Civil Cause of Action for Certain Unauthorized Collection Actions

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[Reg-251502-96]

RIN 1545-AU68

Civil Cause of Action for Certain Unauthorized Collection Actions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to civil

causes of action for damages caused by unlawful collection actions of

officers and employees of the Internal Revenue Service (IRS). The

proposed regulations reflect amendments made by the Taxpayer Bill of

Rights 2. The proposed regulations affect all taxpayers who file civil

actions for damages caused by unlawful collection actions of officers

or employees of the IRS.

DATES: Written comments and requests for a public hearing must be

received by March 2, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (Reg-251502-96), Room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Reg-251502-96), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at http://www.irs.ustreas.gov/prod/tax____regs/

comments.html.

FOR FURTHER INFORMATION CONTACT: Kevin B. Connelly, (202) 622-3640 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Procedure and

Administration Regulations (26 CFR part 301) relating to civil actions

for damages caused by unlawful collection actions of officers or

employees of the IRS. The Taxpayer Bill of Rights 2 (TBOR2), Public Law

104-168, 110 Stat. 1465 (1996), amended section 7433 of the Internal

Revenue Code of 1986 (Code) by raising the cap on the amount a taxpayer

may be awarded for damages caused by unlawful collection actions from

$100,000 to $1,000,000. Under

[[Page 68243]]

prior law, a suit for damages could not be brought unless the taxpayer

first exhausted administrative remedies available within the IRS. TBOR2

eliminated this jurisdictional prerequisite but authorized federal

district courts to reduce damage awards if the taxpayer fails to

exhaust administrative remedies. The proposed regulations reflect these

changes.

Explanation of Provision

Section 801 of TBOR2 amended section 7433(a) of the Code by

increasing from $100,000 to $1,000,000 the cap on the amount of damages

that a taxpayer may recover in Federal district court from the United

States for damages caused by any unauthorized collection actions of an

officer or employee of the IRS occurring after July 30, 1996. Section

802 of TBOR2 amended section 7433(d)(1) of the Code by providing that a

taxpayer's failure to exhaust administrative remedies available within

the IRS shall only be a factor that the court may consider in

determining whether to reduce the amount of an award. In actions filed

prior to the enactment of TBOR2, the failure to exhaust administrative

remedies was a jurisdictional bar to an action. The proposed

regulations reflect the changes made by TBOR 2.

The regulations that are being amended by these proposed

regulations currently provide that administrative remedies shall be

considered exhausted on the earlier of: (1) the date the decision is

rendered by the IRS on an administrative claim for damages filed in

accordance with the manner and form set forth in the regulations; or

(2) the date six months after the date an administrative claim is filed

in accordance with the manner and form set forth in the regulations. 26

CFR Sec. 301.7433-1(d). An exception to this rule is provided with

respect to civil actions filed in federal district court prior to July

31, 1996. Under this exception, if an administrative claim is filed

during the last six months of the period of limitations for filing a

civil action for damages under section 7433 of the Code, administrative

remedies shall be considered exhausted on the date the administrative

claim is filed. The exception was included in the current regulations

because, prior to the enactment of TBOR2, the failure to exhaust

administrative remedies was a jurisdictional bar to an action. Without

the exception, if a taxpayer filed an administrative claim during the

last six months of the period of limitations and the IRS did not

consider the claim before the limitations period expired, the taxpayer

automatically would have been barred from filing suit. These provisions

still apply to actions that were filed on or before July 30, 1996, the

enactment date of TBOR2.

With respect to actions filed after July 30, 1996, the proposed

regulations do not contain the exception for administrative claims

filed during the last six months of the period of limitation because

the failure to exhaust administrative remedies is no longer a bar to an

action. Since the enactment of TBOR2, the failure to exhaust

administrative remedies is just one factor the court may consider in

determining whether to reduce an award of damages. Pursuant to the

notice of proposed rulemaking, if a taxpayer waits until the last six

months of the period of limitations to file an administrative claim,

the IRS does not reach a determination before the limitations period

expires, and the taxpayer files a timely action under section 7433, the

court may consider the facts and circumstances of the case and decide

what effect the late filing of the claim should have on the amount of

damages awarded.

The proposed manner and form for filing an administrative claim for

damages remain the same as those set forth in the current regulations

at 26 CFR 301.7433-1(e)(1) and (2). The claim must be sent in writing

to the district director (marked for the attention of the Chief,

Special Procedures Function) of the district in which the taxpayer

resides. The claim must include: (1) The name, current address, current

home and work telephone numbers and any convenient times to be

contacted, and taxpayer identification number of the taxpayer making

the claim; (2) the grounds, in reasonable detail, for the claim

(include copies of any available substantiating documentation or

correspondence with the Internal Revenue Service); (3) a description of

the injuries incurred by the taxpayer filing the claim (include copies

of any available substantiating documentation or evidence); (4) the

dollar amount of the claim, including any damages that have not yet

been incurred but which are reasonably foreseeable (include copies of

any available substantiating documentation or evidence); and (5) the

signature of the taxpayer or duly authorized representative.

The notice of proposed rulemaking does not have a new effective

date paragraph because amended paragraphs (a), (d), and (e) set forth

the effective dates of the new statutory provisions as well as the

statutory provisions they are replacing.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these regulations, and because the

regulation does not impose a collection of information on small

entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not

apply. Pursuant to section 7805(f) of the Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments that are submitted

timely (a signed original and eight (8) copies) to the IRS. All

comments will be available for public inspection and copying. A public

hearing may be scheduled if requested in writing by a person that

timely submits written comments. If a public hearing is scheduled,

notice of the date, time, and place for the hearing will be published

in the Federal Register.

Drafting Information

The principal author of these regulations is Kevin B. Connelly,

Office of Assistant Chief Counsel (General Litigation) CC:EL:GL, IRS.

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income

taxes, Penalties, Reporting and recordingkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In Sec. 301.7433-1, paragraphs (a), (d), (e), and (f)

are revised to read as follows:

[[Page 68244]]

Sec. 301.7433 Civil cause of action for certain unauthorized

collection actions.

(a) In general. If, in connection with the collection of a federal

tax with respect to a taxpayer, an officer or an employee of the

Internal Revenue Service recklessly or intentionally disregards any

provision of the Internal Revenue Code or any regulation promulgated

under the Internal Revenue Code, such taxpayer may bring a civil action

for damages against the United States in federal district court. The

taxpayer has a duty to mitigate damages. The total amount of damages

recoverable is the lesser of $1,000,000 ($100,000 if the act giving

rise to damages occurred before July 31, 1996) or the sum of--

(1) The actual, direct economic damages sustained as a proximate

result of the reckless or intentional actions of the officer or

employee; and

(2) Costs of the action.

* * * * *

(d) Exhaustion of administrative remedies in suits brought prior to

July 31, 1996--(1) General. With respect to civil actions filed in

federal district court prior to July 31, 1996, no action may be

maintained before the exhaustion of administrative remedies.

Administrative remedies are exhausted on the earlier of the following

dates--

(i) The date the decision is rendered on an administrative claim

filed in accordance with paragraph (f) of this section; or

(ii) The date six months after the date an administrative claim is

filed in accordance with paragraph (f) of this section.

(2) Exception. If an administrative claim is filed in accordance

with paragraph (f) of this section during the last six months of the

period of limitations described in paragraph (g) of this section, the

taxpayer may file an action in federal district court any time after

the administrative claim is filed and before the expiration of the

period of limitations.

(3) No action in federal district court for any sum in excess of

the dollar amount sought in the administrative claim. With respect to

civil actions filed in federal district court prior to July 31, 1996,

no action may be instituted for any sum in excess of the amount

(already incurred and estimated) of the administrative claim filed

under paragraph (f) of this section, except where the increased amount

is based upon newly discovered evidence not reasonably discoverable at

the time the administrative claim was filed, or upon allegation and

proof of intervening facts relating to the amount of the claim.

(e) Exhaustion of administrative remedies in suits brought after

July 30, 1996--(1) General. With respect to civil actions filed in

federal district court after July 30, 1996, the amount of damages

awarded under paragraph (a) of this section may be reduced if the court

determines that the taxpayer has not exhausted the administrative

remedies available within the Internal Revenue Service.

(2) Administrative remedies exhausted. Administrative remedies

shall be considered exhausted on the earlier of--

(i) The date the decision is rendered on a claim filed in

accordance with paragraph (f) of this section; or

(ii) The date six months after the date an administrative claim is

filed in accordance with paragraph (f) of this section.

(f) Procedures for an administrative claim--(1) Manner. An

administrative claim for damages shall be sent in writing to the

district director (marked for the attention of the Chief, Special

Procedures Function) of the district in which the taxpayer resides.

(2) Form. The administrative claim shall include--

(i) The name, current address, current home and work telephone

numbers and any convenient times to be contacted, and taxpayer

identification number of the taxpayer making the claim;

(ii) The grounds, in reasonable detail, for the claim (include

copies of any available substantiating documentation or correspondence

with the Internal Revenue Service);

(iii) A description of the injuries incurred by the taxpayer filing

the claim (include copies of any available substantiating documentation

or evidence);

(iv) The dollar amount of the claim, including any damages that

have not yet been incurred but which are reasonably foreseeable

(include copies of any available substantiating documentation or

evidence); and

(v) The signature of the taxpayer or the taxpayer's duly authorized

representative as defined in paragraph (f)(3) of this section.

(3) Duly authorized representative. For purposes of paragraph

(f)(2)(v) of this section, a duly authorized representative is any

attorney, certified public accountant, enrolled actuary, or any other

person permitted to represent the taxpayer before the Internal Revenue

Service who is not disbarred or suspended from practice before the

Internal Revenue Service and who has a written power of attorney

executed by the taxpayer.

* * * * *

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 97-33791 Filed 12-30-97; 8:45 am]

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