The government makes mistakes. It is not perfect. The United States v. Appelbaum, No. 5:12-CV-186 (W.D.N.C. 2016) , case provides an example. In Appelbaum, the government sued the taxpayer for nearly $4 million that the taxpayer did not owe. The question before the court was whether the taxpayer could recover attorneys fees he incurred in defending against the IRS’s lawsuit.
Facts & Procedural History
The IRS determined that Mr. Appelbaum was liable for a trust fund recovery penalty for taxes his employer did not remit to the IRS.
The IRS brought suit against Mr. Appelbaum to obtain a judgment saying that he was liable for the penalty. Less than ten days before the trial, Mr. Appelbaum raised the issue as to whether the IRS had sent the required notice for the penalty.
The court had a three day bench trial and requested the parties brief the notice issue after the trial.The court concluded that the IRS had not sent the notice and that, as a result, Mr. Appelbaum was not liable for the trust fund recovery penalty. This was a factual determination based on the evidence presented at trial. Mr. Appelbaum then asked the court to award attorneys fees as he had substantially prevailed in the litigation.
The IRS is required to give written notice before assessing a trust fund recovery penalty. This notice is normally provided by mailing the taxpayer a Letter 1153 along with an IRS publication. In Appelbaum, the government could not prove that the notice was sent. It was also too late for the IRS to try to send another letter at that point. By the time the court reached this decision, the time period for the IRS to assess the trust fund recovery period had already passed.
Recovering Attorneys Fees from the Government
Generally, parties to a lawsuit cannot recover attorneys fees from the other party. There are exceptions to this rule. One exception is found in Section 7430. Section 7430 allows a prevailing party to recover reasonable administrative costs and litigation costs incurred in an action brought by or against the United States involving “the determination, collection, or refund of any tax, interest, or penalty.”
The prevailing party is the party which has “substantially prevailed with respect to the amount in controversy or has substantially prevailed with respect to the most significant issue or set of issues presented.” The Code goes on to say that “a party shall not be treated as the prevailing party in a proceeding to which subsection (a) applies if the United States establishes that the position of the United States in the proceeding was substantially justified.” Last, the Code provides that “the position of the United States shall be presumed not to be substantially justified if the Internal Revenue Service did not follow its applicable published guidance in the administrative proceeding. Such presumption may be rebutted.”
The Government’s Position is Substantially Justified
In applying these rules, the court in Appelbaum started with the government’s substantially justified defense. The court concluded that the government’s position was substantially justified.
The court reasoned that its prior determination was one based on the facts and evidence presented at trial. It was a position that “a reasonable person in the government’s position could have concluded that proceeding on the § 6672 claim against Appelbaum was justified in light of both the notice issue and the responsible person issue.” Thus, the court considered the reasonableness of the lack of required notice and the substantive issue in the case.
Based on this, if the court is correct, it appears that attorneys fees may not be recovered under Section 7430 if the IRS makes a procedural foot fault in processing the case and continues to pursue a taxpayer for taxes that are not owed, if it is plausible that the IRS could have been right on the underlying tax issue. This gives the IRS a pass for suing a taxpayer in instances where the IRS made a procedural foot fault in processing the case.