What Is Section 7433 and How Can It Help With Unauthorized Tax Collection?

The IRS has the authority to collect taxes, but sometimes it takes actions that go beyond what is legally allowed. When this happens, taxpayers may have legal options to seek compensation for damages caused by these unauthorized collection efforts.

One such option is Section 7433 of the Internal Revenue Code, which allows individuals to sue the government if they suffer financial harm due to improper tax collection practices. Understanding how this provision works and the steps involved in pursuing a claim can help affected taxpayers protect their rights.

Who Can Pursue Claims

Taxpayers who have suffered financial harm from improper IRS collection practices may be eligible to file a claim under Section 7433. This provision applies to individuals, businesses, estates, and trusts, provided they can show that the IRS engaged in unlawful collection activities that directly caused them monetary losses. However, it does not cover disputes over tax assessments or disagreements about the amount owed—only actions taken during the collection process.

To qualify, the taxpayer must prove that IRS employees knowingly or negligently disregarded tax collection laws. This goes beyond clerical errors or minor mistakes. For example, if the IRS wrongfully levied a bank account despite an active installment agreement or continued collection efforts after a bankruptcy filing in violation of the automatic stay under 11 U.S.C. 362, the taxpayer may have grounds for a claim.

Government employees acting within their official duties cannot file claims under this statute. Additionally, third parties, such as family members or business partners, are ineligible unless they were directly targeted by the improper collection action. The law is designed to compensate those who personally experienced financial harm, not those indirectly affected.

Types of Unauthorized Collection Actions

The IRS must follow strict legal guidelines when collecting unpaid taxes, but there are instances where it oversteps its authority. One example is issuing a levy without proper notice. Under 26 U.S.C. 6330, the IRS must send a Final Notice of Intent to Levy and give the taxpayer 30 days to request a Collection Due Process (CDP) hearing before seizing assets. If this step is skipped, the levy may be unlawful.

Another violation occurs when the IRS improperly files a Notice of Federal Tax Lien (NFTL). While federal tax liens arise automatically when a taxpayer has an outstanding balance, the IRS must notify the taxpayer before publicly recording the lien. If the agency files an NFTL without first sending a Notice of Intent to File a Lien, as required by 26 U.S.C. 6320, the taxpayer may have grounds to challenge the action.

The IRS is also prohibited from using coercive tactics to collect a debt. This includes repeated, harassing phone calls or threats of actions it has no legal authority to take, such as immediate arrest. While the Fair Debt Collection Practices Act (FDCPA) does not apply to the IRS, the agency must follow Internal Revenue Manual provisions that prohibit abusive collection practices.

In some cases, the IRS improperly seizes assets that are legally exempt from levy. Certain income sources, such as Social Security benefits, have protections under 26 U.S.C. 6334, meaning they cannot be taken beyond a specified limit. If the IRS disregards these protections and seizes more than allowed, it may constitute an unauthorized collection action.

Calculating Potential Damages

The amount a taxpayer can recover under Section 7433 depends on the financial harm caused by the IRS’s actions. The statute allows for actual, direct economic losses, including out-of-pocket expenses, lost income, and costs associated with resolving the issue. For example, if a wrongful levy caused a business to miss payroll, leading to penalties and employee departures, these financial consequences could be included in a claim.

Interest on damages may also be recoverable, particularly if the taxpayer had to take out loans or liquidate investments to cover expenses. If a person was forced to sell assets prematurely, the difference between the expected return and the actual proceeds could be considered an economic loss. While emotional distress and punitive damages are not covered under Section 7433, fees paid to accountants or attorneys to mitigate the harm may qualify as compensable expenses.

There is a statutory cap on damages: $100,000 for negligent violations and $1,000,000 for willful or reckless misconduct. To maximize recovery, taxpayers must provide clear documentation, such as financial statements, bank records, and correspondence with the IRS, demonstrating the direct link between the agency’s actions and their losses. Courts require substantial evidence, and speculative claims without verifiable financial impact are unlikely to succeed.

Filing a Complaint in Court

Before filing a lawsuit under Section 7433, taxpayers must first exhaust administrative remedies by submitting a written claim to the IRS. If the agency fails to respond within six months or denies the claim, the taxpayer may proceed with litigation. The suit must be filed in federal district court, not the U.S. Tax Court, since it involves a claim for damages rather than a dispute over tax liability.

Jurisdictional and procedural rules must be followed carefully to avoid dismissal. The complaint should outline the specific unauthorized collection actions, detail the financial harm suffered, and cite relevant legal provisions. Plaintiffs must also file within the two-year statute of limitations, which begins when the improper collection action occurs or when the taxpayer should have reasonably discovered the misconduct. Courts strictly enforce this deadline, making timely action essential.

The litigation process includes discovery, where both parties exchange evidence, and motion practice, where the government may seek dismissal based on procedural deficiencies or lack of merit. If the case proceeds to trial, the burden of proof rests on the taxpayer to demonstrate that the IRS’s actions violated collection laws and directly caused financial harm.

Administrative Resolution Options

While a lawsuit under Section 7433 is an option, taxpayers may find it more efficient to resolve disputes through administrative channels first. The IRS provides a structured process for handling complaints related to unauthorized collection actions, which can sometimes lead to a quicker resolution without court involvement.

Submitting an administrative claim requires a written request detailing the specific collection action, the financial harm suffered, and the amount of damages sought. This claim must be sent to the IRS Advisory Group for the taxpayer’s region. Supporting documentation, such as bank statements, correspondence with IRS agents, and proof of financial losses, should be included to strengthen the case. The IRS typically has six months to review and respond. If the agency denies the claim or fails to act within this timeframe, the taxpayer may then proceed with a lawsuit.

Taxpayers facing significant financial hardship due to collection actions may also seek assistance from the Taxpayer Advocate Service (TAS), an independent office within the IRS. The TAS can intervene to halt improper enforcement measures and facilitate a resolution. While this route does not provide monetary compensation, it can prevent further financial damage and expedite corrective action by the IRS.