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By Roy Whitehead, Jr., JD, LLM, and Donna Smith, CPA, University of Central Arkansas

Some 18 months after the Taxpayer Bill of Rights 2 (TBOR2), Public Law 104-68, was enacted on July 30, 1996, the IRS has finally published the proposed regulations concerning taxpayer civil actions for unlawful collection practices required by sections 801 and 802 of the act. Under prior law, a suit for damages could not be brought unless the taxpayer had first exhausted all administrative remedies available within the IRS and the money damages for such practices were limited to $100,000.

Section 801 of TBOR2 amends section 7433(a) of the code by increasing from $100,000 to $1,000,000 the amount that a taxpayer can recover for damages caused by unlawful collection practices of an officer or employee occurring after July 30, 1996. Section 802 of the act amends IRC sections 7433(d)(1) and (e) by stating that the failure to exhaust administrative remedies is not a jurisdictional bar to suing the IRS for actions filed after July 30, 1996. The court may, however, reasonably consider the failure to exhaust administrative remedies as a factor in deciding damages.

The new proposed IRC section 7433(a) provides that if, in connection with collection of a Federal tax, an officer or employee of the IRS recklessly or intentionally disregards any provision of the code or any regulation promulgated under the code, the taxpayer may bring an action for damages in Federal district court. The total damages recoverable is the lessor of $1,000,000 or the sum of--

(1) the actual, direct economic damages sustained as a proximate result of the reckless or intentional actions of the officer or employee; and

(2) the costs of the action.

The new IRC section 7433(e) is amended to provide that with respect to suits brought after July 30, 1996, the amount of damages awarded under section 7433(a) may be reduced if the court determines that the taxpayer has not exhausted administrative remedies available within the IRS. Remedies are considered exhausted on the earlier of--

(1) the date a decision is rendered on a claim filed with the IRS; or

(2) the date six months after an administrative claim is filed.

For purpose of notice to the taxpayer, the two proposed regulations properly highlight the critical importance of July 30, 1996, the day the TBOR2 was enacted. First, section 7344(d) correctly emphasizes that for unlawful collection actions filed prior to July 31, 1996, no court action may be maintained before exhaustion of administrative remedies. Sadly, the following proposed section 7334(e), rather than clearly indicating that administrative remedies do not have to be exhausted, obliquely says that the court, in deciding damages for unlawful collection activities commenced after July 30, 1996, may consider the fact that IRS administrative remedies were not exhausted.

A carefully focused reading of the proposed regulations by an astute taxpayer will reveal that he or she does not have to exhaust administrative remedies in unlawful collection cases. Taxpayers, however, might expect that the proposed section 7344(e) would be written to affirmatively indicate, as Congress intended, that a taxpayer action commenced after July 30, 1996, for unlawful collection activity could be commenced without exhausting administrative remedies. Instead, the language used carefully avoids directly mentioning the intent of the act, that administrative remedies do not have to be exhausted, in favor of strained language that obliquely stresses that the court, in deciding damages, may consider that administrative remedies were not exhausted. Congress properly intended that the court could consider, in appropriate circumstances, that the taxpayer's unreasonable failure to follow administrative remedies could be a factor in determining damages. But, it is obvious that the intent of the Taxpayer Bill of Rights Act was to convey to the taxpayer the benefit of not having to exhaust administrative remedies in unlawful collection cases. The public and the IRS would be better served by an straightforward rather than a strained disingenuous presentation of the change in law and regulation. *

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