[Federal Register Volume 67, Number 43 (Tuesday, March 5, 2002)]
[Proposed Rules]
[Pages 9929-9934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5113]


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DEPARTMENT OF THE TREASURY

26 CFR Part 301

[Reg-107366-00]
RIN 1545-AY08


Civil Cause of Action for Damages Caused by Unlawful Tax 
Collection Actions, Including Actions Taken in Violation of Section 362 
or Section 524 of the Bankruptcy Code

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 IRS and the awarding of costs and certain 
fees. The proposed regulations reflect amendments made by the Taxpayer 
Bill of Rights 2 and the Internal Revenue Service Restructuring and 
Reform Act of 1998. The proposed regulations affect all persons who 
suffer 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 June 3, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (Reg-107366-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered to: 
CC:ITA:RU (Reg-107366-00), room 5226, 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 www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Kevin B. 
Connelly, (202) 622-3630 (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), amended section 7433 of the Internal Revenue 
Code of 1986 (Code) by increasing the maximum amount of damages a 
taxpayer may be awarded for unlawful collection actions from $100,000 
to $1,000,000. TBOR2 also eliminated the jurisdictional requirement 
that administrative remedies be exhausted before a court may award 
damages; TBOR2 authorized the court, however, to reduce damages if it 
determined that the plaintiff did not exhaust administrative remedies. 
These TBOR2 provisions were effective for actions of IRS officers or 
employees after July 30, 1996. The Internal Revenue Service 
Restructuring and Reform Act of 1998 (RRA 1998), Public Law 105-206 
(112 Stat. 685), although retaining the pre-existing authorization for 
an award of damages in the case of reckless or intentional disregard of 
the Code or regulations, amended section 7433 by providing that 
taxpayers may file actions for damages caused by the negligent 
disregard of the Code or regulations. In addition, this amendment 
provided that an action for damages could be brought for the IRS's 
willful violation of section 362 (relating to the automatic stay) or 
section 524 (relating to the effect of discharge) of the Bankruptcy 
Code. The maximum amount of damages that may be awarded for negligent 
disregard is $100,000. The maximum amount of damages that may be 
awarded for reckless or intentional disregard or for willful violations 
of section 362 or 524 of the Bankruptcy Code is $1,000,000. RRA 1998 
also reinstated the requirement under section 7433 that the plaintiff 
must exhaust administrative remedies before a court may award damages. 
These RRA 1998 provisions are effective for actions of IRS officers or 
employees after July 22, 1998.
    RRA 1998 also added new subsection (h) to section 7426, which 
authorizes persons who bring wrongful levy actions under section 7426 
to sue for

[[Page 9930]]

damages caused by the reckless or intentional, or negligent, disregard 
of any provision of the Code, plus costs of the action. Consistent with 
section 7433, damages awarded under section 7426(h) are limited to 
$1,000,000 for reckless or intentional disregard and $100,000 for 
negligent disregard. In addition, a plaintiff must exhaust 
administrative remedies before a court may award damages under section 
7426(h). The provisions of section 7433 relating to mitigation and the 
period for bringing an action also apply to actions brought under 
section 7426(h).

Explanation of Provisions

Sec. 301.7426-2

    RRA 1998 added a new subsection (h) to section 7426. Subsection (h) 
authorizes persons to sue the United States in federal district court 
for damages due to a wrongful levy caused by the reckless or 
intentional, or negligent, disregard of a provision of the Code. 
Plaintiffs are entitled to recover the lesser of actual direct economic 
damages and costs of the action or $1,000,000 ($100,000 in the case of 
negligence). The amendment also provided that the rules of section 
7433(d) relating to exhaustion of administrative remedies, mitigation 
of damages and the period for bringing an action shall apply. The 
proposed regulations thus adopt rules like those promulgated under 
section 7433 that plaintiffs must mitigate damages and no damages may 
be awarded unless the court determines that the plaintiff has exhausted 
administrative remedies available within the IRS, e.g., by filing an 
administrative claim for damages. The proposed regulations also provide 
that any action for damages under this section must be brought within 2 
years after the date the action accrues. This two-year limitations 
period is independent of the nine-month period after the wrongful levy 
during which the IRS may return, or the third party may make a claim 
for, wrongfully levied property.

