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 126.96.36.199, 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.
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.
In 40 minutes, we'll teach you how to survive an IRS audit.
We'll explain how the IRS conducts audits and how to manage and close the audit.