Can you make the IRS pay your legal fees?

What if you the IRS audits you and you, with the help of your lawyer or attorney, are able to show the IRS you did nothing wrong.

Are you now able to go after the IRS for your lawyer fees? Maybe, maybe not.

In order to receive legal fees from the IRS, you have to show that the IRS was not substantially justified in going after you.  If on the other hand the IRS can show a justification for their actions you probably aren’t going to receive any attorney fees.

Below is relevant language from a recent court case on the subject, yeah there is a bit of legalese involved, but it is a good summary.

Need to discuss your situation face to face with a real tax attorney?  If you live in La Quinta, Rancho Mirage, Palm Desert, Indio, Cathedral City, Palm Springs, Indian Wells, or the Coachella Valley we are just a few minutes drive away.

 

We may grant summary judgment where there is no genuine dispute of material fact and a decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). We conclude that there is no genuine dispute as to any material fact regarding the issue raised in respondent’s motion.

Section 7430(a)(1) authorizes an award to the “prevailing party” of reasonable administrative costs incurred in connection with an administrative proceeding within the Service involving the determination, collection, or refund of any tax, [*13] interest, or penalty under the Code, provided that certain requirements are satisfied.  5

Section 7430(c)(4)(B)(i) provides the following exception to the definition of the term “prevailing party” in section 7430(c)(4)(A): “A party shall not be treated as the prevailing party in a proceeding * * * if the United States establishes that the position of the United States in the proceeding was substantially justified.”

The position of the United States is substantially justified if it “is one that is ‘justified to a degree that could satisfy a reasonable person’ or that has a ‘reasonable basis both in law and fact.'” Swanson v. Commissioner, 106 T.C. 76, 86 (1996) (quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988)). “A position has a reasonable basis in fact if there is relevant evidence that a reasonable mind might accept as adequate to support a conclusion.” Corkrey v. Commissioner, 115 T.C. 366, 373 (2000) (citing Underwood, 487 U.S. at 564-565). In determining whether the position of the Commissioner of Internal Revenue (Commissioner) was substantially justified, we must “consider the basis for * * * [the Commissioner’s][*14] legal position and the manner in which the position was maintained.” Wasie v. Commissioner, 86 T.C. 962, 969 (1986). Whether the Commissioner acted reasonably will be resolved “upon those available facts which formed the basis for the position taken in the * * * [administrative proceeding], as well as upon any legal precedents related to the case.” Maggie Mgmt. Co. v. Commissioner, 108 T.C. 430, 443 (1997). The Commissioner’s position “may be incorrect but substantially justified ‘if a reasonable person could think it correct’.” Id. (quoting Underwood, 487 U.S. at 566 n.2).

A significant factor in determining whether the Commissioner’s position is substantially justified as of a given date is whether on or before that date the taxpayer has presented all relevant information under the taxpayer’s control and relevant legal arguments supporting the taxpayer’s position. Corson v. Commissioner, 123 T.C. 202, 206-207 (2004); sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

The Commissioner’s concession of an issue is not conclusive as to whether the Commissioner’s position with respect to that issue was substantially justified. See Corkrey v. Commissioner, 115 T.C. at 373; Sokol v. Commissioner, 92 T.C. 760, 767 (1989); Wasie v. Commissioner, 86 T.C. at 968-969. In other words, the Commissioner’s concession of an issue, standing alone, does not establish that the [*15] Commissioner took an unreasonable position with respect to that issue. See Lavallee v. Commissioner, T.C. Memo. 1997-183, 1997 WL 189928, at *5.

For purposes of an administrative proceeding, the “position of the United States” means “the position taken in an administrative proceeding to which subsection (a) [of section 7430] applies as of the earlier of — (i) the date of the receipt by the taxpayer of the notice of the decision of the Internal Revenue Service Office of Appeals, or (ii) the date of the notice of deficiency.” Sec. 7430(c)(7)(B).

On the record before us, we conclude that respondent’s position in the administrative proceeding is respondent’s position as of April 19, 2011, the earliest date on which petitioner received a “notice of the decision” of the Appeals Office with respect to petitioner’s protest, as reflected in the Tampa Appeals April 19, 2011 letter. See id.

It is respondent’s position in the instant proceeding that on or before April 19, 2011, the date on which the Tampa Appeals Office sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had failed to provide that office with records and other documentation and information that established petitioner’s entitlement under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question. As a result, according to respondent, [*16] the Tampa Appeals Office’s position to include in petitioner’s income that COI income in question, as reflected in the Tampa Appeals Office’s April 19, 2011 letter, was reasonable in fact and in law and thus was substantially justified undersection 7430(c)(4)(B)(i).

Petitioner’s only argument with respect to whether respondent’s position in the administrative proceeding was substantially justified is set forth in petitioner’s petition.  6 In the petition, petitioner alleged in pertinent part:

The Petitioner had to appeal an over assessment of
tax liability for Form 1040 Tax Year 2008. The Petitioner
received a One Hundred Percent (100%) favorable determination
by the Internal Revenue Service Appeals [Office].
The original finding of tax liability was reversed.
Pursuant to 26 U.S.C. section 7430 the prevailing
party may file a request for an award of reasonable
administrative costs incurred in connection with
such administrative proceeding within the Internal
Revenue Service.

