By Anthony Diosdi
The Internal Revenue Service or “IRS” often files liens on individuals or business entities that have outstanding assessments for taxes or penalties. An IRS lien can harm one’s finances, credit, and can even put a business in jeopardy. Sometimes the IRS fails to remove a lien after a liability has been satisfied or after the statute of limitations on collections has expired. On other occasions the IRS may erroneously file a lien associated with a penalty it may not have the legal authority to assess. This article discusses the procedure to obtain damages for the improper conduct by the IRS associated with the failure to release a lien when the circumstances warrant.
Sovereign Immunity Limitation and Internal Revenue Code Section 7432
The Internal Revenue Code permits limited types of damage actions to be brought against the United States for improper conduct by an officer or employer of the United States under Section 7432 related to improper collection activity such as the improper filing of a lien or the failure to release a lien.
Typically, the doctrine of sovereign immunity bars actions to recover damages for the misconduct of an officer or employee of the United States. Under this doctrine, the United States or its agencies such as the IRS cannot be sued except where a federal statute has expressly authorized such an action. Although the Federal Tort Claims Act provides jurisdiction to the United States district courts for common law torts committed by a federal employee within the normal course of employment, that statute expressly excludes any claim “arising in respect of the assessment or collection of any tax.” See 28 U.S.C. Section 2680(c). This exclusion has been construed to be intended to insulate the IRS from tort liability stemming from any of its revenue-raising activities. It is with this background that Congress enacted Internal Revenue Code Section 7432 to permit tort-type actions against the IRS with respect to erroneously filed liens or the failure to release a lien.
Court Jurisdiction to Hear a Case Under Section 7432
The United States district courts have exclusive jurisdiction under Section 7432 to hear a cause of action by a taxpayer for damages arising from the knowing or negligent failure of the IRS to release a notice of tax lien as required under Section 6325. Section 6325 establishes a procedure for the release of a tax lien that was appropriate when originally filed, but which has become unenforceable. In general, Section 6325 requires the release of a lien when an assessment is paid or the liability at issue becomes legally unenforceable, e.g., the statute of limitations on collections has expired.
The Necessity to Exhaust Administrative Remedies
Prior to commencing an action under Section 7432, an individual or business harmed by a lien must exhaust its administrative remedies. This requires the filing of a written claim with the District Director for the district in which the individual harmed by a lien currently resides or where the notice of tax lien in question was filed. The claim must be marked for the attention of the Chief, Special Procedures Function, and include the following information:
1. The name of the individual making the claim, current home, telephone numbers, and individual’s identification;
2. A copy of the notice of federal tax lien affecting the individual’s property;
3. A copy of the request for release of lien made under Section 6325;
4. The grounds in “reasonable detail” for the claim, including copies of any substantiating documents or correspondence with the IRS;
5. A description of the injuries incurred, including copies of any substantiating documents or correspondence with the IRS;
6. The dollar amount of the claim, including both incurred and reasonably foreseeable damages;
7. The signature of the individual making the claim or duly authorized representative (such as an attorney admitted to practice before the IRS).
All of the above requirements must be satisfied in order to properly exhaust the administrative remedies associated with a Section 7432 claim.
Jurisdiction of a District Court to Adjudicate a Section 7432 claim
Once an individual has properly exhausted his or her administrative remedies and the IRS has either failed to respond or has refused to remove a lien, an action under Section 7432 can only be brought by the individual against whom the lien in question was filed.Such an action can only be filed in a United States district court with proper venue. The cause must be brought against the United States, not the IRS. A case filed in federal court naming the IRS or an employee of the IRS will likely be dismissed by the court for lack of jurisdiction. Furthermore, an individual bringing an action under Section 7432 will not have a right to a jury trial.
Damages that May be Recovered in a Section 7432 Action
Under Section 7432, an individual is entitled to recover “actual, direct economic damages” sustained, plus the cost of the action. The term actual, direct economic damages is defined for this purpose as actual pecuniary damages that would not have been sustained “but for” the actions of the IRS. Injuries such as inconvenience, emotional distress, and loss of reputation are compensable only to the extent they result in actual pecuniary damages. The amount of damages recoverable is reduced by any amount that reasonably could have been mitigated by the individual claiming harm from the IRS. An action under Section 7432 must be brought within two years after the right of action accrues
Section 7432 provides judicial relief to individuals and businesses that have been harmed for the IRS’s failure to remove a lien. Section 7432 applies to a tax or penalty that was satisfied or legally unenforceable. Prior to commencing such an action requires the exhaustion of administrative remedies. Succeeding in a Section 7432 case is all about organization and preparation. If you are considering bringing a Section 7432 because a lien appears to be unauthorized, you must understand the reason why the IRS has assessed the lien against you. Only by understanding the IRS’ position, can you adequately prepare your case. Litigating a lien controversy before a United States district court is no simple task. If you are involved in a lien controversy with the IRS, you should consider retaining the services of a tax attorney who can guide you through this complicated process.
Anthony Diosdi is a tax attorney at Diosdi Ching & Liu, LLP. He has more than 20 years of experience defending private clients before the IRS in difficult and complex tax disputes. Anthony counsels clients through examinations and liability disputes and, when necessary, takes disputed issues to court. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.