Recovering Legal Fees From the IRS | Kathryn Meyer Law PC

Sometimes. Under IRC 7430, a taxpayer who substantially prevails against the IRS may recover reasonable administrative and litigation costs, including attorney fees capped at $260 an hour for work done in 2026, but only if the IRS cannot show its position was substantially justified, you used the IRS appeal process first, you did not drag the case out, and you meet the net worth limits ($2 million for an individual; $7 million and 500 employees for a business).

A well-timed "qualified offer" can also make you the prevailing party even if the IRS's position was reasonable. These rules are worth knowing before the dispute starts, because some of them depend on steps taken early. They are part of Kathryn Meyer's tax litigation practice.

Who counts as the prevailing party?

IRC 7430(c)(4) sets four conditions, and the IRS can defeat the claim on the fifth point below.

Requirement	What it means	Source
Substantially prevailed	On the amount in controversy, or on the most significant issue or set of issues	IRC 7430(c)(4)(A)(i)
Net worth, individuals	Not more than $2,000,000 when the case was filed; spouses on a joint return are tested separately	28 U.S.C. 2412(d)(2)(B); IRC 7430(c)(4)(D)
Net worth, businesses	Not more than $7,000,000 and not more than 500 employees when the case was filed	28 U.S.C. 2412(d)(2)(B)
Exhausted IRS remedies	You used the administrative appeal process available within the IRS; refusing to extend the assessment deadline does not count against you	IRC 7430(b)(1)
No unreasonable delay	No costs for any part of the case you unreasonably protracted	IRC 7430(b)(3)
IRS position not substantially justified	The IRS bears the burden of showing its position was substantially justified; if it does, you are not the prevailing party	IRC 7430(c)(4)(B)

Two rules help the taxpayer on the last point. The IRS's position is presumed not to be substantially justified if the IRS did not follow its own applicable published guidance, such as regulations, revenue rulings, revenue procedures and notices, or a private ruling issued to you. And the court must take into account whether the government has lost on substantially similar issues in other circuits' courts of appeals.

What costs can be recovered?

Litigation costs: reasonable court costs, expert witness expenses (capped at the highest rate the United States pays experts), the cost of studies or analyses the court finds necessary, and attorney fees (IRC 7430(c)(1)).
The fee cap: the statute sets $125 an hour, indexed for inflation; Revenue Procedure 2025-32 sets the limit at $260 an hour for fees incurred in calendar year 2026. A court may allow more for a special factor, such as the limited availability of qualified attorneys or the difficulty of the issues.
Administrative costs: IRS fees and the same kinds of expenses incurred in the IRS proceeding, but only from the earliest of the date you receive the Appeals decision, the date of the notice of deficiency, or the date the IRS sends the first letter of proposed deficiency that offers Appeals review (IRC 7430(c)(2)). The second of those documents is explained in what to do when you receive a notice of deficiency.
Representatives: fees of anyone authorized to practice before the Tax Court or the IRS are treated as attorney fees, and pro bono representatives can be awarded reasonable fees, paid to the representative or employer (IRC 7430(c)(3)).

The "first letter of proposed deficiency" is usually the 30-day letter at the end of an audit, explained in what to do with an IRS 30-day letter. Costs incurred before then are not recoverable as administrative costs.

How the qualified offer rule works

IRC 7430(c)(4)(E) and (g) give taxpayers a way to shift the cost risk. A qualified offer is a written offer that:

is made during the qualified offer period, which runs from the date the first letter of proposed deficiency offering Appeals review is sent until 30 days before the case is first set for trial;
states the amount of your liability you are offering, without interest;
is designated as a qualified offer under section 7430 when it is made; and
stays open until the IRS rejects it, the trial begins, or the 90th day after it is made, whichever comes first.

If the court's judgment is equal to or less than the liability you offered, you are treated as the prevailing party even if the IRS's position was substantially justified, provided you meet the net worth requirement. The rule does not apply to a judgment entered under a settlement. Settlement itself is discussed in whether a Tax Court case can settle before trial.

How you claim costs, step by step

In a settled Tax Court case, any award of costs must be included in the stipulated decision (Rule 231(a)(1)).
In an unagreed case, file a motion within 30 days after service of the written opinion, or of the transcript pages containing an oral opinion, or after settling everything except costs (Rule 231(a)(2)).
Support the motion. Rule 231(b) requires statements showing you substantially prevailed or made a qualified offer, that you meet the net worth limits (by an affidavit or declaration signed by you, not your attorney), that you exhausted administrative remedies, that you did not unreasonably protract the case, and the specific costs claimed with a supporting affidavit.
Keep cost evidence out of the trial. Rule 143(a) says evidence relevant only to costs is not introduced at trial.
Appeal if needed. An order granting or denying costs is appealable in the same way as the decision (IRC 7430(f)(1)). If the IRS decides administrative costs at its level, that decision can be reviewed by petition to the Tax Court (IRC 7430(f)(2)).

