Can You Sue the IRS for Damages?

Published Categorized as Tax Litigation, Tax Procedure
sue the IRS for damages

There are times when IRS employees violate the law. This includes intentional and negligent conduct that violates the law.

Many of these violations go unreported. This is often for fear of retaliation or lack of resources. It may also be due to a belief that there is no remedy for taxpayers in this situation.

The IRS can be held liable for this type of conduct. Congress has provided a remedy for taxpayers. It allows taxpayers to sue the IRS and recover damages. This is in addition to suing the IRS to correct the underlying tax liability.

The recent Chowns Fabrication & Rigging, Inc. v. United States, No. 5:21-cv-03543 (E.D. Pa. 2022) case provides an opportunity to consider these rules. The Chowns case alleges extraordinary acts by the IRS to collect taxes, penalties, and interest that it later conceded were not owed. There is a similar provision that applies to other tax matters, such as IRS agents who are conducting audits.

Facts & Procedural History

The Chowns case involved employment taxes and penalties assessed for employment taxes.

The filings indicate that the IRS had assessed substantial penalties and attempted to collect them, only to later abate the tax, penalties and interest.

There were questions as to whether the IRS properly assessed the penalties. Apparently the IRS did not follow its normal assessment procedures in assessing the penalties. The filings indicate that the IRS advanced a theory that if the business lacked the funds to pay the penalties, then the IRS would not have to abate them. It is not clear if this was why the IRS eventually abated the taxes, penalties and interest.

The filings also indicate that the IRS had worked out a payment plan, but then an armed IRS agent showed up at the business and seized a check from the taxpayer’s business. The IRS apparently applied the proceeds to a later tax period, leaving the taxpayer liable for the taxes at issue.

Before the taxes, penalties and interest were removed, the filings say that the IRS filed a lien notice that resulted in the taxpayer’s lender to levy on its bank account. This apparently resulted in a cash crunch for the business, which in turn triggered a bankruptcy for the business. The filings say that this caused the second-generation business to go out of business. The IRS continued its collections efforts even after the business went under.

The taxpayer worked with IRS Appeals and sent numerous letters to the IRS during this time. IRS appeals eventually abated the tax, penalties and interest, according to the filings.

The taxpayer ended up filing suit against the IRS under Section 7433. To gather the information to support its case, it filed a separate FOIA case against the IRS. The IRS failed to respond to the FOIA request for over two years, even though Congress only provided 20 days for the IRS to respond.

Suits Against the IRS Under Section 7433

Section 7433 provides taxpayers with the ability to sue the IRS and recover damages for unlawful collection actions. It is a separate cause of action from the right to sue the IRS for refusing to release an unlawful lien under Section 7432.

The rules for Section 7433 are similar to Section 7426, which applies to other actions that do not involve collecting taxes (such as IRS agents conducting audits).

These Code sections are an exception to the general rule that one cannot sue the IRS. The IRS as a government agency is afforded sovereign immunity. Sovereign immunity shields the federal government, its agencies, and its officials in their official capacities from suit.

These Code sections apply if the IRS employees “recklessly or intentionally, or by reason of negligence, disregards any provision of” our tax laws.

The damages are capped at $1 million for intentional acts and $100,000 for negligent acts. Suit has to be brought within two years of the date the claim arose.

As relevant in the Chowns case, the taxpayer also has to exhaust its administrative remedies before bringing suit.

The Administrative Claim for Damages

The regulations provide the method for submitting an administrative claim. This is set out in Reg. § 301.7426-2.

According to the regulations, an administrative claim has to fist be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer resides.

The regulations go on to say that the administrative claim has to include:

  • (i) The name, taxpayer identification number, current address and current home and work telephone numbers (indicating any convenient times to be contacted) of the person making the claim;
  • (ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service);
  • (iii) A description of the damages incurred by the claimant filing the claim (include copies of any available substantiating documentation or evidence);
  • (iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and
  • (v) The signature of the claimant or duly authorized representative.