Sec. 301.7430-8

    Section 7430 provides that reasonable administrative costs may be 
awarded to the prevailing party in an administrative proceeding brought 
by or against the United States in connection with the determination, 
collection, or refund of any tax, interest, or penalty under Title 26. 
Because, prior to the amendments in RRA 1998, taxpayers generally were 
not entitled to recover costs for administrative proceedings in 
connection with collection matters, the current regulations exclude 
such collection matters, including proceedings under sections 7432 and 
7433, from the definition of administrative proceedings. To reflect the 
RRA 1998 amendments, the proposed regulations expand the definition of 
an administrative proceeding to include any administrative action for 
damages under section 7433(e) and any procedure or action brought 
before the IRS seeking relief with respect to a violation by the IRS of 
section 362 or 524 of the Bankruptcy Code.
    The proposed regulations provide that the prevailing party is a 
party who establishes that, in connection with the collection of his or 
her federal tax, the IRS has willfully violated a provision of section 
362 or 524 of the Bankruptcy Code. The only administrative costs that 
may be awarded are those incurred after the date of the bankruptcy 
petition that gave rise to the section 362 stay or section 524 
discharge injunction.
    A claim with the IRS for administrative costs must be filed within 
90 days after the date the IRS mails its decision on the taxpayer's 
administrative claim for damages under Sec. 301.7433-2(e) or claim for 
relief from a violation of section 362 or 524 of the Bankruptcy Code.

Sec. 301.7433-1

    Section 3102 of RRA 1998 amended section 7433(a) of the Code by 
providing that a taxpayer may sue the United States in a district court 
of the United States for damages caused by the negligent disregard of 
the Code or regulations in connection with the collection of the 
taxpayer's tax liability. Section 801 of TBOR2 amended section 7433(b) 
by increasing the maximum amount of damages that a taxpayer may recover 
for damages caused by the reckless or intentional disregard of the Code 
or regulations from $100,000 to $1,000,000. Section 3102 of RRA 1998 
caps the amount of damages that a taxpayer may recover for negligent 
disregard at $100,000. The proposed regulations under Sec. 301.7433-1 
reflect these changes.

Sec. 301.7433-2

    RRA 1998 also amended section 7433 by adding a new subsection (e). 
Subsection (e) gives taxpayers the right to petition the bankruptcy 
court to recover damages if, in connection with the collection of a 
federal tax, any officer or employee of the IRS willfully violates 
section 362 or 524 of the Bankruptcy Code or any regulation promulgated 
thereunder. Damages in connection with a claim under section 7433(e) 
are recoverable under section 7433(b) and are subject to the 
limitations imposed by section 7433(d).
    Section 362 relates to the automatic stay, which arises by 
operation of law when a debtor files a bankruptcy petition. The stay 
prohibits certain collection actions against the debtor, the debtor's 
property, and the property of the bankruptcy estate. Prior to enactment 
of section 7433(e), individuals injured by the IRS's willful violation 
of the automatic stay could only sue to recover actual damages, 
including costs and attorneys' fees, under Bankruptcy Code section 
362(h). Section 7433(e) provides an alternative cause of action to 
recover damages, but still permits an individual to recover damages 
under section 362(h) of the Bankruptcy Code, in lieu of an action under 
section 7433(e). However, section 7433(e) explicitly provides that 
administrative and litigation costs incurred in pressing a claim under 
section 362(h) of the Bankruptcy Code may only be paid pursuant to, and 
subject to the conditions described in, section 7430 of the Code. 
Section 7430 authorizes the payment of administrative and litigation 
costs only if a taxpayer exhausts administrative remedies. The proposed 
regulations provide that in order to qualify for an award of 
administrative and litigation costs in an action under section 362(h) 
of the Bankruptcy Code, a taxpayer must (as in the case of damages 
actions under section 7433(e)) file an administrative claim with the 
IRS relating to the violation of the automatic stay.
    Section 524 sets forth the effect of a discharge under the 
Bankruptcy Code. A discharge operates as an injunction against the 
commencement or continuation of any action to collect a discharged debt 
as a personal liability of the debtor. Prior to enactment of section 
7433(e), a debtor who believed the IRS had willfully violated the 
discharge injunction could request the Bankruptcy Court under 
Bankruptcy Code section 105 to hold the IRS in contempt and seek to 
recover damages under that Bankruptcy Code provision. Section 7433(e) 
now provides the exclusive remedy for the IRS's willful violation of 
the discharge injunction.
    The proposed regulations set forth procedures relating to these 
claim and damage allowance provisions. Damages recoverable under 
section 7433(e) for a violation of the automatic stay or the discharge 
injunction are limited to (1) the actual, direct economic damages 
sustained by the taxpayer (and the taxpayer has a duty to mitigate 
those damages), plus (2) costs of the action. The maximum damage award 
is $1,000,000. No petition for damages

