In most civil litigation cases, the parties are not entitled to an award of attorneys fees. The exceptions are generally when there is a contract that provides for attorneys fees or there is a statute.
This can be problematic in litigation cases–particularly where one party brings or defends a friviolous suit just to drive up the attorneys fees on the other party. This is even more problematic in tax litigation cases against the government as the government typically does not have any concern about attorneys fees. It has attorneys on staff and pays them regardless of whether they are working cases or not.
This is why Congress added a provision to the tax code to allow for an award of attorneys fees. The nuances of this rule however, make it very difficult for taxpayers to recover. This is even true when the taxpayer completely prevails in the underlying tax case.
The recent Gonzalez v. United States, No. 2:22-cv-03370 (E.D.N.Y. Aug. 22, 2025) case provides an opportunity to consider exactly how wrong the IRS has to be before taxpayers can recover their attorney’s fees.
Contents
Facts & Procedural History
The taxpayer served as corporate secretary of a construction company located in New York. The company was owned by her husband. Though she had sold her ownership shares in 2011, she continued to have some connections to the company. She performed administrative duties for the corporation, including signing employee paychecks, using a company debit card, and executing loan documents. She also signed as “owner” and personally guaranteed repayment for a $250,000 loan.
The company did not pay employment taxes totaling over $1.3 million for five quarters in 2012 and 2013. The IRS pursued the taxpayer personally for a trust fund recovery penalty under Section 6672. By 2022, the IRS was seeking to collect the $1,650,826.53 penalty from her personally.
The taxpayer exhausted administrative remedies through IRS appeals and collection due process hearings. She submitted a refund claim for $111.69 representing one employee’s taxes. When the IRS refused to release the assessments, she filed suit in federal district court.
At trial, the government argued the taxpayer’s check-signing authority and corporate position made her responsible for the unpaid taxes. The taxpayer countered that she lacked actual control over company finances and tax decisions. The jury sided with the taxpayer on all counts. The jury found that she was neither a responsible person and she did not willfully fail to pay the employment taxes. The court ordered release of all IRS tax liens against her.
Following this complete victory, the taxpayer sought recovery of $95,042.19 in attorney’s fees and costs under Section 7430. The attorneys fees were the subject of this decision and of this article.
Attorneys Fee Recovery Under Section 7430
Section 7430 says that prevailing taxpayers can recover litigation costs from the government in tax cases. Congress enacted this provision to deter the IRS from pursuing unreasonable positions and cases with no legal or factual basis. The idea is that taxpayers should not have to incur costs to defend against improper assessments. The statute applies to any proceeding involving determination, collection, or refund of taxes, interest, or penalties.
To qualify for fee recovery, taxpayers have to satisfy several requirements. They have to have a net worth less than $2 million for individuals or $7 million for businesses with fewer than 500 employees. They have to file their fee application within thirty days of final judgment. They have to exhaust administrative remedies before going to court. And, as relevant here, they have to be the “prevailing party” in the litigation.
The prevailing party requirement is not as straight forward as it seems. There are two paths for qualification. Taxpayers can substantially prevail on the amount in controversy or on the most significant issues presented. Winning completely at trial, as the taxpayer did here, satisfies this standard. Yet, as this case shows, even complete victory doesn’t guarantee fee recovery.
The Substantial Justification Exception
There is an exception that can take away recovery for prevailing taxpayers. It is found in Section 7430(c)(4)(B).
This code section says that taxpayers cannot be treated as prevailing parties if the government’s position was “substantially justified.” This exception applies regardless of how thoroughly the taxpayer wins at trial. The government bears the burden of proving substantial justification based on the totality of circumstances.
Substantial justification means “justified in substance or in the main”—a position that could satisfy a reasonable person. The standard requires more than mere arguability but less than correctness. The government does not have to prove it should have won. It only has to prove that reasonable people could debate the merits of its position.
Courts evaluate substantial justification by examining the facts known when the government took its position. Later revelations at trial don’t retroactively undermine reasonableness. The analysis focuses on whether the government had adequate grounds for its position, not whether it ultimately persuaded the factfinder.
How Wrong Must the IRS Be?
The substantial justification standard creates a zone where the IRS can be wrong without paying attorney’s fees. The government’s position must be more than incorrect—it must lack reasonable support in law and fact. This distinction between being wrong and being unreasonably wrong protects the government’s ability to pursue debatable cases. It may also result in the government not having to pay when it in fact should.
Consider the spectrum of government positions. At one end lies the clearly correct position that wins at trial. Moving along the spectrum, we find positions that lose but had reasonable support—these are substantially justified despite being wrong. Further along are positions lacking reasonable basis—only these trigger fee recovery. At the far end are frivolous positions pursued in bad faith.
The substantial justification standard sits well before bad faith on this spectrum. The government need not act improperly or negligently to avoid paying fees. It can pursue positions that ultimately fail as long as reasonable people could have supported them initially.
Why Check-Signing Authority Matters
To evaluate this issue, we have to go back to the facts and law in this case.
Section 6672 imposes personal liability on those responsible for collecting and paying employment taxes who willfully fail to do so. The penalty equals 100% of the unpaid trust fund taxes—the amounts withheld from employee paychecks for income tax and FICA. Courts determine responsibility through a multi-factor test examining the individual’s control over company finances.
Check-signing authority represents one factor in this analysis. Someone who can write checks controls which creditors receive payment and when. This power includes deciding whether employment taxes reach the IRS or whether the company pays other expenses instead. Regular exercise of check-signing authority demonstrates active participation in financial management beyond mere paper authority.
Courts have found individuals responsible based partly on check-signing authority. In Hochstein v. United States, 900 F.2d 543 (2d Cir. 1990), the Second Circuit emphasized how check-signing authority combined with requesting company funds established sufficient control. The ability to direct company payments, even if someone else makes strategic decisions, can support responsibility findings.
So what evidence supports substantial justification for this penalty? That is what this court case addresses. It shows that various combinations of evidence can be cited by the government. Corporate titles and positions provide starting points for inquiry. Check-signing authority and actual check-signing activities strengthen the government’s position. Use of company credit cards and payment of company expenses add support. Execution of loan documents and personal guarantees demonstrate financial involvement.
Given this, the district court found the government’s position substantially. The court noted that the taxpayer’s documented financial activities during the relevant quarters. She signed “hundreds” of employee paychecks in 2012 and 2013. She regularly used a company debit card for business expenses. She executed loan documents as “owner” and personally guaranteed company debt.
The court concluded that these facts created reasonable grounds for believing the taxpayer exercised significant control over company finances. The court noted that “a reasonable factfinder could have found that [the taxpayer’s] activities evidenced a sufficient level of control.” The jury’s contrary conclusion didn’t negate the reasonableness of pursuing the case.
The Takeaway
Unfortunately, simply winning at trial won’t guarantee fee recovery. When it comes down to it, taxpayers have to be able to demonstrate the government lacked reasonable basis for its position from the outset. This requires showing that available evidence couldn’t support responsibility findings by reasonable people. The stronger the documentary evidence against the taxpayer, the harder this can be. Taxpayers who are considering taking the IRS to court and hoping to recover attorneys fees for the tax litigation should evaluate fee recovery prospects realistically given these rules. Even strong defenses may not yield attorney’s fees if the government has colorable arguments.
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