The regulations do not provide any requirement that the IRS actually act on or respond to the administrative claim. However, Section 7433(c) authorizes the IRS to pay the claims. The IRS can even make payment to settle claims before the action is filed in court.

The IRS’s procedures for handling administrative claims is set out in IRM 34.5.7.1, et seq. These policies explain that the IRS is to respond with a defense letter and, internally, it has to decide whether the government attorneys will represent the IRS employees who are involved in the case.

Strict Compliance With the Administrative Claim Requirement

The IRS filed a motion to dismiss in the Chowns case. The IRS argued that the taxpayer did not file an administrative claim.

The taxpayer countered that it substantially complied with this requirement by writing letters to various IRS employees and participating in the IRS administrative process. The court noted that there is no legal authority for failure to file the administrative claim.

The court did not accept the letters the taxpayer submitted as being a valid administrative claim:

Moreover, Chowns’ letters and complaint did not substantially comply with the specific requirements of a claim for two reasons. First, they were not sent to the correct person or address. See 26 C.F.R. § 301.7433-1(e) (providing that the claim “be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer currently resides”); Rogers v. Dir. Internal Revenue Bureau, No. 19-1642, 2021 U.S. App. LEXIS 37700, at *3 (3d Cir. Dec. 21, 2021) (concluding that the district court appropriately dismissed the § 7433 claim for failure to exhaust because although the taxpayer spoke with a tax official about his claim, “[p]roviding actual notice to the relevant agency is not sufficient to prove exhaustion”); Bowers v. United States, 498 F. App’x 623, 626-27 (7th Cir. 2012) (rejecting the plaintiff’s argument that it complied with § 301.7433-1(a) because, inter alia, he sent his letter to the wrong IRS office). Second, Chowns’ letters and complaint did not include the “dollar amount of the claim.” See 26 C.F.R. § 301.7433-1(e)(2)(iv); Rogers, 2021 U.S. App. LEXIS 37700, at *2 (“The claim must include certain information such as the grounds for the claim and the dollar amount requested. § 301.7432-1(f)(2).”); Chocallo, 299 F. App’x at 116 (affirming dismissal of the § 7433 claim where the plaintiff’s letters to an IRS revenue officer failed to comply with the regulations and “sought merely the payment of a tax refund and the cancellation of tax levies and did not demand the payment of damages or otherwise set forth a § 7433 claim”).

As a result, the court dismissed the claim. It is not clear whether the taxpayer can simply file the administrative claim and then immediately re-file its suit. There is no time limit for bringing suit after the claim is submitted. However, if a new claim is filed, the IRS might file a motion to dismiss as the claim was not filed within two years of the IRS conduct that gave rise to the suit.

The Takeaway

IRS employees do violate the law. It may be necessary to sue the IRS when this happens.

This case highlights how important it is to file an administrative claim with the IRS in these situations. This means that aggrieved taxpayers should send a demand letter to the IRS, just as they would any other private party who violated the law resulting in damages.

The timing aspect of this case should also be considered. The IRS did not timely respond to the taxpayers FOIA request for more than two years. This act of not responding was contrary to our FOIA laws and is all too common. This means that the taxpayer likely would not have had the information needed to file an administrative claim in full compliance with the regulations. Thus, the IRS was allowed to prevail on its motion to dismiss the Section 7433 claim for damages by withholding information contrary to our FOIA laws. That is a troubling result that aggrieved taxpayers have to plan for in some cases.

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3 comments

  1. There is something new going on with the IRS. The IRS flags people Social Security numbers as deceased and put some manual freeze on any returns that are due the taxpayer. I have been going through this now for three years. The IRS assures me every time that they have resolved the issue and I am no longer deceased this is not true they are lying to me they have admitted that they made an electronic mistake and the mistake that I was deceased is there a mistake. I have been to the IRS in person, I’ve had a tax payer advocate try and solve the issue, I have called the IRS more times than I Count. They owe me money from the stimulus that they will not pay me because I’m dead to them at this point I do not know where to turn

    1. It sounds like this may be a situation where you file a refund claim, see if the IRS denies it, and then bring suit on the claim. We’d need to know more about the case to be sure, but if you are researching it, that might give you an avenue to pursue. Separately, have you tried your local Congressman? They can usually assist with cases like this.

