Collecting Attorney's Fees and Expenses From the IRS
By Joel N. Crouch on November 13, 2024
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Joel N. Crouch
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We previously discussed making a qualified settlement offer pursuant to I.R.C. Section 7430 to put pressure on the IRS and potentially collect attorneys’ fees and costs. How much does that offer need to be? In Mann Construction Inc. v. United States, (E.D. Mich. 1/1/24), a district court said the offer can be as little as $1 for a prevailing taxpayer to collect attorneys’ fees and expenses.
What is a qualified offer? Under Section 7430(g), a qualified offer is a written offer that: (i) specified the offered amount of the taxpayer’s liability (without interest), (ii) designated as a “qualified” offer under Section 7430(g), and (iii) is made by the taxpayer after the 30-Day Letter (i.e., final audit report offering IRS Appeal review rights) but before the date that is 30 days before the case is first set for trial. Section 7430 permits the award of reasonable administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty.
An award of reasonable administrative or litigation costs is available where: (1) the taxpayer did not unreasonably protract the proceedings, (2) the amount of the costs requested is reasonable, (3) the taxpayer exhausted available administrative remedies (e.g., sought review by IRS Appeals after the audit), and (4) the taxpayer is the “prevailing party.” The latter requirement is the most difficult, as it requires the taxpayer to establish, among other things, that it substantially prevailed as to the most significant issues and that the IRS position was not substantially justified. Where a taxpayer makes a qualified offer which the IRS rejects, and the taxpayer later wins a judicial determination to pay less than the amount offered, the taxpayer is treated as the “prevailing party,” largely paving the way for the award of practitioner fees and costs.
In Mann Construction, the taxpayer made a qualified settlement offer of $1, prevailed in the case, and sought attorneys’ fees and costs. In response, the government argued that a qualified offer must be reasonably calculated to justify serious consideration by the IRS. Otherwise, tax-litigants would “game” the qualified offer rules by making nominal offers. In awarding the taxpayer attorneys’ fees of $220,482.50 and costs of $1,355.90, the court said Section 7430 required neither a minimal nor good-faith reasonable offer. The court cited the decision awarding attorneys’ fees and costs in BASR Partnership v. United States, 130 Fed. Cl. 286 (2017), aff’d, 915 F. 3d. 771 (Fed. Cir. 2019), a case discussed in a previous blog post here .
The lesson from Mann Construction and BASR Partnership is that where a case involves an up or down result, i.e., the court must find for one party or the other, a qualified settlement offer of $1 should be considered and can be a powerful negotiating tool.
If you have any questions on this or any other tax-related matter, please feel free to contact me at jcrouch@meadowscollier.com.
What is a qualified offer? Under Section 7430(g), a qualified offer is a written offer that: (i) specified the offered amount of the taxpayer’s liability (without interest), (ii) designated as a “qualified” offer under Section 7430(g), and (iii) is made by the taxpayer after the 30-Day Letter (i.e., final audit report offering IRS Appeal review rights) but before the date that is 30 days before the case is first set for trial. Section 7430 permits the award of reasonable administrative and litigation costs to a taxpayer in an administrative or court proceeding brought against the United States in connection with the determination of any tax, interest, or penalty.
An award of reasonable administrative or litigation costs is available where: (1) the taxpayer did not unreasonably protract the proceedings, (2) the amount of the costs requested is reasonable, (3) the taxpayer exhausted available administrative remedies (e.g., sought review by IRS Appeals after the audit), and (4) the taxpayer is the “prevailing party.” The latter requirement is the most difficult, as it requires the taxpayer to establish, among other things, that it substantially prevailed as to the most significant issues and that the IRS position was not substantially justified. Where a taxpayer makes a qualified offer which the IRS rejects, and the taxpayer later wins a judicial determination to pay less than the amount offered, the taxpayer is treated as the “prevailing party,” largely paving the way for the award of practitioner fees and costs.
In Mann Construction, the taxpayer made a qualified settlement offer of $1, prevailed in the case, and sought attorneys’ fees and costs. In response, the government argued that a qualified offer must be reasonably calculated to justify serious consideration by the IRS. Otherwise, tax-litigants would “game” the qualified offer rules by making nominal offers. In awarding the taxpayer attorneys’ fees of $220,482.50 and costs of $1,355.90, the court said Section 7430 required neither a minimal nor good-faith reasonable offer. The court cited the decision awarding attorneys’ fees and costs in BASR Partnership v. United States, 130 Fed. Cl. 286 (2017), aff’d, 915 F. 3d. 771 (Fed. Cir. 2019), a case discussed in a previous blog post here .
The lesson from Mann Construction and BASR Partnership is that where a case involves an up or down result, i.e., the court must find for one party or the other, a qualified settlement offer of $1 should be considered and can be a powerful negotiating tool.
If you have any questions on this or any other tax-related matter, please feel free to contact me at jcrouch@meadowscollier.com.
