You may be able to recover economic damages if an IRS error ends up costing you money. However, the circumstances under which you can recover damages are quite limited.
These situations typically occur when an IRS mistake results in a bank charge. There are three ways this can happen:
- You have a direct debit installment agreement, and the IRS makes a mistake when processing your payment, such as withdrawing the incorrect amount or making a withdrawal on the wrong date.
- You send a check to the IRS and they lose or misplace it.
- The IRS wrongfully levies your bank account.
In these situations, you may seek reimbursement of the associated bank charges using Form 8546, Claim for Reimbursement of Bank Charges.
Recoverable Economic Damages
Claims for reimbursement of bank charges must be made within one year and are limited to $1,000. You can only recover damages for charges you actually paid—you can’t seek damages if your bank waived the charges.
A mistake processing your installment agreement would typically result in an overdraft charge if the withdrawal was too large or made on the wrong day.
An error with a bank levy may result in a levy processing charge or an overdraft fee.
If the IRS loses your check, you may have to pay a bank charge in order to stop payment on that check.
When you submit Form 8546, you can include supporting documentation showing the IRS error and the bank charges that resulted. The IRS must acknowledge that the error occurred and you cannot have contributed to the error, such as by failing to respond to inquiries from the IRS.
Handling Claim Denials
If your claim is denied, you have the option of suing the federal government. However, you may not want to deal with the legal process to seek a small financial recovery.
In cases where the IRS negligently or intentionally didn’t follow the law when collecting taxes or pursuing enforced collection actions, you may be able to file an administrative claim to seek damages. Consult with a tax attorney to discuss your case and determine what your potential economic damages are.
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