Bankruptcy lawyers: if you want attorneys' fees from the IRS, exhaust your administrative remedies (It might not be a bad idea anyway).

• Author: Baer, Charles

Dealing with creditor violations of the automatic stay under 11 U.S.C. [section]362(a) is part of the job for debtor's counsel. One saving grace of those situations for debtor's counsel is that the offending creditor is often ordered to pay the attorneys' fees of the debtor in the stay litigation. The Bankruptcy Code expressly contemplates awards of fees. 11 U.S.C. [section]362(h). This article will discuss how the interplay between 11 U.S.C. [section]362(h), the recently enacted 26 U.S.C. [section]6330 (Internal Revenue Code) and 26 U.S.C. [section]7430 may effect the award of attorneys' fees against the U.S. in bankruptcy cases.

Award of Attorneys' Fees under Prior Law

As the Internal Revenue Service is a major creditor in bankruptcy cases, (1) it is hardly unknown for it to violate the automatic stay. It is not uncommon for IRS stay violations to cause courts to award damages as well as awards of other fees payable to debtor's counsel for violating the automatic stay. (2)

The 11th Circuit has held that the attorneys' fee award procedures of the Internal Revenue Code, 26 U.S.C. [section]7430, as well as the general provisions for fee awards against the U.S., 28 U.S.C. [section]2412, apply to requests for award of attorneys' fees against the U.S. in bankruptcy cases. Hardy v. United States (In re Hardy), 97 F.3d 1384, 1390 (11th Cir. 1996). Attorneys' fees may also be awarded pursuant to an 11 U.S.C. [section]105 contempt order for a stay violation. Hardy, 97 F.3d at 1387. Among the requirements for an award of attorneys' fees is that the debtor has exhausted his administrative remedies. 26 U.S.C. [section]7430(b)(1). Courts have repeatedly upheld this requirement. (3) For years it was black letter law that there was no right to a hearing or other due process review before the IRS could exercise forced collection of delinquent taxes by levy. (4)

Administrative Appeal Rights for IRS Collections

In 1998, after a parade of horribles at hearings held by Senator Roth, (5) Congress passed the Internal Revenue Service Restructuring and Reform Act ("restructuring act"). Among the provisions of the restructuring act was the creation of a right to an administrative appeal before the IRS could take a delinquent taxpayer's property by administrative levy to deal with these claims of IRS overzealousness. 26 U.S.C. [section]6330. At least 30 days before the IRS may levy (administratively garnish) a tax delinquent's property, it must give the person written notice of his right to administrative appeal. 26 U.S.C. [section]6330(a). If the appeal is made during that 30-day period, the levy actions are suspended during the pendency of the appeal unless the IRS shows that there is good cause not to suspend the levy. 26 U.S.C. [section]6330(c). (6)...