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IRS Finalizes Rules on Recovering Litigation Costs

Mar 29th 2016
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Six years after proposing amendments to Section 7430 of the Internal Revenue Code, the IRS earlier this month issued final rules concerning the awards of administrative costs and legal fees incurred by a prevailing party in a tax-related administrative or court proceeding.

To qualify for an award, a prevailing taxpayer must exhaust administrative remedies, pay or incur costs, and meet net-worth requirements.

The following summarizes most of the changes.

Net worth. Net-worth value is based on acquisition costs of taxpayer assets and follows case law. When taxpayers who file jointly also jointly petition the court and jointly incur costs, they each qualify for a net-worth limit of $2 million, but their combined assets can’t be more than $4 million. If they file jointly but file separate court actions, each taxpayer faces a net-worth limit of no more than $2 million. Trusts are required to meet net-worth requirements before qualifying for awards.

Petition for administrative costs. A taxpayer has 90 days after the IRS mails a final decision about tax, interest, or penalty owed.

Petition for review of adverse decision on costs. A taxpayer has 90 days after the IRS mails the final adverse decision on an award of costs.

Pro bono. Eligibility will not be limited based on the income or financial resources of the recipient of the representation beyond the limit provided by Code Section 7430(c)(4)(A)(ii). The US Treasury Department and the IRS also issued Revenue Procedure 2016-17, which states that attorneys working pro bono who don’t charge an hourly rate should be paid the statutory rate unless they establish that a special factor described in Code Section 7430(c)(1)(B)(iii) justifies a higher hourly rate. Rev. Proc. 2016-17 also provides fee rates for attorneys working with students or in low-cost legal clinics.

The rules include amendments to Section 7430 made in 1997 and 1998, which were enacted in the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998.

The rules took effect on March 1 and were published in the Federal Register.

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