[[Page 9931]]

under section 7433(e) may be filed in a bankruptcy court unless the 
taxpayer first exhausts administrative remedies within the IRS.
    Similar to rules previously adopted with respect to other wrongful 
collection actions, the proposed regulations define direct, economic 
damages as actual, pecuniary damages sustained by the taxpayer as a 
result of the willful violation of section 362 or 524 of the Bankruptcy 
Code. Injuries such as inconvenience, loss of reputation, and emotional 
distress, are not compensable except to the extent they result in 
actual pecuniary loss.
    The proposed regulations define costs of the action that are 
recoverable as damages under section 7433(e) as: (1) Fees of the clerk 
and marshal; (2) fees of the court reporter for all or any part of the 
stenographic transcript necessarily obtained for use in the case; (3) 
fees and disbursements for printing and witnesses; (4) fees for 
exemplification and copies of paper necessarily obtained for use in the 
case; (5) docket fees; and (6) compensation of court appointed experts 
and interpreters. Costs of the action do not include any costs other 
than those enumerated in this paragraph.
    Reasonable administrative and litigation costs, including attorneys 
fees, are not recoverable as direct economic damages. These costs are 
recoverable, if at all, under section 7430. The taxpayer generally will 
be entitled to reasonable litigation costs under section 7430 if the 
taxpayer (1) files an administrative claim with the IRS, (2) 
establishes that the IRS willfully violated either the automatic stay 
under Bankruptcy Code Section 362 or the discharge injunction under 
section 524, (3) substantially prevails with respect to the amount of 
damages in controversy, and (4) meets the requirements of sections 
7430(c)(4)(A)(ii) regarding net worth.
    A petition for damages under section 7433 may not be filed in a 
bankruptcy court unless the taxpayer first files an administrative 
claim for damages with the IRS. The claim must be made in writing to 
the Chief, Local Insolvency Unit for the judicial district in which the 
bankruptcy was filed. The claim must include: (1) The claimant 
taxpayer's name, taxpayer identification number, current address, 
current home and work telephone numbers and any convenient times to be 
contacted; (2) the court and case number of the bankruptcy case in 
which the violation occurred; (3) a description, in reasonable detail, 
of the violation (with copies of any available substantiating 
documentation or correspondence with the IRS); (4) a description of the 
injuries incurred by the taxpayer filing the claim (with copies of any 
available substantiating documentation or evidence); (5) the dollar 
amount of the claim, including any damages that have not yet been 
incurred but which are reasonably foreseeable (along with any available 
substantiating documentation or evidence); and (6) the signature of the 
taxpayer or any duly authorized representative.
    The proposed regulations provide that, after an administrative 
claim for damages has been filed, a petition for damages under section 
7433 may not be filed in a bankruptcy court until the earlier of (1) 
the time a decision is rendered on the claim or (2) six months from the 
date the administrative claim is filed. Because a taxpayer must 
petition the bankruptcy court for damages within two years after the 
cause of action accrues, the proposed regulations contain an exception 
for claims filed in the last six months before the two-year limitation 
period expires. In those circumstances, taxpayers may file petitions 
for damages at any time after they file their administrative claims and 
before the period of limitations expires. A cause of action accrues 
under this section when the taxpayer has had a reasonable opportunity 
to discover all essential elements of a possible cause of action.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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 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 (preferably a signed original and eight (8) copies) to the IRS. 
Alternatively, taxpayers may submit comments electronically to the IRS 
Internet at www.irs.gov/regs. All comments will be available for public 
inspection and copying. The IRS and Treasury request comments on the 
clarity of the proposed rules and how they may be made easier to 
understand or to implement. 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 Associate Chief Counsel (Procedure and Administration), 
Collection, Bankruptcy & Summons Division, CC:PA:CBS, IRS. However, 
other personnel from the IRS and the 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 recordkeeping 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. Section 301.7426-2 is added to read as follows:


Sec. 301.7426-2  Recovery of damages in certain cases.

