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It’s received wisdom that fighting the IRS is an uphill battle. That there’s almost nothing you can do, even if right is on your side, to win against such a powerful opponent. And they certainly will never pay your attorneys’ fees!

As any Orange County tax litigation attorney will tell you, it is certainly not a given that you will lose if you challenge the IRS, (on the contrary!), but that is a topic for another blog post. Let’s talk about the IRS paying your attorneys’ fees. It seems surreal, but it can happen. As with anything tax-related, though, it involves meeting some specific requirements.

Section 7430 of the Internal Revenue Code is a fee-shifting statute. It compels the IRS to pay costs incurred and attorneys’ fees in most administrative hearings before the IRS and court proceedings in federal court.

Here is an outline of the criteria for court costs:

  1. Litigation costs. This refers to actual costs. Taxpayers represented pro bono, for instance, do not incur actual attorney fee costs. There is also a net worth requirement to qualify for an award of litigation costs. For instance, an individual must be worth less than two million dollars.
  2. Exhaustion of administrative remedies. This must be done to qualify. If given an opportunity for an appeals office conference, the taxpayer must accept – and participate.
  3. No protraction of the administrative or court proceeding.
  4. Taxpayer must substantially prevail. This may not be cut and dried if a settlement with the IRS is reached. The burden is on the taxpayer to prove they substantially prevailed.
  5. Was the IRS substantially justified in the position they took? This is even tougher. The burden is on the IRS to prove they were justified, and they will likely claim that the taxpayer did not provide all of the relevant information they needed to form their position.
  6. The claim for costs must be timely. Thirty days after the serving of the court’s opinion, or, if the case is settled, the claim should be submitted with the stipulation of settlement.
  7. The claim must be reasonable. Reasonable costs include attorneys’ fees, court costs, expert witnesses, and engineering reports.
  • Source: Florida Bar Journal “The IRS Will Absolutely, Positively Not Pay Your Attorneys’ Fees (Or Will They?)” May 2010                                                                                   aar