While respondent acknowledges that petitioner received a “One Hundred Percent (100%) favorable determination” by the Philadelphia Appeals Office and that the “original finding of tax liability was reversed”, respondent maintains that those facts, standing alone, do not entitle petitioner to administrative costs where respondent establishes, as respondent claims respondent has, that respondent’s position in the administrative proceeding was substantially justified. We agree.

[*17] Before turning to an examination of respondent’s position as of April 19, 2011, to include in petitioner’s income under section 61(a) petitioner’s COI income in question, we will summarize the applicable provisions of sections 61(a) and 108 with which petitioner was obligated to comply in order to be entitled to exclude that income under section 108.

Section 61(a) defines the term “gross income” broadly to mean all income from whatever source derived, including income from discharge of indebtedness (i.e., COI income). Seesec. 61(a)(12). Section 108(a) provides certain exceptions to section 61(a)(12). As pertinent here, section 108(a)(1)(B) excludes from gross income any amount that otherwise would be includible in gross income by reason of the discharge in whole or in part of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent; i.e., the taxpayer is insolvent immediately before the discharge. See sec. 108(d)(3). The amount of COI income excluded under section 108(a)(1)(B) is not to exceed the amount by which the taxpayer is insolvent. See sec. 108(a)(3). “The burden of proving insolvency under section 108(a)(1)(B) is on * * * [the taxpayer].” Bressi v. Commissioner, T.C. Memo. 1991-651, 1991 Tax Ct. Memo LEXIS 693, at *18, aff’d without published opinion, 989 F.2d 486 (3d Cir. 1993).

[*18] We turn now to an examination of respondent’s position as of April 19, 2011. As we do so, we bear in mind that we concluded in Maggie Mgmt. Co. v. Commissioner, 108 T.C. at 443, that our resolution of whether respondent acted reasonably in taking the position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, as reflected in the Tampa Appeals April 19, 2011 letter, is to be based “upon those available facts which formed the basis for the position taken in the * * * [administrative proceeding], as well as upon any legal precedents related to the case.” We also bear in mind that we concluded in Corson v. Commissioner, 123 T.C. at 206-207, that a significant factor in our determination of whether the position of respondent as of April 19, 2011, was substantially justified is whether on or before April 19, 2011, the date on which respondent sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had presented to respondent all relevant information under her control and relevant legal arguments supporting her position. See also sec. 301.7430-5(c)(1), Proced. & Admin. Regs.

In support of respondent’s position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, the Tampa Appeals Office stated in pertinent part in the Tampa Appeals April 19, 2011 letter: “Since you failed to respond to our inquiries we are sorry, but we [*19] cannot allow the above claim for an adjustment to your tax”. In other words, the Tampa Appeals Office made the determination in the Tampa Appeals April 19, 2011 letter that petitioner is not entitled to exclude from her income for her taxable year 2008 petitioner’s COI income in question because petitioner had failed to meet her burden of establishing as of April 19, 2011, that she was insolvent immediately before the forced sale of petitioner’s rental property.

We have found that petitioner did not provide any information to the Tampa Appeals Office in response to the Tampa Appeals officer’s requests for information, including his request for the so-called insolvency worksheet. We have further found that petitioner did not provide to respondent any records, documents, or other information that tended to show that she was insolvent immediately before the forced sale of petitioner’s rental property until petitioner’s representative sent to the Philadelphia Appeals officer on May 20 and June 2, 2011, certain documents and other information. It was only after reviewing those documents and that other information that petitioner sent to him on those two dates that the Philadelphia Appeals officer was able to, and did, conclude that petitioner was insolvent immediately before the forced sale of petitioner’s rental property and [*20] that consequently petitioner’s COI income in question was excludible from her income for her taxable year 2008.  7

On the record before us, we find that as of April 19, 2011, the date on which the Tampa Appeals Office sent to petitioner the Tampa Appeals April 19, 2011 letter, petitioner had not provided to the Tampa Appeals officer any records, documentation, or other information in support of her position that she is entitled under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question. On the record before us, we find that as of that date, April 19, 2011, petitioner had failed to satisfy her burden of establishing by providing records and other pertinent documentation and information to a representative of the Tampa Appeals Office  8 (1) that she was insolvent immediately before the forced sale of petitioner’s rental property and (2) that she is entitled under section 108 to exclude from her income for her taxable year 2008 petitioner’s COI income in question.

[*21] Based upon our examination of the entire record before us, we find that respondent’s position as of April 19, 2011, to include in petitioner’s income for her taxable year 2008 petitioner’s COI income in question, as determined in the Tampa Appeals April 19, 2011 letter, had a reasonable basis in both fact and law. On that record, we further find that respondent has satisfied respondent’s burden under section 7430(c)(4)(B)(i) of establishing that respondent’s position in the administrative proceeding was substantially justified. On the record before us, we hold that petitioner is not entitled to an award of administrative costs under section 7430(a)(1).

We have considered all of the parties’ respective contentions and arguments that are not discussed herein, and we find them to be without merit, irrelevant, and/or moot.

To reflect the foregoing,

An order granting respondent’s motion and decision for respondent will be entered.

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