48.12 Suing the IRS for Unauthorized Collection

If an IRS employee or officer recklessly, intentionally, or negligently disregards the law or IRS regulations when taking a collection action, you may sue the IRS in federal district court for actual economic damages resulting from the IRS employee’s misconduct, plus certain costs of bringing the action. The lawsuit must be filed within two years of the date your right to sue accrued.

Caution

Penalty for Frivolous Action

If you bring an action in federal district court for unauthorized collection activities that the court considers to be frivolous, it may impose a penalty of up to $10,000.

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For negligent IRS collection activities, you may sue for damages of up to $100,000, and for reckless or intentional misconduct, the maximum damage award is $1 million. Administrative remedies must be exhausted to obtain an award.

According to IRS regulations, actual economic damages that may be recovered are monetary losses you suffer as a direct result of the IRS’s action. For example, a business may lose loyal customers and suffer an actual cash loss if the IRS’s action damages the business’s reputation. Other actual expenses could include the cost of renting a house or a car if the IRS puts a lien on or seizes your property, or loss of income due to the garnishment of your paycheck. Damages from the IRS for loss of reputation, inconvenience, or emotional distress are allowed only to the extent that they result in such actual monetary loss.

The IRS defines “costs of action” that you may recover as (1) fees of the clerk and marshall; (2) fees of the court reporter; (3) fees and disbursements for printing and witnesses; (4) copying fees; (5) docket fees; and (6) compensation for court-appointed experts and interpreters.

Planning Reminder

IRS Failure To Release Lien

A suit for damages may also be brought in federal district court against the IRS if IRS employees improperly fail to release a lien on your property. Before you sue, you must file an administrative claim for damages. The lawsuit must be filed within two years after your claim arose. You may sue for actual economic damages plus costs of the action; the types of damages that may be recovered are similar to those discussed for suing the IRS for unauthorized collection actions.

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Litigation costs and administrative proceeding costs are not treated as “costs of the action.” However, if the IRS denies your administrative claim for damages and you successfully sue in federal district court, you are considered a “prevailing party” and may recover attorneys’ fees, related litigation expenses, and administrative costs before the IRS as discussed in 48.11.