The IRS is required to pay a taxpayers attorney’s fees for defending unsupportable positions. This can even include attorney’s fees when the matter is settled administratively before court. But the IRS is not required to pay attorney’s fees if the IRS’s position is substantially justified. The Bontranger v. Commissioner, T.C. Memo. 2019-45, helps clarify how to view “substantially justified” when the law changes in the taxpayer’s favor.

Facts & Procedural History

The taxpayer was assessed criminal restitution. The IRS assessed interest on the restitution. It then filed a lien to try to collect the restitution and interest thereon. The taxpayer filed a collection due process hearing request.

At the CDP hearing, the IRS Appeals Office upheld the IRS’s ability to collect. A year later, the IRS attorney settled the case in the taxpayer’s favor. The taxpayer requested the IRS pay his attorney’s fees–which was the issue the court considered in its opinion.

When the IRS Pays Attorney’s Fees

The IRS is required to pay a taxpayer’s attorney’s fees in some cases. The rules are set out in Sec. 7430.

These rules generally apply when the taxpayer substantially prevails at the administrative or court level.

To qualify for administrative costs, the taxpayer has to submit an application with the IRS within 91 days of the final administrative determination. To qualify for court costs, the taxpayer has to file a request with the court.

Taxpayers are not entitled to an award of attorney’s fees if the IRS was substantially justified in its position. This defense brings us to the Bontranger case.

Is the IRS’s Position Substantially Justified?

In Bontranger, the taxpayer substantially prevailed. He did so given that the law for imposing interest on restitution payments was not clear when he initiated his claim.

The court had decided the issue in another case and held that interest was not due on restitution tax assessments. The IRS agreed with the court holding in the other court case and settled the present case based on it.

The question in Bontranger was when one views whether the IRS’s position was substantially justified. The law says that the IRS’s position is viewed from the earlier of: (1) the date the taxpayer receives the decision of the IRS Appeals Office or (2) the date of the notice of deficiency. With litigation, the IRS’s position is viewed from the date the IRS files an answer in the court case.

The court noted in Bontranger that the law was not settled at the time the IRS filed its answer in the court case. The guidance available at the time supported the IRS’s position. Thus, the court concluded that the IRS’s position was substantially justified and the taxpayer was not entitled to attorney’s fees.

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