Fighting the IRS costs money. In limited circumstances, IRC 7430 lets a taxpayer who prevails recover reasonable administrative and litigation costs from the government. The most useful tool within that statute is one many taxpayers never hear about: the qualified offer.
Used correctly, a qualified offer puts real pressure on the IRS to settle at a reasonable number. Here is how the rules work.
The basic rule
IRC 7430(a) allows the prevailing party in an administrative or court proceeding involving the determination, collection, or refund of tax to be awarded reasonable administrative costs and reasonable litigation costs. Costs include court costs, the reasonable cost of studies, analyses, and reports needed to prepare the case, and reasonable attorney's fees, subject to limits.
Attorney's fees are capped by statute at an hourly rate that started at $125 and is adjusted annually for inflation under IRC 7430(c)(1). A higher rate is allowed only if the court finds a special factor, such as the limited availability of qualified attorneys for the proceeding or the difficulty of the issues presented. Check the IRS's annual inflation adjustment revenue procedure for the current year's cap.
Who is a prevailing party
Under IRC 7430(c)(4)(A), a prevailing party must:
- Substantially prevail with respect to the amount in controversy or the most significant issue or set of issues; and
- Meet the net worth requirements of 28 U.S.C. 2412(d)(2)(B). For an individual, that is generally net worth not exceeding $2 million when the proceeding began. For a business, generally net worth not exceeding $7 million and not more than 500 employees.
Even then, IRC 7430(c)(4)(B) says you are not treated as the prevailing party if the United States establishes that its position was substantially justified. The position is presumed not substantially justified if the IRS did not follow its applicable published guidance in the administrative proceeding, and the court must consider whether the government has lost on substantially similar issues in other circuits.
Other conditions
- Exhaustion. IRC 7430(b)(1) bars litigation costs unless you exhausted administrative remedies within the IRS. Participating in an Appeals conference is the usual way to satisfy this. Refusing to extend the assessment statute does not count against you.
- No protracting. Costs are denied for any portion of a proceeding the prevailing party unreasonably protracted.
- Only costs allocable to the United States. Costs related to disputes with other parties do not count.
The qualified offer: a different path to prevailing
The substantially justified defense makes ordinary cost awards hard to win. The qualified offer rule in IRC 7430(c)(4)(E) avoids it. A party who meets the net worth requirement is treated as the prevailing party if the liability determined in the judgment, without regard to interest, is equal to or less than the liability that would have been determined if the IRS had accepted the party's qualified offer.
In other words: make a reasonable written offer, the IRS rejects it, and the court's judgment comes out at or below your offer, and you are the prevailing party, regardless of whether the IRS's position was substantially justified.
What makes an offer "qualified"
IRC 7430(g)(1) defines a qualified offer as a written offer that:
- Is made by the taxpayer to the United States during the qualified offer period;
- Specifies the offered amount of the taxpayer's liability, determined without regard to interest;
- Is designated at the time it is made as a qualified offer for purposes of IRC 7430; and
- Remains open from the date it is made until the earliest of the date it is rejected, the date the trial begins, or the 90th day after it is made.
Treas. Reg. 301.7430-7 adds detail on the form and content of qualified offers. Follow it carefully. An offer that is not clearly designated, or that is conditioned in ways the regulation does not allow, may not qualify.
The qualified offer period
Under IRC 7430(g)(2), the qualified offer period begins on the date the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the IRS Independent Office of Appeals is sent. That is usually the 30-day letter. It ends 30 days before the date the case is first set for trial.
Here's the part most people miss: the window opens with the 30-day letter, long before litigation. A qualified offer made early, alongside a protest to Appeals, can shift the incentives for the entire case.
Limits on the qualified offer rule
- No settlements. IRC 7430(c)(4)(E)(ii) says the rule does not apply to a judgment issued pursuant to a settlement. If the case settles, the qualified offer does not make you a prevailing party.
- Costs only after the offer. When the rule applies, reasonable costs include only those incurred on and after the date of the offer, measured by the last qualified offer made.
- Net worth still applies. The qualified offer rule does not waive the 28 U.S.C. 2412 limits.
Administrative costs, too
IRC 7430 is not limited to court costs. A prevailing party can also recover reasonable administrative costs incurred in connection with an administrative proceeding within the IRS. Those costs generally include only costs incurred on or after the earliest of the date of the Appeals decision notice, the date of the notice of deficiency, or the date the first letter of proposed deficiency allowing Appeals review is sent, under IRC 7430(c)(2). If a case resolves in your favor in Appeals because the IRS position was not substantially justified, an administrative cost claim may be available even without litigation. The process is set out in Treas. Reg. 301.7430-2, and Tax Court review of a denied administrative cost claim is available under Rule 270 and following.
For how the cost question fits with the rest of the post-opinion process, see Rule 155 and the Tax Court decision.
Claiming costs in Tax Court
Tax Court Rule 34(f) says a claim for costs must not be included in the petition. Instead, Rule 231 governs. In unagreed cases, the motion must generally be filed within 30 days after service of a written opinion determining the issues, or within 30 days after service of the transcript of a bench opinion. If the parties settle everything except costs, the motion is filed with a stipulation of the settled issues.
Rule 231(b) lists what the motion must contain, including statements on prevailing party status, net worth supported by the moving party's own affidavit or declaration, exhaustion of administrative remedies, not having unreasonably protracted the proceeding, and the specific costs claimed. Rule 231(e) requires a copy of the qualified offer to be attached when one is relied on.
Strategy: making a qualified offer work
- Value the case honestly. The offer must be low enough to be meaningful and high enough that the judgment is likely to come in at or below it.
- Make it in writing, designated as a qualified offer under IRC 7430(g).
- Keep it open for the required period.
- Update it if the case changes. The last qualified offer controls.
- Track your costs from the offer date. Detailed billing records matter.
- Remember the settlement exception. The offer's value is as leverage. If the IRS accepts, you have a settlement on your terms. If it rejects and then loses, you may recover costs.
Let's talk
A qualified offer is one of the few tools that makes the IRS weigh the cost of being wrong. If you have a 30-day letter or a docketed case, call (813) 229-7100. Let's talk about whether a qualified offer belongs in your strategy.