What Is the IRS 7430 Credit for Prevailing Taxpayers?

Disputes with the Internal Revenue Service (IRS) can be time-consuming and expensive. Internal Revenue Code (IRC) Section 7430 provides a way for taxpayers to recover some of these expenses by allowing for the award of reasonable administrative and litigation costs. To be eligible, a taxpayer must prevail against the government in a tax controversy. This provision is a potential reimbursement, not a tax credit, and is intended to discourage the IRS from pursuing cases where its position is not well-founded.

Eligibility Requirements for an Award

To receive an award for costs, a taxpayer must be recognized as the “prevailing party.” This requires demonstrating that you substantially prevailed regarding the amount in controversy or the most significant issue in the case. Simply winning is not enough; you must also establish that the IRS’s position during the proceeding was not “substantially justified.” A position is considered substantially justified if it has a reasonable basis in both law and fact.

For example, if the IRS bases a notice of deficiency on a legal interpretation that courts have consistently rejected, its position may not be substantially justified. The IRS’s official position is established at a specific point in the administrative process, such as the date a taxpayer receives a notice of decision from the IRS Independent Office of Appeals or the date a statutory notice of deficiency is issued.

Beyond the merits of the case, financial and procedural requirements must be met. For individuals, their net worth cannot exceed $2 million at the time the legal action begins. For businesses, estates, or organizations, the net worth limit is $7 million, and they cannot have more than 500 employees. These financial caps are designed to direct this relief toward taxpayers with more limited resources.

A final prerequisite for recovering litigation costs is the exhaustion of administrative remedies. This means the taxpayer must have used the internal review processes available within the IRS before taking the case to court. This involves participating in a conference with the IRS Appeals Office if the opportunity was provided. Failing to pursue an available appeal can disqualify a taxpayer from recovering costs.

Recoverable Administrative and Litigation Costs

When a taxpayer qualifies for an award, they can seek reimbursement for specific, reasonable costs. These expenses fall into two main categories: administrative and litigation costs. Administrative costs are those incurred on or after the date the IRS takes a formal position, such as issuing a notice of deficiency. Recoverable costs include fees for professionals like attorneys and accountants, charges for expert witnesses, and the costs of studies or reports used to prepare the case.

A limitation applies to the fees charged by attorneys or other authorized tax practitioners. The law establishes a statutory hourly rate for these fees, which is adjusted annually for inflation. For 2025, the statutory rate is $250 per hour. This cap means that even if a taxpayer’s attorney charges a higher rate, the recoverable amount is limited to this inflation-adjusted figure.

In limited situations, a court may approve a higher hourly rate. This can happen if a special factor, such as the limited availability of qualified attorneys for the proceeding, justifies a higher fee. However, meeting this standard is difficult, and the statutory rate is the most common measure for awards.

Required Information for Your Claim

Preparing a claim for costs under Section 7430 requires documentation to substantiate every aspect of the request. You must assemble a package of information that proves your eligibility and quantifies the expenses. Your claim should include the following:

• A statement explaining how you were the prevailing party and why the IRS’s position was not substantially justified.
• A detailed, itemized log of all fees and costs, including the date, a description of the service, time spent, and the professional’s hourly rate.
• A sworn affidavit or a declaration made under penalty of perjury confirming you meet the applicable net worth and employee limits.
• Evidence that you exhausted all available administrative remedies, such as correspondence showing participation in an IRS Appeals conference.

How to Submit Your Claim for Costs

The procedure and timing for submission differ depending on whether you are seeking administrative costs from the IRS or litigation costs from a court. These deadlines are strict, and failure to comply can result in the forfeiture of the award.

For administrative costs incurred during proceedings with the IRS, you must file a written claim directly with the agency. This claim must be submitted within 90 days of the date on which the IRS issues its final determination on the tax matter. The claim package should be mailed to the specific IRS office that handled the underlying case.

When seeking reimbursement for litigation costs from a court proceeding, you must file a formal motion with the court. This motion for costs must be filed within 30 days of the final judgment in the litigation. The motion is submitted directly to the court where you prevailed, such as the U.S. Tax Court or a federal district court.