The Internal Revenue Service has issued guidance on the tax treatment of litigation costs and attorney fees, particularly when there is pro bono representation.
Revenue Procedure 2016-17 provides guidance regarding the recovery of administrative and litigation costs by individuals and organizations that provide pro bono representation to taxpayers.
Section 7430 of the Tax Code provides for awards of reasonable administrative and litigation costs incurred by taxpayers who substantially prevail in administrative or court proceedings brought by or against the United States in connection with the determination, collection, or refund of any tax, interest, or penalty. Under a 1998 law, the IRS Restructuring and Reform Act, a court may award reasonable attorneys’ fees above the fees paid or incurred if the fees are less than reasonable attorneys’ fees because they are representing the prevailing party on a pro bono basis. The fees for the services of an individual (whether or not an attorney) who is authorized to practice before the U.S. Tax Court or before the IRS are treated as fees for the services of an attorney.
In 2009, the Treasury Department and the IRS published proposed amendments to the Treasury regulations relating to awards of administrative costs and attorneys’ fees to conform the regulations to the amendments that were made under the 1998 law, including the amendment allowing for an award of reasonable attorneys’ fees when a taxpayer is represented on a pro bono basis.
The IRS and the Treasury also issued final regulations in Treasury Decision 9756 last week in conjunction with the revenue procedure. TD9756 contains final regulations relating to awards of administrative costs and attorneys’ fees. The final regulations conform the regulations to the amendments made in the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998. The regulations affect taxpayers seeking attorneys’ fees and costs.