    (a) In general. In addition to remedies related to wrongful levy 
set forth in Sec. 301.7426-1(b), if a district court of the United 
States finds in any action brought under section 7426 that any officer 
or employee of the Internal Revenue Service recklessly or 
intentionally, or by reason of negligence, disregarded any provision of 
this title, the United States shall be liable to the plaintiff for 
damages. The plaintiff has a duty to mitigate damages. The total amount 
of damages recoverable under this section is the lesser of $1,000,000 
($100,000 in the case of negligence), or the sum of--
    (1) Actual, direct economic damages as defined in Sec. 301.7433-
1(b) sustained as a proximate result of the reckless, intentional, or 
negligent actions of the officer or employee, reduced by the amount of 
any damages awarded under Sec. 301.7426-1(b); and

[[Page 9932]]

    (2) Costs of the action as defined in Sec. 301.7433-1(c).
    (b) Administrative remedies must be exhausted. The court may not 
award a judgment for damages under paragraph (a) of this section unless 
the court determines that the plaintiff has filed an administrative 
claim pursuant to paragraph (d) of this section, and has satisfied the 
requirements of paragraph (c) of this section.
    (c) No request for damages in a district court of the United States 
prior to filing an administrative claim. (1) Except as provided in 
paragraph (c)(2) of this section, no request for damages under 
paragraph (a) of this section shall be maintained in any district court 
of the United States before the earlier of the following dates--
    (i) The date the decision is rendered on a claim filed in 
accordance with paragraph (d) of this section; or
    (ii) The date that is six months after the date an administrative 
claim is filed in accordance with paragraph (d) of this section.
    (2) If an administrative claim is filed in accordance with 
paragraph (d) of this section during the last six months of the period 
of limitations described in paragraph (f) of this section, the claimant 
may file an action in a district court of the United States any time 
after the administrative claim is filed and before the expiration of 
the period of limitations.
    (d) Procedures for an administrative claim--(1) Manner. An 
administrative claim for the lesser of $1,000,000 ($100,000 in the case 
of negligence) or actual, direct economic damages as defined in 
Sec. 301.7433-1(b) shall be sent in writing to the Chief, Local 
Insolvency Unit for the area in which the levy was made.
    (2) Form. The administrative claim shall include--
    (i) The name, taxpayer identification number, current address and 
current home and work telephone numbers (indicating any convenient 
times to be contacted) of the person 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 damages incurred by the claimant 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 claimant or duly authorized 
representative.
    (3) Duly authorized representative. For purposes of this paragraph 
(d), a duly authorized representative is any attorney, certified public 
accountant, enrolled actuary, or any other person permitted to 
represent the claimant 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 to the 
claimant.
    (e) No liability for damages for any sum in excess of the dollar 
amount sought in the administrative claim. See Sec. 301.7433-1(f).
    (f) Period of limitations--(1) Time for filing. A civil action 
under paragraph (a) of this section must be brought in a district court 
of the United States within 2 years after the date the cause of action 
accrues.
    (2) Right of action accrues. A cause of action under paragraph (a) 
of this section accrues when the plaintiff has had a reasonable 
opportunity to discover all essential elements of a possible cause of 
action.
    (g) Recovery of costs under section 7430. See Sec. 301.7433-1(h).
    (h) Effective date. This section is applicable on the date final 
regulations are published in the Federal Register.
    Par. 3. Section 301.7430-1 is amended by redesignating paragraphs 
(e), (f) and (g) as paragraphs (f), (g) and (h), respectively, and 
adding a new paragraph (e) to read as follows:


Sec. 301.7430-1  Exhaustion of administrative remedies.

* * * * *
    (e) Actions involving willful violations of the automatic stay 
under section 362 of the Bankruptcy Code--(1) Section 7433 claims. A 
party has not exhausted administrative remedies within the Internal 
Revenue Service with respect to asserted violations of the automatic 
stay under section 362 of the Bankruptcy Code or the discharge 
provisions under section 524 of the Bankruptcy Code unless it files an 
administrative claim for damages or for relief from a violation of 
section 362 or 524 of the Bankruptcy Code with the Chief, Local 
Insolvency Unit, for the area in which the bankruptcy petition that is 
the basis for the asserted automatic stay was filed pursuant to 
Sec. 301.7433-2(e) and satisfies the other conditions set forth in 
Sec. 301.7433-2(d) prior to filing a petition under section 7433.
    (2) Section 362(h) claims. A party has not exhausted administrative 
remedies within the Internal Revenue Service with respect to asserted 
violations of the automatic stay under section 362 of the Bankruptcy 
Code unless it files an administrative claim for relief from a 
violation of section 362 of the Bankruptcy Code with the Chief, Local 
Insolvency Unit, for the area in which the bankruptcy petition that is 
the basis for the asserted automatic stay was filed pursuant to 
Sec. 301.7433-2(e) and satisfies the other conditions set forth in 
Sec. 301.7433-2(d) prior to filing a petition under section 362(h) of 
the Bankruptcy Code.
* * * * *


