Academic journal article Journal of Accountancy

Recoverable Costs

Academic journal article Journal of Accountancy

Recoverable Costs

Article excerpt

A taxpayer who is the prevailing party in a legal dispute with the IRS may be entitled to recover some of his or her litigation-related costs. There have been numerous suits outlining the costs taxpayers can recover if they hire an attorney. When taxpayers represent themselves, however, what expenses they can recover in court are not as clear. Recently, the Tax Court addressed this issue.

John and Rebecca Dunaway represented themselves before the Tax Court in a dispute with the IRS over their 2001 tax return. The Dunaways were successful, and the IRS conceded its position in the deficiency notice was not substantially justified. The Dunaways then sued to recover their costs under IRC section 7430. The IRS disagreed with the amounts the couple claimed.

Result. In part for the IRS and in part for the taxpayer. Section 7430 allows the prevailing party to recover reasonable litigation and administration costs. By definition reasonable costs include court costs, attorney fees, expert witness costs and expenses to prepare the case.

The Dunaways asked to recover the value of their time to research the tax issues involved in the dispute. Based on prior cases, the Tax Court rejected this part of the claim. The couple also requested lost wages. The court rejected this claim as well because of a lack of substantiation rather than on the merits. With proper backup, future taxpayers may be able to recover lost wages. If they do, they most likely will have to include this part of the recovery in their income.

The Tax Court did allow the Dunaways to be reimbursed for postage, photocopying and office supplies. However, it limited the recovery to the amounts the couple could substantiate. Future taxpayers involved in similar disputes should carefully document all costs if they want to be reimbursed for them.

The couple then requested reimbursement for mileage and parking. …

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