Tax Notes Today quoted Christopher S. Rizek concerning unsuccessful civil actions made by taxpayers under section 7433, a provision within the Internal Revenue Code (IRC). Under the provision, taxpayers can seek damages against the IRS for unauthorized collection activities. Unfortunately strict legal hurdles have made it nearly impossible to bring a successful action. For the complete article, please visit Tax Notes Today's website (subscription required).
Excerpt taken from the article "A Taxpayer Right to Damages, Rendered a 'Toothless Tiger'" by Eric Kroh for Tax Notes Today.
Christopher S. Rizek of Caplin & Drysdale said he was not surprised that taxpayers have met with little success bringing action under section 7433. Proving direct economic damages is a difficult bar to surpass, said Rizek, a former Treasury attorney-adviser and tax legislative counsel. The two-year statute of limitations is also strict, he said, adding that that doesn't necessarily mean that the provision is unfairly designed.
The government "can't just pass out $1,000 every time there's a foot fault" by the IRS, Rizek said. It is fair to require taxpayers to bring a timely claim and to prove that they were directly harmed by the actions of an agency employee before being awarded damages, he said.
Rizek said that according to his recollection, the provision was not controversial when lawmakers were considering it. It was "pretty much a consensus item," he said, adding, "I don't think anybody at Treasury or IRS viewed it as a huge, bad thing. If the Service engages in unauthorized collection activity, there should be a remedy for taxpayers." But that remedy should have safeguards to prevent frivolous actions, he said.
According to Rizek, there may be another reason that not many section 7433 claims are successful: The IRS may not perform many unauthorized collection activities in the first place.
"There are two potential conclusions one could draw" from the lack of successful claims, Rizek said. "One is that the provision is utterly ineffective, that it doesn't provide sufficient recompense to taxpayers who are the victims of unauthorized collection actions. The other alternative is maybe the IRS doesn't engage in an awful lot of unauthorized collection actions," he said, adding that the second reason is more likely.
The perfect penalty is never enforced because it deters the action it is meant to protect against, Rizek said. There are already many procedural requirements built into the collections process to deter unauthorized actions by IRS employees that act as safeguards, he said.
One thing that Congress could consider if it wants to make the provision more effective is to change the statute so there is a floor for damages, such as $1,000, Rizek said. "That might change the calculus a little bit," he said, adding that a taxpayer would still have to show that the IRS collection action was unauthorized.