonprofit organizations themselves are harmed by lengthy administrative processes; pro bono attorneys have less time and bandwidth to represent other clients while struggling to resolve what they reasonably thought were predictable cases. 

In Chapter 18 of the forthcoming edition of Effectively Representing Your Client Before the IRS,  we discuss in more detail the rules on how to submit a QO and when one is warranted.  Ultimately, we explain why QOs are the “easy way” to recover costs and fees and how they serve to encourage the settlement of tax disputes.  While a QO is not and should not be a panacea for every case, QOs should be considered in strong cases that encounter time-consuming challenges or delays in resolution through no fault of the taxpayer. 

Filed Under: Qualified Offer Tagged With: ,

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

December 16, 2020 by 1 Comment

We welcome first-time guest blogger Maria Dooner to Procedurally Taxing. Maria is the Director of Tax Controversy Services at TaxFirm.com. 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.

read more...

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.

Filed Under: Attorney's fees, Collection Due Process Tagged With: