Can I Sue the IRS?

Before filing a lawsuit, you must first exhaust all administrative remedies with the Internal Revenue Service (IRS).

The IRS is the tax collection arm of the federal government. IRS agents have the authority under the Internal Revenue Code (IRC) to verify your tax liability and ensure you have paid the correct amount of income tax that you owe.

Sometimes, it’s not enough to have a certified professional accountant (CPA) or tax preparer on your side when you’re going through an IRS audit. A tax lawyer is a specific kind of taxpayer advocate who can ensure you are afforded the full protection of your rights in any tax case. This legal expertise can be crucial when up against a powerful government agency like the IRS.

Types of Claims Against the IRS

This article will describe some of the common reasons to sue the IRS, which include:

• The IRS denied your tax refund.
• The IRS claimed you owe more in taxes than you should.
• The IRS wrongfully took your property or garnished your wages.
• The IRS shared your confidential information.

If you have another type of legal dispute with the IRS, it’s a good idea to get specific legal advice from an attorney. Your ability to sue depends on whether your type of claim is included in the statutory waivers of sovereign immunity. Your lawyer can help evaluate your options and assess the damages.

Tax Refund Claim Denied? You Can Sue

The most common reason to sue the IRS would be to recover your tax refund.

For example, let’s say you timely filed your tax return and fully paid your taxes last year. The IRS outright disregards or denies your rightful claim to a tax refund. In this case, you can sue them in a United States District Court or the United States Court of Federal Claims. There is a statute of limitations to file a refund lawsuit within a certain amount of time from the date you receive an IRS denial notice, so act quickly.

Before you sue, you usually must exhaust all your administrative remedies. This means you must make a reasonable and good-faith attempt at contacting the IRS and explaining to them why you believe you are owed a tax refund.

Appeal Your Denial First

For example, if the IRS denies your tax refund because of your own filing errors, a direct appeal to the IRS would give you an opportunity to correct the mistake. If you sue prematurely only to find out that your money was withheld because of your own failure to properly add up your income and expenses, you might lose your case.

Suppose a certified professional accountant files your taxes. According to the CPA, the IRS should mail you a check for $2,000. Months go by, and the IRS sends you a denial letter stating that your CPA’s calculations are incorrect and the IRS does not owe you any refund.

Your CPA checks their calculations to verify they did not make a mistake. You and your CPA then contact the IRS and appeal to them directly to try to refute the IRS’s incorrect position. 

File a Lawsuit

Suppose the IRS stands its ground and refuses to budge. At this point, you have tried to resolve the problem administratively. But you still haven’t had any success. You may be able to sue the IRS.

Did the IRS Send You a Notice of Deficiency? You Can Sue

A Notice of Deficiency is a proposal from the IRS that the amount of taxes you owe needs to be adjusted upwards. This is also known as a 90-day letter because you get 3 months (or a more generous 150 days if you’re abroad) from the notice date to file a petition against the IRS in Tax Court or in appropriate federal district courts. This petition lets you challenge the additional tax assessment the IRS has made against you.

Between the time you receive the letter and file your petition in tax court, you can and should contact the IRS to ensure you actually owe more in tax. If you find out the IRS is right, you’ll be responsible for back taxes. You’ll have to pay the remainder or consider options such as an offer in compromise.

But you might have a good reason for disputing the notice. If the IRS is unwilling to listen to you, getting your case in front of a judge might be your best option.

If you ignore a notice of deficiency, the IRS may begin collection actions against you. You should avoid this at all costs, as it could result in the payment of penalties and interest. The IRS can also seize your property to satisfy any alleged tax deficiency.

Property Wrongfully Seized? You Can Sue

The law states that if any officer or employee of the IRS recklessly, intentionally, or negligently disregards the law in initiating a wrongful collection of tax against you, you can bring a civil action for damages against the United States in federal district court.

For instance, suppose that you’ve correctly filed your taxes normally every year without any problems, and you’ve always duly paid all sums that you owed to the government. Still, you wake up one day to find that your wages have been garnished by the IRS. Money is missing from your bank account.

After investigating, you discover the IRS mistook you for someone with a similar name and seized your money in error. In court, you argue that the IRS was negligent in wrongfully collecting tax you did not owe because they took your property without any prior warning or legal justification.

The key is that you can sue because the collection action was wrongful. Essentially, the IRS didn’t exercise due diligence in ensuring you’re actually the blameworthy citizen and not just someone with a similar-sounding name. 

What You Can Recover in a Lawsuit Against the IRS

In cases where you can sue and win against the IRS, your legal remedies may be:

• Case costs and attorney’s fees
• Actual economic damages
• In some cases, a flat penalty per each IRS violation

Each of the items above is usually subject to caps (limits) placed by law. For instance, penalties for unauthorized disclosures by the IRS are limited to $1,000 per occurrence, negligently wrongful collection actions are penalized at a cap of $100,000, and fines for reckless collection actions by the IRS are capped at $1,000,000.

Example of Damage Caps

For example, let’s say an IRS employee wrongfully taps into your bank account and draws your entire balance of $10,000.00 even after you correctly explained to them you don’t owe any money. Your account goes into overdraft, and the bank charges you a $50 fee. It turns out that in the course of the garnishment, the IRS employee also negligently made an unauthorized disclosure of your bank information to a non-bank employee. You end up spending $1,000 on court filing fees and $4,000 on attorney fees.

Here, your potential recovery may be:

• $5,000 for your court and attorney’s fees
• $10,050 for your actual economic damages
• $1,000 penalty for the IRS employee’s unauthorized disclosure of your bank information
• Additional penalties if the employee was reckless or negligent in wrongfully collecting

Proving Reasonable Damages

Ultimately, the court will have the discretion to reduce the amounts to what is reasonable under the eyes of the law.

For example, to obtain recovery for court costs and attorney’s fees, you must show:

• Your costs were reasonably incurred.
• You tried to resolve the problem through administrative means, e.g. by appealing to the IRS directly before you filed in court.
• In court, you actually prevailed against the IRS.

Depending on the facts of your case and your individual circumstances, there may be additional restrictions.

Does the IRS Have Sovereign Immunity?

Yes, the IRS is a federal government agency, so it has sovereign immunity. Sovereign immunity is a legal doctrine that protects a government from lawsuits without its consent. It helps prevent the government from getting tied up in endless litigation, which would strain taxpayer resources. 

But as you can see above, the IRS has waived its immunity for certain types of claims. You probably can’t sue just because you don’t want to pay taxes or don’t like a tax penalty you incurred. Yet, there are circumstances in which an IRS lawsuit is appropriate and permissible. After all, wrongful taxation is a key topic dating back to the founding of the United States. 

A Tax Attorney Can Help You Sue the IRS

Tax law is an incredibly frustrating area of the legal system. If you’re up against the IRS, you should be aware of your due process rights before you get caught up in tax litigation or have your bank account frozen or seized by the IRS. An experienced tax attorney can directly negotiate on your behalf with the IRS or represent you in the U.S. tax court system if you’re in a position to have to sue or defend against the IRS.

Even if you’ve already lost against the IRS in the U.S. Court of Federal Claims or U.S. District Court, a tax lawyer may be able to get your case in front of the U.S. Court of Appeals so that another judge can look at it and ensure that you weren’t deprived of your rights. A good legal advocate can also help you get the best payment plan with the IRS, even in more difficult circumstances where you can’t get out of a tax assessment.