Tax Law

Suing IRS Tax Collectors Can Make Your Tax Debt Situation Worse

Sue the IRS. What could possibly go wrong?

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Needless to say, it’s no fun when you owe back taxes and have to deal with the Internal Revenue Service’s collections department. If there is a lot of money involved, it can be a contentious process especially when the collections department issues tax liens, demands an unworkable payment plan, or worse, issues bank levies or wage garnishments.

Occasionally, a frustrated taxpayer wants to sue the IRS to stop the collection process and collect damages.

While their anger is understandable, it is generally not a good idea to sue the IRS for two reasons. First, most lawsuits that try to stop collection action will be dismissed under the Tax Anti-Injunction Act.

Second, if the IRS were to be sued, they can file a counterclaim to get a judgment on the taxes owed. This is not good. Normally, the IRS has 10 years to collect the tax starting from the day the tax was assessed. For most people, the collection period starts on the day the tax return is filed. But if the IRS can obtain a civil judgment, they can obtain a judgment lien which allows them to collect for 20 years which can be renewed for another 20 years.

This is what happened in the case of United States v. Sharpe where the district court denied a taxpayer’s motion to dismiss a lawsuit filed against her by the federal government.

In 2017, a few years before the underlying lawsuit was filed, the IRS filed a notice of federal tax lien against Lorie B. Sharpe for unpaid taxes. In response, Sharpe filed a lawsuit in the Court of Common Pleas of Philadelphia County requesting that the lien be marked satisfied and released. In response, the IRS removed the case to federal district court and filed a counterclaim for the amount owed on the tax lien.

The district court dismissed the lawsuit due to lack of jurisdiction. The IRS filed a motion to reconsider which was also denied. This was because Sharpe — filing the lawsuit herself — erroneously listed the IRS as the plaintiff and herself as the defendant.

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Then the government filed a lawsuit against Sharpe to recover erroneous refunds (totaling $452,803.89) as well as civil penalties for filing frivolous tax returns. The government also claims that Sharpe owes $2,392,971.88 in back taxes plus penalties and interest.

Sharpe then filed a motion to dismiss with the court. Her argument was that since a federal judge in the earlier case dismissed the lawsuit, the case should be dismissed on the grounds of issue and claim preclusion. In addition, there was improper service of process.

The judge ruled that both claim preclusion and issue preclusion did not apply to this lawsuit. The previous case was dismissed due to lack of jurisdiction. Because of this, the court found that there was no adjudication on the merits which is required to claim both issue and claim preclusion.

Secondly, the judge ruled that Sharpe did not raise this issue when she filed an answer to the complaint. While the court was willing to cut her some slack due to her pro se status, she was still required to follow the court’s procedural rules. Regardless, the court found that under the circumstances, the service of process was proper.

While this lawsuit and its disposition was fairly straightforward, it is not common. On one hand, this may look like a spiteful act of retaliation by the IRS for the original lawsuit in state court. But on the other, the amount of the taxes Sharpe owed and the fact that she received over $450,000 in a potentially erroneous refund payment could have left the IRS with no other choice but to file a civil lawsuit. The Internal Revenue Manual gives guidelines on when the IRS can file a civil lawsuit to collect taxes although the specifics are not disclosed to the public. But looking at the tax amounts owed and the refunds given to Sharpe, the facts of this case provides a glimpse at the criteria used by the IRS for filing a lawsuit.

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The safest way to sue the IRS is to file a refund suit. This means that while you disagree with the taxes owed, you pay it in full, and then try to resolve the matter with the IRS administratively. If that fails, then file a lawsuit to contest the tax and get a refund. In some cases, this can be advantageous but since it requires full payment, only the wealthy have this option which can raise equal access to justice issues.

If you want to settle with the IRS’s collection department, it is best to cooperate, and talk to supervisors or the Taxpayer Advocate if you reach an impasse with a revenue officer. Or consult with a tax debt resolution professional. Because of Sharpe’s decision to sue the IRS to nullify the tax lien, she might have put herself in a worse situation than where she was before, and the IRS may be able to collect for at least 40 years. The lesson here is to understand the risk taken when suing the IRS. The most likely risk being that the IRS can countersue for the tax debt owed. This could result in a judgment that gives the IRS the power to collect on a debt for decades.

(Gavel bang: Procedurally Taxing)

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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