Making the IRS Pay for Unlawful Collection Activities

Taxpayers often feel helpless when it comes to the IRS. We hear this from clients when there is some real or perceived injustice involving the IRS. While the IRS and IRS employees have a lot of power, they are subject to the law.  The law provides taxpayers with several remedies when they are harmed by the IRS or its employees. This article considers Section 7433, which can be used to make the IRS pay for unlawful collection activities.

About Section 7433

The Federal government, which includes the IRS, enjoys sovereign immunity.  This means that the IRS generally cannot be sued without its express consent. Section 7433 waives the IRS’s sovereign immunity.

Section 7433 provides that taxpayers can bring suit against the IRS in the U.S. district courts for damages if, in connection with the collection of a federal tax, the IRS recklessly or intentionally, or by reason of negligence, disregards any provision of the Code or any applicable regulation.  There are a number of unlawful collection actions that can qualify under Section 7433.  For example, in Edkins v. United States, No. 14-11054 (E.D. Mich. 2016), the taxpayer brought suit for the IRS levying on his property when it had sent the required pre-levy notice to the wrong mailing address.

This is the only remedy that allows the taxpayer to recover damages against the IRS for collection actions.  The amount the taxpayer can recover is limited to the smaller of (1) $1 million (or $100,000 in the case of negligence) or (2) the sum of (a) actual direct economic damages incurred by the taxpayer and (b) court costs.

It should also be noted that this remedy is only available to the taxpayer from whom the IRS collects.  Third parties cannot take advantage of Section 7433.

Administrative Remedies First

To be able to recover damages, the taxpayer has to have first exhausted all administrative remedies with the IRS before bringing suit. This means that the taxpayer has to first file an administrative claim before filing an action in district court. The taxpayer has to then wait for the IRS to decide the claim or wait six months after the claim is submitted before they file suit.

This has to be done before the date on which the taxpayer files suit.

The administrative claim has to be in writing, sent to the correct IRS office, and include the following:

  • The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;
  • The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the IRS);
  • A description of the injuries incurred by the taxpayer filing the claim (include copies of any available substantiating documentation or evidence);
  • The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and
  • The signature of the taxpayer or duly authorized representative. For purposes of this paragraph, a duly authorized representative is any attorney, certified public accountant, enrolled actuary, or any other person permitted to represent the taxpayer before the IRS who is not disbarred or suspended from practice before the Internal Revenue Service and who has a written power of attorney executed by the taxpayer.

Time for Bringing Suit Against the IRS

Just like the time limits on bringing a civil suit against any other private party, taxpayers have a limit period of time to bring suit under Section 7433. This time period is two years from the date the illegal collections activity. This is a relatively short period when compared to the time limit to bring suit against private parties outside of Section 7433.