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Tax Preparer Wins Costs and Fees after Prevailing in Action for Refund of Penalties

(Parker Tax Publishing March 2020)

A district court awarded costs and fees under Code Sec. 7430 to a tax return preparer, who had all but six of 34 tax preparer penalties assessed against him by the IRS dismissed. The court held that the return preparer was the prevailing party and met the statutory net worth requirements under Code Sec. 7430, and concluded that the government's position was not substantially justified except with respect to the six returns included in the settlement, so the court excluded from the award the costs and fees with respect to those six returns. Lowery v. U.S., 2020 PTC 89 (W.D. N.C. 2020).

In August of 2014, the IRS proposed tax return preparer penalties against Marshall Lowery under Code Sec. 6694(b) totaling $170,000 and arising out of 34 tax returns. In 2016, the IRS Appeals Office dismissed nine of the 34 penalties in their entirety and reduced the penalty on 19 returns that were not prepared by Lowery from $5,000 to $2,500. The IRS then assessed penalties in the amount of $77,500, arising out of 25 tax returns.

Lowery filed a refund claim with the IRS and, after the IRS failed to take action, filed a lawsuit in a district court. In Lowery v. U.S., 2018 PTC 329 (W.D.N.C. 2018), the court granted, in part, Lowery's motion for summary judgment and dismissed the penalties on the 19 returns that Lowery did not prepare or sign. In that decision, the court said it was not persuaded that Lowery was liable under Code Sec. 6694(b) for returns he was not involved with preparing that were signed by other tax return preparers, and the court found that the IRS failed to identify relevant legal authority that supported the imposition of penalties.

In 2019, Lowery settled with the IRS on the six remaining penalties. He agreed to accept liability for three of the six remaining returns and agreed to cap his claim for costs and fees under Code Sec. 7430 at $50,000. Thus, as a result of these administrative and judicial proceedings, $140,000 of the initial proposed penalties - arising out of 28 of the initial 34 tax returns - were dismissed. The settlement resulted in liability of $15,000, arising out of three returns, in lieu of a liability of $170,000 arising out of 34 returns.

Lowery then filed a motion for an award of costs and fees. Under Code Sec. 7430, the prevailing party in an administrative or judicial proceeding involving the determination, collection, or refund of any tax may be awarded reasonable administrative and litigation costs. In general, the prevailing party is the party which has substantially prevailed with respect to the amount in controversy or the most significant issue or set of issues presented. To be the prevailing party, the taxpayer also must have a net worth not in excess of $2,000,000 at the time the action was filed. However, even if these two requirements are met, the taxpayer is not treated as the prevailing party if the government can establish that its position was substantially justified.

The district court awarded Lowery costs and fees with respect to all but the six returns with respect to which he settled with the IRS. The court found that Lowery substantially prevailed, given the IRS's opening assessment when the dispute began and the $15,000 amount for which Lowery ultimately settled. The court also found that Lowery established his net worth of between $1 million and $2 million at the relevant time. Finally, the court found that the IRS's position was substantially justified only as to the six returns actually signed by Lowery - the six matters over which the parties negotiated just before trial, and for three of which Lowery accepted liability. As to the matters that were administratively dismissed and those dismissed by summary judgment by the court in favor of Lowery, the court found that the IRS's position was not substantially justified.

For a discussion of the rules for recovering litigation and administrative costs, see Parker Tax ¶263,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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