IRC §7430 is a provision in the tax law meant to allow taxpayers to recover costs when the IRS acts unreasonably. However, not all unreasonable conduct by the IRS that results in costs to the taxpayer will find redress in the provisions of IRC §7430, as the taxpayer in the case of Milligan v. Commissioner, TC Memo 2014‑259 discovered.

Patricia’s problems began with her receipt of a CP2000 notice asking for payment of $16,384 in taxes, a penalty of $3,277 and interest of $2,146. Patricia paid the amounts requested and then filed a timely claim for refund.

Now the IRS begins acting in a less than helpful manner. The IRS service center responded to her request for a refund by issuing her a claim disallowance letter (Letter 105C), indicating that:

“Your claim is frivolous and has no legal basis. Federal courts consistently rule against these arguments.”

Patricia then requested a conference with the IRS Appeals Office. The service center conveniently filed away this request rather than sending it on to the Appeals Office.

Eventually, over a year after the disallowance letter, Patricia was able to get the Taxpayer Advocate’s office to intervene and the case was assigned to an Appeals Officer.

The Appeals Officer apparently did not see her claim as frivolous, deciding she was entitled to a refund of $14,644 of taxes and a full abatement of the penalties. Patricia, who by this point would seem to have a harmed party, filed a claim with the Appeals Office for a reimbursement of administrative costs.

Unfortunately, this provision only applies if the IRS took a position in an administrative proceeding that was not substantially justified. However, that position applies as of the earlier of:

· The date of receipt by the taxpayer of a notice of deficiency from the IRS or

· The date of receipt of a notice of decision of Internal Revenue Service Office of Appeals

Neither the CP2000 notice nor the later Letter 105C were notices of deficiency—none was ever actually issued by the IRS.

Therefore, there was no position of the IRS which could be deemed to be not substantially justified until Appeals gave its decision—which, in this case, was in favor of the taxpayer. So, as the Court noted “…although we recognize that some of respondent's administrative actions unjustifiably caused petitioner to incur some cost and stress, section 7430 does not permit her to recover any administrative costs.”