Note:

Bad faith includes vexatious, wanton, or oppressive behavior. The Act doesn’t:

Apply to United States Tax Court or State courts’ litigation.

Award for fees and costs a taxpayer incurs in IRS administrative proceedings.

The IRS is unable to prove that its position was "substantially justified."

IRC 7430 provides that a taxpayer who prevails may be awarded reasonable administrative and litigation costs, including attorney fees in these proceedings for civil tax litigation begun on the Federal courts, including the United States Tax Court, after February 28, 1983. Such an award is generally limited to matters where the position of the United States isn’t substantially justified.

Although effective tax administration sometimes results in judicial proceedings in which taxpayers prevail, strictly following existing IRM provisions should safeguard against a court's finding that the position of the United States was not substantially justified.

As long as our position is found to have a reasonable basis both in law and fact, no award is usually authorized under IRC 7430 even though we lost the case. Therefore, the law doesn’t limit our statutory duty to effectively enforce the Internal Revenue laws. See Rev. Proc. 64-22, 1964-1 C.B. 689 for the principles we must follow to carry out our duties.

The exception to the substantial justification defense is if the taxpayer submits a qualified offer under IRC 7430. A qualified offer is just a settlement offer that contains certain specified language. A qualified offer will be recognizable by either referring to qualified offers, IRC 7430(c)(4)(E) or IRC 7430(g). Taxpayers may submit qualified offers once they have received their first opportunity for review by Appeals. Taxpayers who receive a 30-day letter that gives them the option of continuing to work with Exam or seeking review in Appeals, may submit a qualified offer to Exam. For more information on qualified offers, see IRM 4.8.8.20.