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Recovery of legal fees from IRS possible in some cases

The general rule in American courts is usually that each side pays its own legal fees. But there are some important exceptions to this general rule.

One of those exceptions is in the field of tax law. Under a provision added to the tax code in 1982, a taxpayer may be able to get the IRS to pay the taxpayer's litigation costs in certain cases. The exception applies when the IRS is unable to show that the position it took on a tax issue was "substantially justified" under the law.

To be sure, it is usually pretty tough for taxpayers to convince a court that the IRS failed to meet this test. In this week's post, however, we will discuss a recent case in which a federal judge ordered the IRS to pay the legal fees of a couple who were litigating a tax controversy with the IRS over the payment of payroll taxes.

The case dates all the way back to 1998. The taxpayer was an engineer who worked for no fewer than three firms in the construction industry that didn't make payroll tax payments during the first half of the year.

The IRS contended that the engineer could be held responsible for the nonpayment because of his position at one of the three firms. The IRS assessed significant tax penalties against him. Seeking to collect those penalties, the agency also withheld tax refunds that the engineer and his wife were eligible for.

The couple challenged the IRS actions. They did so first in an administrative appeal and then in court.

The couple eventually won their lawsuit against the IRS. After this victory, they sought to recover attorney's fees. The federal court agreed with their argument and made an award of more than $53,000, of which somewhat less than $8,000 was for the cost of the suit seeking attorney's fees.

There is no doubt that the IRS will continue to contest these cases closely. But the ruling in this case is an important reminder that it is possible to recover attorney's fees from the IRS when the agency's position lacks sufficient justification

Source: The Wall Street Journal, "Court to IRS: Pay Legal Fees," Laura Saunders, Dec. 20, 2013

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