Internal Revenue Code (IRC) section 7430 permits courts to award “reasonable litigation costs” and “reasonable administrative costs” to the “prevailing party” in any “administrative or court proceeding … brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty” under the IRC. These costs can include administrative fees, costs of analyses and studies “necessary for the preparation of the party’s case,” and attorney’s fees [IRC section 7430(a), (c); Treasury Regulations section 301.7430-4(a) & (b)]. Attorney’s fees may be awarded for the fees of any practitioner authorized to practice before the IRS, even if not an attorney [IRC section 7430(c)(3)(A)]. As CPAs are authorized to practice before the IRS (31 CFR. section 10.3), the fees of a CPA for handling an audit, appeal, refund claim, or collection matter, or for assisting with a Tax Court case or other litigation, may be awarded [Ragan v. Comm’r, 135 F.3d 329, 337 (5th Cir. 1998); Han v. Comm’r, T.C. Memo 1993-386].
In order to qualify for an award of reasonable litigation costs under IRC section 7430, a taxpayer must show that—
- the taxpayer meets the net worth requirements;
- the taxpayer substantially prevailed;
- the position of the United States was not substantially justified;
- the taxpayer exhausted administrative remedies; and
- the taxpayer did not unnecessarily protract the proceeding. [IRC section 7430(a)-(c)]
These elements are discussed below, but CPAs should keep in mind that even if each is satisfied, an award of fees is within the court’s discretion [Zinniel v. Comm’r, 883 F.2d 1350, 1355 (7th Cir. 1989)].
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