Tax Court Update – July 30, 2009 – Recovering Attorneys Fees and Costs

Tax Court Update – July 30, 2009 – Recovering Attorneys Fees and Costs

Share this

One of the big complaints about the American judicial system is that litigants who are in the right often lose their cases merely because the party in the wrong has more money and can outspend them in the process.

The Internal Revenue Code attempts to address this problem.

Section 7430 allows taxpayers to recover their attorneys’ fees and costs if they can show that they,

  1. were the prevailing party within the meaning of section 7430(c)(4);
  2. exhausted the applicable administrative remedies;
  3. have claimed costs that are reasonable; and
  4. unreasonably protract the proceedings.

Section 7430(c)(4) provides:

A party shall not be treated as the prevailing party in a proceeding to which subsection (a) applies if the United States establishes that the position of the United States in the proceeding was substantially justified.

In Steven Trollope v. Commissioner of Internal Revenue, the Court addressed the taxpayer’s §7430 claim for fees and costs.

Judge Harry Allen Haines explained how to determine whether or not the IRS’s position is “substantially justified.”

For a position to be substantially justified, “substantial evidence” must exist to support it. Pierce v. Underwood, 487, U.S. at 564.

That phrase does not mean a large or considerable amount of evidence, but rather ‘such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.’ Id. at 564-565 (quoting Consolidated Edison Co. v. NLRB, 305 U.S. 197, 229 (1938)).

The Commissioner’s position may be incorrect but substantially justified ‘if a reasonable person could think it correct.’ Id. at 566 n.2.

In order to avoid having to pay a taxpayer’s attorneys fees and costs the IRS must only show that its position was supported by the evidence available to it at the time.

In Trollope Judge Haines ruled that it was and in so doing denied the taxpayer’s claim for fees and costs:

On the basis of the evidence available to respondent, as well as the facts and circumstances, we hold that respondent’s legal position was substantially justified in both the administrative and judicial proceedings.

Word to the Wise: It is critical that a taxpayer provide all available information to IRS auditors and appeals officers prior to filing a tax court petition. If he fails to provide all of the documents the IRS needs to make a determination in his favor, he will not be able to recover attorneys fees and costs under §7430 even if he ultimately prevails at trial.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida