Bankruptcy Lawyers: If You Want Attorneys’ Fees From the IRS, Exhaust Your Administrative Remedies
Dealing with creditor violations of the automatic stay under 11 U.S.C. §362(a) is part of the job for debtor’s counsel. One saving grace of those situations for debtor’s counsel is that the offending creditor is often ordered to pay the attorneys’ fees of the debtor in the stay litigation. The Bankruptcy Code expressly contemplates awards of fees. 11 U.S.C. §362(h). This article will discuss how the interplay between 11 U.S.C. §362(h), the recently enacted 26 U.S.C. §6330 (Internal Revenue Code) and 26 U.S.C. §7430 may effect the award of attorneys’ fees against the U.S. in bankruptcy cases.
Award of Attorneys’ Fees under Prior Law
As the Internal Revenue Service is a major creditor in bankruptcy cases,1 it is hardly unknown for it to violate the automatic stay. It is not uncommon for IRS stay violations to cause courts to award damages as well as awards of other fees payable to debtor’s counsel for violating the automatic stay.2
The 11th Circuit has held that the attorneys’ fee award procedures of the Internal Revenue Code, 26 U.S.C. §7430, as well as the general provisions for fee awards against the U.S., 28 U.S.C. §2412, apply to requests for award of attorneys’ fees against the U.S. in bankruptcy cases. Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996). Attorneys’ fees may also be awarded pursuant to an 11 U.S.C. §105 contempt order for a stay violation. Hardy, 97 F.3d at 1387. Among the requirements for an award of attorneys’ fees is that the debtor has exhausted his administrative remedies. 26 U.S.C. §7430(b)(1). Courts have repeatedly upheld this requirement.3 For years it was black letter law that there was no right to a hearing or other due process review before the IRS could exercise forced collection of delinquent taxes by levy.4
Administrative Appeal Rights for IRS Collections
In 1998, after a parade of horribles at hearings held by Senator Roth,5 Congress passed the Internal Revenue Service Restructuring and Reform Act (“restructuring act”). Among the provisions of the restructuring act was the creation of a right to an administrative appeal before the IRS could take a delinquent taxpayer’s property by administrative levy to deal with these claims of IRS overzealousness. 26 U.S.C. §6330. At least 30 days before the IRS may levy (administratively garnish) a tax delinquent’s property, it must give the person written notice of his right to administrative appeal. 26 U.S.C. §6330(a). If the appeal is made during that 30-day period, the levy actions are suspended during the pendency of the appeal unless the IRS shows that there is good cause not to suspend the levy. 26 U.S.C. §6330(c).6 The appeal is heard by the IRS Office of Appeals (“appeals office”). The appeals office is required to act “with strict impartiality between the taxpayer and the Government.. . . ” 26 C.F.R. §601.106(f)(1). Congress required that appeals of proposed levies be handled by an impartial officer who had no prior involvement in the matter. 26 U.S.C. §6330(b)(3). regulation, proceedings before the appeals office are informal. 26 C.F.R. §601.106(c). Testimony under oath is not presented, although affidavits or declarations may be required. 26 C.F.R. §601.106(c). The request for a collection due process hearing must be in writing. 26 C.F.R. §301.6330-1(c)(1). Attorneys or other taxpayer representatives7 must present a power of attorney form before the appeals officer will discuss the matter with the representative. 26 C.F.R. §301.6103(c)-1. The demand for this form by the appeals officer is not mere bureaucratic rigidity. IRS employees who discuss a taxpayer’s tax situation with an unauthorized third party may face criminal prosecution. 26 U.S.C. §7213. An appeal may be presented upon a written record or upon a conference with the appeals officer, if requested. Among the issues that may be considered by the appeals officer are “innocent spouse” defenses8 offered by a tax delinquent; challenges to the appropriateness of collection actions; and offers of collection alternatives, such as an installment agreement, or an offer of compromise. 26 U.S.C. §6330(c)(2).
If the tax delinquent is dissatisfied with the determination of the appeals officer, he may then seek judicial review. The forum for judicial review depends on the type of tax involved. If the tax at issue is the type of which the U.S. Tax Court has jurisdiction (such as an income tax or an estate or gift tax)9 appeal lies to the Tax Court. 26 U.S.C. §6330(d)(1)(A). The Tax Court is located in Washington, D.C.,10 and pleadings, including the appeal, must be filed there. The Tax Court presides over cases when it “rides circuit” through the nation to hear cases. In Alabama, the Tax Court holds sessions in Birmingham and Mobile. Otherwise (as for “Form 941″ employment taxes or the “100% Penalty” for failure to turn over trust fund taxes of 26 U.S.C. §6672) appeal lies in the U.S. District Court. 26 U.S.C. §6330(d)(1)(B). This right to an administrative appeal before IRS collection became effective in January 19, 1999. Note to 26 U.S.C. §6330.
Effect of 1998 Changes on Awards of Attorneys’ Fees
The Bankruptcy Court for the Southern District of Alabama may have been the first court to have applied the administrative exhaustion requirement of 26 U.S.C. §7430 to a failure to utilize the administrative remedy of 26 U.S.C. §6330. In re Parker, 279 B.R. 596 (Bankr. S.D. Ala. 2002).11 There the court found that the IRS had sent debtors notices of intent to levy, and actually attempted to levy on debtors’ bank account, even though debtors had been in a bankruptcy case for several years. Parker, 279 B.R. at 599-602. In fact, the IRS had previously been sanctioned for violations of the automatic stay earlier in the same case. Parker, 279 B.R. at 599. After hard fought litigation, the court awarded debtors damages for proven medical costs and their time and expenses in attending the hearing. Parker, 279 B.R. at 604-605. The court denied damages for general and emotional stress, following Aiello v. Providian Financial Corp., 239 F.3d 876, 880 (7th Cir. 2001), and In re Taylor, 263 B.R. 139 (N.D. Ala. 2001).
The U.S. argued that debtors could not be awarded attorneys’ fees as they had not exhausted their administrative remedies under 26 U.S.C. §6330. In connection with the notices of intent to levy and the attempted levy, the court agreed, holding that “as to the Notice of Levy of November 28, 2000, and the levy itself in May 2001, no fees can be paid. All administrative procedures were not exhausted.” Parker, 279 B.R. at 606. The court noted that this administrative remedy did not exist at the time of its In re Matthews, 184 B.R. 594 (Bankr. S.D. Ala. 1995), decision. Parker, 279 B.R. at 606 n.8.
It may be expected that other government counsel will cite the exhaustion requirement ruled on in Parker and Torres. Both the Bankruptcy Code and the Internal Revenue Code indicate that Congress, while providing some remedy for taxpayers aggrieved by government action, intended to limit the liability of other taxpayers for any damage awards.12 Congress has imposed even more stringent exhaustion requirements in regard to other sorts of claims against the U.S. Treasury. For example, both tort claims and tax refund actions against the U.S. are barred unless the plaintiff had first filed an administrative claim.13 Counsel hoping for an award of attorneys’ fees should therefore consider an appeal of administrative collection to the appeals office before filing a motion for damages for violation of the automatic stay in Bankruptcy Court to avoid losing their claim to attorneys’ fees. An administrative appeal may also lead to a quick resolution to the automatic stay violation, and minimize the damages to your client.14
The administrative appeal rights of 26 U.S.C. §6330 may also be an alternative to a Title 11 bankruptcy filing for a client whose woes are more limited to tax collection problems than financial problems generally. The informal procedures before IRS appeals are not public, unlike bankruptcy court filings. There is no need to make public financial disclosures, or to imperil other credit; nor is there a need for the client to take time off from work to attend court hearings. Both the collection appeal form, Form 9423, and the power of attorney form, Form 2848, are available at the IRS Web site, www.irs.gov. Counsel may wish to give serious consideration to using the administrative appeal rights of 26 U.S.C. §6330 to handle a client’s problems before the IRS, rather than filing a bankruptcy petition.
1 The April 1997 Visa Consumer Bankruptcy Survey reported that six percent of bankruptcy filers reported that taxes were the immediate cause for their bankruptcy.
2 Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996); In re Jove Eng’g v. I.R.S., 92 F.3d 1539, 1560 (11th Cir. 1996); United States v. Flynn (In re Flynn), 185 B.R. 89 (S.D. Ga. 1995); Thibodaux v. United States (In re Thibodaux), 201 B.R. 827 (Bankr. N.D. Ala. 1996); Davis v. United States (In re Davis), 201 B.R. 835 (Bankr. S.D. Ala. 1996); Mathews v. U.S. (In re Matthews), 184 B.R. 594 (Bankr. S.D. Ala. 1995); In re Tyson, 145 B.R. 91 (Bankr. M.D. Fla. 1992).
3 Mathews v. U.S. (In re Matthews), 184 B.R. 594 (Bankr. S.D. Ala. 1995). See also In re Brickell Inv. Corp., 922 F.2d 696, 703-04 (11th Cir. 1991) (Award of attorneys’ fees proper as there was no administrative remedy for an erroneous proof of claim).
4 G.M. Leasing Corp. v. United States, 429 U.S. 338, 352 n.18 (1997). Myers v. United States, 647 F.2d 591, 602 (5th Cir. 1981).
5 The IRS, in view of the taxpayer privacy requirements of 26 U.S.C.§6103, did not publicly answer any of these taxpayer complaints, leaving the discussion one-sided.
6 The legislative history states that an appeal can still be filed even after the 30 day period expires. H.R. Rep. 105-599 at p. 131.
7 Taxpayers are often represented by accountants before the appeals office.
8 See 26 U.S.C. §6015.
9 26 U.S.C. §§6212(a); 6213(a).
10 400 Second Street, N.W., Washington, D.C. 20217.
11 The Bankruptcy Court for the District of Puerto Rico, in an unreported decision, denied an award of attorneys’ fees based upon the failure of debtors to submit an administrative claim for damages to an IRS district director. The regulations under 26 U.S.C. §7430 include such a written claim under the definition of “administrative remedies” for the purpose of 26 U.S.C. §7430. 26 C.F.R. §301.7430-1(d)(i)(ii). In re Torres, No. 92-05406 (GAC), 2001 WL 1807624, (Bankr. D. P.R. Oct. 17, 2001). The 26 U.S.C. §7430 regulations predate the enactment of 26 U.S.C.§6330.
12 See 11 U.S.C. §106(a)(3)[bar against punitive damages]; §106(c)[offset of damage claim against governmental claim]; 26 U.S.C. §7430.
13 28 U.S.C. §2675(a); 26 U.S.C. §7422(a).
14 Another way to obtain quick relief from stay violations by agencies of the U.S. government is to contact the appropriate U.S. attorney’s office or Internal Revenue Service area counsel office. Please feel free to call the author at (251) 415-7161 or fax at (251) 441-5051. In North Florida (Melbourne, Orlando, Polk County, Tampa and north) one may call IRS Counsel Senior Attorney Willie Fortenberry at (904) 665-1988. In South Florida one may call John Lortie at (954) 423-7944. Please include whatever document the client received from the IRS or other agency, the bankruptcy court case number and the Social Security or tax identification number of the debtor.
Charles Baer graduated from Holy Cross and Duke Law. He is admitted in Georgia, Alabama, and, since 1978, Florida. He was in private practice in Ft. Lauderdale and worked at the SEC, the Department of Justice, and was a SAUSA and IRS attorney in Jacksonville 1987-1999, and is now an assistant U.S. attorney in Mobile, Alabama. The opinions expressed herein are solely those of the author and do not necessarily reflect those of the U.S. Attorney’s Office for the Southern District of Alabama, the Department of Justice, or the Internal Revenue Service.
This column is submitted on behalf of the Tax Section, Richard B. Comiter, chair, and Michael D. Miller, Benjamin A. Jablow, and Normarie Segurola, editors.