  2. 1999. I had a thriving business. Corporation inc. Tv commercial s business office in Colorado springs mall. Basement unlimited Inc. It took me 5 hard years to get on top. One day IRS called me said. Bring in bank statements for 3 years of deposit s. And with draw statements and all your tax records for last 5 years. I said. What. She was mean. I called my accountant. He said there no problem. We did the audit. Then. Next thing I unreal. I’m at a party. And I told everyone weeks prior what IRS was doing giving me hell. But one night at friend house. Birthday party. Someone said Tommy hurry look at this tv reporters. N Colo springs Colorado. The IRS building is in guft of flames. It is out of control on fire. OMG. I said. Ya. I was here’. Omg. Then I thought great that what Carmen will do. Well about 8 months later same woman calls me up. Said Tommy fetters. We need a check from you for $165,000.00. I said what. She Smart said your file. Didn’t get burned it just smells like smoke we recovered your file. You need to come in the office give us the money today. I was freak out. What. She was mean. Then. I called my accountant told him they want 165 k. He like laugh. I said curtly she serious. He said there’s way. You don’t owe anything. You paid I said I thought we did. What about her he said I’ll call. Well that weekend I call my bank. N line see what my balance was. It said your balance s 0 zero. Im freaking out I’m running a business and m very busy. Monday I called my banker. Told her is my accountant zero. She said ohhh tommy. I said what going on. Tommy IRS has Levy your money and I’m so sorry to tell you but your out of business. They have seized up your basement unlimited Inc. I’m flipping out. She said. Go to IRS building see what. Going on. I called my accountant told him. He didn’t believe me. I went to IRS building they laughed at me said 165 k. Today. Then you get your bank account open. They would not listen to me or my accountant. I was freaking out I’m closed out of business. I have 16 subcontractor s and few helpers. I’m running around 6 basement unlimited jobs I’m out on the street no money except for my drywall bucket I threw my coins in every day. Which was 3/4 full I had to move back to Alabama to live with grandma. Lost my business 5 years. Tv commercial I was sick for every talk about sick. Everyone made fun. Saying you didn’t pay your taxes it was horrible. Threaten by a other IRS man Mr green. Sending me letter s every week. Your going to jail. Hey Tommy we can work out a deal. In payments. I said ok bring owe you. On and on week months. Letters stack high I won’t open them my family criticism. I was scared. I try calling lawyers but none would take my case nobody. Untill 2 years went on I was hearing cars think they going pull me out throw me on streets. But I finally by some miracle a man told me what to do. Send $60 to Washington DC for a federal court hearing. I did. I told them. IRS found out about it then pursued harder. We can alternate the bill to 145k. Then 135k. Then 125k. I told him fuck you ilksee you in court. Finay my day in court. The judge ask the mr green one question. How did you come up with 165 k. He stood up with no papers no nothing. Nor brief case. Said. Your honor. We feel terrible about this young man. Judge answer the question. How did you come up 165 k. Sir. All this took place in Colorado. We’re here in Alabama we really don’t know what Colorado was figureing. Judge said. 5 min recess then all rise. Judge said Tommy fetters. You owe 10 k to IRS. Slammed the hammer. I about punch that Mr green in the mouth you son of bitch I lost my career my family my everyhig and you stole my money and land. Now I’m going to sue IRS again. I need a lawyer. This is just like what I just read. Exactly how they did me reackless. I always thought .y tv commercial s was the trigger that moratativd them to go after me this was a huge heart break and. Have been n The hospital for nerve breakdown. Yes it’s true lady my mind. Sick to my stomach. I was on a higher break thru about to go into a franchise deal. Few weeks they wreck my life. Tell me some one to get a lawyer I need it now. That’s been since 1999. Long time. But I’m still going for it.

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