Sec. 301.7430-2  [Amended]

    Par. 4. In Sec. 301.7430-2, paragraph (c)(2) is amended by:
    1. Adding the language ``except that requests with respect to 
administrative proceedings defined by Sec. 301.7430-8(c) should be made 
to the Chief, Local Insolvency Unit'' at the end of the first sentence.
    2. Removing the language ``District Director for the district'' and 
adding ``Internal Revenue Service office'' in its place in the second 
sentence.
    Par. 5. Section 301.7430-3 is amended by:
    1. Revising paragraph (a)(4),
    2. Paragraph (b) is amended by adding the language ``except those 
collection actions described by section 7433(e)'' at the end of the 
last sentence.
    The revision reads as follows:


Sec. 301.7430-3  Administrative proceeding and administrative 
proceeding date.

    (a) * * *
    (4) Proceedings in connection with collection actions (as defined 
in paragraph (b) of this section), including proceedings under section 
7432 or 7433, except proceedings brought under section 7433(e) and 
Sec. 301.7433-2 or proceedings otherwise described in Sec. 301.7430-
8(c). See Sec. 301.7430-8.
* * * * *
    Par. 6. Section 301.7430-6 is amended by adding a sentence at the 
end of the section to read as follows: Sec. 301.7430-6 Effective dates.
    * * * Sections 301.7430-2(c)(2), 7430-3(a)(4) and (b) are 
applicable with respect to actions taken by the Internal Revenue 
Service after July 22, 1998.
    Par. 7. Section 301.7430-8 is added to read as follows: 
Sec. 301.7430-8 Administrative costs incurred in damage actions for 
violations of section 362 and 524 of the Bankruptcy Code.
    (a) In general. The Internal Revenue Service may grant a taxpayer's 
request for recovery of reasonable administrative costs incurred in 
connection with the administrative proceeding before the Internal 
Revenue

[[Page 9933]]

