How to Recover Attorneys Fees From the IRS

Taxpayers who successfully challenge the Internal Revenue Service (IRS) may be able to recover their attorneys’ fees and other related costs. This reimbursement is not automatic and is governed by rules in the Internal Revenue Code. Successfully recovering costs depends on meeting a series of legal and financial requirements for costs incurred both at the administrative level within the IRS and during formal court proceedings.

Conditions for Recovering Fees

To be eligible for an award of costs, a taxpayer must qualify as the “prevailing party” in a tax dispute. This status is achieved by substantially prevailing with respect to the amount in controversy or the most significant issue presented in the case. For example, if the IRS claims a taxpayer owes $100,000 in additional tax and the final determination is that only $5,000 is owed, the taxpayer has likely substantially prevailed on the amount. If a case involves multiple issues, winning on the one that has the largest financial impact or legal importance may also deem them the prevailing party.

A prerequisite for recovering fees is the exhaustion of administrative remedies. This means the taxpayer must have used all available options to resolve the dispute directly with the IRS before proceeding to court. A taxpayer is required to participate in a conference with the IRS Appeals Office to attempt to settle the matter. Skipping this step will disqualify a taxpayer from later seeking reimbursement for their legal expenses, even if they win the case.

Net worth limitations also apply. For an individual taxpayer, their net worth cannot exceed $2 million at the time the legal action was filed. For businesses, partnerships, corporations, or other organizations, the net worth cannot exceed $7 million, and they cannot have more than 500 employees. These financial caps are designed to limit fee awards to individuals and smaller entities who might otherwise be deterred from challenging the IRS.

A challenging condition to meet is proving that the IRS’s position was not “substantially justified.” This means the government lacked a reasonable basis in both law and fact for the stance it took. It is not enough for the taxpayer to simply win the case; they must demonstrate that the IRS’s argument was unreasonable from the outset. For instance, if the IRS pursued a case based on a legal interpretation that had been clearly rejected by prior court decisions, its position would likely be found to be not substantially justified.

Allowable Costs and Limitations

The types of expenses that can be recovered are categorized as either administrative costs or litigation costs. Administrative costs are those incurred during the IRS’s internal processes, such as an audit or an appeal. Litigation costs are those incurred after a lawsuit has been filed in a venue like the U.S. Tax Court or a federal district court. Recoverable expenses can include fees for attorneys, accountants, or other authorized tax practitioners, as well as costs for expert witnesses and necessary studies or reports used to prepare the case.

Federal law places a cap on the hourly rate that can be recovered for attorney fees. For fees incurred in 2025, this statutory rate is $250 per hour, and this rate is adjusted annually for inflation. The fees claimed must still be proven as reasonable and necessary for the case.

In certain situations, a court may approve an hourly rate higher than the statutory limit. This requires demonstrating the existence of a “special factor.” Such factors could include the limited availability of qualified tax attorneys in a specific geographic area or the unusual complexity of the issues involved. For example, a case involving a novel issue in international tax law might justify a higher rate if very few attorneys possess the required knowledge.

How to Request Reimbursement

To recover costs incurred during an administrative proceeding, a taxpayer must file a formal request directly with the IRS. This claim must be submitted within 90 days of the date the IRS mails its final decision on the tax matter, and it should be sent to the specific IRS office that handled the case. The submission package must contain:

• A written statement affirming that all conditions for an award have been met
• A detailed, itemized invoice from the attorney or practitioner
• An affidavit from the attorney attesting to the accuracy of the fees and costs claimed
• A statement of the taxpayer’s net worth and, for businesses, the number of employees

When seeking reimbursement for litigation costs, the process moves from the IRS to the court that heard the case. The taxpayer must file a motion for fees and costs with that court within 30 days of the final, non-appealable judgment. The motion should outline how the taxpayer meets all statutory requirements, with a particular focus on why the government’s position was not substantially justified. Similar to an administrative claim, the court motion must be supported by detailed documentation, including itemized billing statements and affidavits from legal counsel.