IRS Ordered to Pay Taxpayer’s Legal Fees! That’s a headline we rarely read. With hundreds of thousands of tax audits performed each year, only a handful of taxpayers ever get their legal fees reimbursed by the government. John and Frances Purciello are two of those rare exceptions.
To understand the Purciellos’ story, a little knowledge of tax law is helpful.
In 1982, Congress amended the Internal Revenue Code to say that taxpayers in certain circumstances could win legal fees against the IRS. Until the courts took up the law a decade later, attorney fee awards were virtually nonexistent. Now the law says that if taxpayers win their tax case and can prove the IRS’ position was not “substantially justified,” attorneys fees can be awarded.
One expert says that the IRS has only been ordered to pay approximately $1.5 million in just 22 cases over the last decade. In other words, winning a tax court case with the IRS does not mean one should expect an award for legal fees.
There are also a couple exceptions to the legal fee provision in the tax code. For example, big corporations (over 500 employees) and individuals with a net worth of more than $2 million can’t qualify.
According to a recent tax court decision, John Purciello was an engineer for a group of construction companies in 1998. For several months that year, the businesses failed to remit payroll taxes. Although he did not control the businesses, the IRS determined that he was responsible for the unpaid taxes. (These IRS audits are called Trust Fund Recovery Penalty assessments.)
The IRS began withholding refunds from the couples’ annual tax returns. Ultimately, the Purciellos won their battle against the IRS on appeal. Unfortunately, the IRS had already taken $68,000 in refunds. Even though they won their case, the IRS refused to give back the refunds! That meant another battle with the IRS.
Ultimately, this year the court ruled that the IRS did not have substantial justification for their refusal to return the Purciellos money. The court ordered their $68,000 refunded and an additional $53,307 for legal fees. With interest, the Purciellos are entitled to receive $167,000.
Of course, the IRS and Justice Department still have the opportunity to appeal the decision which could mean even more years before the couple sees any money. No word if the IRS will appeal.
Tax audits can become very expensive. The risks of ignoring an audit or assessment are huge, although the costs of defending an audit can also be quite high. Like everyone else, the IRS makes mistakes. Although a mere mistake may not be enough to justify an award of attorney’s fees, every now and then the “little guy” wins and the IRS can be ordered to write a check.
If you or your business is facing an audit, seek professional help immediately. Our team of IRS tax attorneys can help defend you in any type of tax audit. From state revenue departments to the IRS, we have helped many taxpayers including individuals and Fortune 500 companies.
In this economy, financial hardships can happen to anyone.
For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author can also be contacted at or by phone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege.
Post by Brian Mahany, Esq.
Tag as tax audit, tax audit defense, legal fee awards, IRS tax attorney