Cost recovery depends on records kept from the first day of the case, so billing statements belong with the papers listed in what to bring to a first meeting about a Tax Court case.

What changes the answer

Which court. IRC 7430 applies to court proceedings brought by or against the United States over tax, so it reaches refund suits as well as Tax Court cases; the forums are compared in Tax Court, district court or the Court of Federal Claims. Section 7430(a) also covers proceedings over collection, such as Tax Court review of a Collection Due Process decision.
Whether you went to Appeals. Skipping available IRS appeals can bar litigation costs under IRC 7430(b)(1); the Appeals process is in what happens at an IRS Appeals conference.
Net worth on the filing date. The limits are measured when the case is filed, and joint filers are tested separately.
The IRS's guidance. A position contrary to the IRS's own published guidance is presumed unjustified.
Your own conduct. Time spent on a part of the case you unreasonably protracted is excluded.
Multiple cases. Cases that could have been joined, including joint returns of married individuals, are generally treated as one proceeding (IRC 7430(e)).

For example: a qualified offer that pays off

For example, imagine a small business owner whose audit ends with a 30-day letter proposing $40,000 of tax. Her net worth is well under $2 million. She files a protest and goes to Appeals, which does not settle, and then petitions the Tax Court after a notice of deficiency. Four months before the case is first set for trial, her representative sends IRS counsel a written offer to agree to $12,000 of tax, expressly designated as a qualified offer under section 7430. The IRS does not accept it within 90 days. At trial, the court determines a deficiency of $10,000. Because the judgment is less than her qualified offer, she is treated as the prevailing party even though the IRS's position on some issues was reasonable, and within 30 days after the opinion is served she files a Rule 231 motion for costs incurred after the 30-day letter, with attorney fees for 2026 limited to $260 an hour unless the court finds a special factor. This is a hypothetical, not a real case.

Common mistakes with cost recovery

Skipping Appeals. Failing to exhaust IRS remedies can bar litigation costs.
Missing the 30-day motion deadline. Rule 231 sets it from service of the opinion.
Forgetting to label the offer. An offer is a qualified offer only if it is designated as one when made.
Making the offer too late. The period ends 30 days before the case is first set for trial.
Poor time records. Rule 231 requires a statement of specific costs supported by an affidavit; vague billing records weaken the claim.
Expecting market rates automatically. Fees above the statutory rate need a special factor the court accepts.

What to do this week

Keep detailed, dated records of time and costs from the first letter of proposed deficiency forward.
Confirm your net worth (and your spouse's separately) as of the date a case would be filed.
Make sure every available IRS appeal step has been used.
Consider a written qualified offer, designated as such, inside the offer period.
Calendar the 30-day motion deadline that follows an opinion.

Frequently asked questions

Does a partial win count?

It can. You must substantially prevail on the amount in controversy or on the most significant issue or set of issues, and the IRS must fail to show its position was substantially justified, unless the qualified offer rule applies.

Can you recover fees spent during the audit itself?

Generally not before the first letter of proposed deficiency offering Appeals review, the notice of deficiency, or the Appeals decision, whichever is earliest (IRC 7430(c)(2)).

Can a business recover costs?

Yes, if its net worth was not more than $7 million and it had no more than 500 employees when the case was filed.

Can the court penalize the taxpayer instead?

Yes, in the other direction: IRS Publication 5 warns that the Tax Court can impose a penalty of up to $25,000 for cases brought mainly for delay or on frivolous positions (IRC 6673).

Who decides whether you prevailed?

The parties by agreement, or otherwise the IRS for a final determination at the administrative level and the court for a final determination in court (IRC 7430(c)(4)(C)).

Does the burden of proof on the tax affect costs?

The cost question is separate, but the strength of the record on each issue shapes both; see who has to prove what in a Tax Court case.

Can a cost decision be appealed?

Yes, with the decision itself; see whether you can appeal a Tax Court decision.

Planning for costs from the start

Cost recovery is shaped by steps taken long before trial: going to Appeals, keeping records, and deciding whether to make a qualified offer. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel, which handles these motions for the government in the Tax Court, and now represents taxpayers. If you are weighing a fight with the IRS, contact the firm or call (571) 560-8674.

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