| ||IRS Misconduct in an Audit: Is There a Civil Remedy?|
Michael G. Tanner
The author expresses his thanks to his colleagues at Holland & Knight LLP for their assistance with this article: Juan Bendeck, Kathie Fennell, Jack A. Levine, David Warner and Andrew H. Weinstein.
Section 120(2) of the Internal Revenue Manual states that the mission of the Internal Revenue Service is to encourage the highest possible degree of voluntary compliance with our nation's tax laws and to "conduct itself so as to warrant the highest degree of public confidence in its integrity and efficiency." Certainly the Service employs thousands of conscientious and capable people who are dedicated to advancing this mission. But as recent congressional hearings have demonstrated, within the Service's ranks are persons who, unfortunately, are not so high-minded.
Suppose your client has the misfortune to be audited by an agent who is demonstrably biased, takes pleasure in demanding reams of irrelevant information, asserts unfounded legal positions, generally behaves so as to maximize your client's discomfort and expense, and who makes special arrangements to deliver his 30-day letter to your client on Christmas Eve.
Following several well-publicized instances of Service abuse in recent years, Congress came to the aid of taxpayers by enacting the Omnibus Taxpayer Bill of Rights, the Taxpayer Bill of Rights 2, and the Taxpayer Bill of Rights 3. These measures have given taxpayers additional remedies predominately in response to Service activities in tax collection, not in tax determination, the audit phase. This legislation did provide some relief in the audit phase by creating the Office of Ombudsman (later replaced by the National Taxpayer Advocate) which has broad powers to issue taxpayer assistance orders when a taxpayer is suffering or is about to suffer a "significant hardship" as a result of the manner in which the internal revenue laws are being administered. The statistics, though, suggest it is improbable that a taxpayer dealing with an abusive or incompetent agent in an audit will receive help from the Advocate. In 1999, the Advocate received 92,852 requests for assistance which met the hardship criteria of the statute, yet only five taxpayer assistance orders were issued, and only one of these was to stop an audit where the taxpayer was being harassed.
Of course, the taxpayer's simplest approach is to endure the agent's behavior and if a tax deficiency is asserted, seek a redetermination in the Tax Court or pay the deficiency and seek a refund in district court. If the taxpayer prevails in these proceedings, he or she may be eligible to recover attorneys' fees and other expenses. In the great majority of cases, this is the best approach, but it does not address the abusive behavior. What about the audit which is not based on any valid legal theory, or which is conducted for no reason other than to harass the taxpayer? And what if the taxpayer (even if he or she prevails in court) is not eligible to make a claim for the fees and expenses incurred during the ordeal? For such special cases, is another remedy available? Can the audit be enjoined or is a damages claim assertable? This article will examine these questions.