Service relating to the willful violation of section 362 or 524 of the 
Bankruptcy Code only if the taxpayer is a prevailing party.
    (b) Prevailing party. A taxpayer is a prevailing party for purposes 
of this section only if--
    (1) The taxpayer satisfies the net worth and size limitations in 
paragraph (f) of Sec. 301.7430-5;
    (2) The taxpayer establishes that in connection with the collection 
of his or her federal tax an officer or employee of the Internal 
Revenue Service has willfully violated a provision of section 362 or 
524 of the Bankruptcy Code; and
    (3) The position of the Internal Revenue Service in the proceeding 
was not substantially justified.
    (c) Administrative proceeding. For purposes of this section, an 
administrative proceeding is a proceeding related to an administrative 
claim presented to the Internal Revenue Service seeking relief from a 
violation of section 362 or 524 of the Bankruptcy Code by the Internal 
Revenue Service or recovery of damages from the Internal Revenue 
Service under Sec. 301.7433-2(e).
    (d) Costs incurred after filing of bankruptcy petition. 
Administrative costs may be recovered only if incurred on or after the 
date of filing of the bankruptcy petition that formed the basis for the 
stay on collection under Bankruptcy Code section 362 or the discharge 
injunction under Bankruptcy Code section 524, as the case might be.
    (e) Time for filing claim for administrative costs. (1) For 
purposes of this section, the taxpayer must file a claim for 
administrative costs before the Internal Revenue Service not later than 
90 days after the date the Internal Revenue Service mails to the 
taxpayer, or otherwise notifies the taxpayer of, the decision regarding 
the claim for relief from or damages relating to a violation of the 
collection stay or the discharge injunction to the taxpayer.
    (2) If the Internal Revenue Service denies the claim for 
administrative costs in whole or in part, the taxpayer must file a 
petition with the Bankruptcy Court for administrative costs no later 
than 90 days after the date on which the denial of the claim for 
administrative costs is mailed, or otherwise furnished, to the 
taxpayer. If the Internal Revenue Service does not respond on the 
merits to a request by the taxpayer for an award of reasonable 
administrative costs within 6 months after such request is filed, the 
Internal Revenue Service's failure to respond may be considered by the 
taxpayer as a denial of an award of reasonable administrative costs.
    (3) For purposes of paragraphs (e)(1) and (2) of this section, if 
the 90th day falls on a Saturday, Sunday, or a legal holiday, the 90-
day period shall end on the next succeeding day which is not a 
Saturday, Sunday, or a legal holiday. The term legal holiday means a 
legal holiday in the District of Columbia. If the request for costs is 
to be filed with the Internal Revenue Service at an office of the 
Internal Revenue Service located outside the District of Columbia but 
within an internal revenue district, the term legal holiday also means 
a statewide legal holiday in the state where such office is located.
    (f) Effective date. This section is applicable with respect to 
actions taken by the Internal Revenue Service after July 22, 1998.
    Par. 8. Section 301.7433-1 is amended as follows:
    1. In paragraph (a) introductory text, in the first sentence, the 
language ``, or by reason of negligence,'' is added after the language 
``recklessly or intentionally''. In addition, the language ``$100,000'' 
in the third sentence is removed and ``$1,000,000 ($100,000 in the case 
of negligence)'' is added in its place.
    2. In paragraph (b)(1) the language ``, or negligent,'' is added 
after the language ``reckless or intentional''.
    3. In paragraph (e)(1), in the first sentence, the language 
``$100,000'' is removed and ``$1,000,000 ($100,000 in the case of 
negligence)'' is added in its place. In addition, the language 
``district director (marked for the attention of the Chief, Special 
Procedures Function) of the district'' is removed and ``Chief, Local 
Insolvency Unit in the area'' is added in its place.
    4. In paragraph (h), in the penultimate sentence, the language 
``7432(a)'' is removed and ``7433(a)'' is added in its place.
    5. Revising paragraph (i).
    The revision reads as follows:


Sec. 301.7433-1  Civil cause of action for certain unauthorized 
collection actions.

* * * * *
    (i) Effective dates. The portions of this section relating to 
reckless or intentional acts are applicable to actions taken by 
Internal Revenue Service officials after July 30, 1996. The portions of 
this section relating to negligent acts are applicable to actions taken 
by the Internal Revenue Service officials after July 22, 1998.
    Par. 9. Section 301.7433-2 is added to read as follows:


Sec. 301.7433-2  Civil cause of action for violation of section 362 or 
524 of the Bankruptcy Code.

    (a) In general. (1) If, in connection with the collection of a 
federal tax with respect to a taxpayer, an officer or employee of the 
Internal Revenue Service willfully violates any provision of section 
362 (relating to the automatic stay) or section 524 (relating to 
discharge) of title 11, United States Code, or any regulation 
promulgated under the provisions of title 11, United States Code, the 
taxpayer may file a petition for damages against the United States in 
federal bankruptcy court. The taxpayer has a duty to mitigate damages. 
The total amount of damages recoverable under this section is the 
lesser of $1,000,000, or the sum of--
    (i) Actual, direct economic damages sustained as a proximate result 
of the willful actions of the officer or employee; and
    (ii) Costs of the action.
    (2) An action under this section constitutes the exclusive remedy 
under the Internal Revenue Code for violations of sections 362 and 524 
of the Bankruptcy Code. In addition, taxpayers injured by violations of 
section 362 of the Bankruptcy Code may maintain actions under section 
362(h) of the Bankruptcy Code (relating to an individual injured by a 
willful violation of the stay).
    (b) Actual, direct economic damages--(1) Definition. See 
Sec. 301.7433-1(b)(1).
    (2) Litigation costs and administrative costs not recoverable as 
actual, direct economic damages. Litigation costs and administrative 
costs are not recoverable as actual, direct economic damages. These 
costs may be recoverable under section 7430 (see paragraph (h) of this 
section), or, solely to the extent described in paragraph (c) of this 
section, as costs of the action.
    (c) Costs of the action. Costs of the action recoverable as damages 
under this section are limited to the costs set forth in Sec. 301.7433-
1(c).
    (d) No civil action in federal bankruptcy court prior to filing an 
administrative claim--
    (1) In general. Except as provided in paragraph (d)(2) of this 
section, no action under paragraph (a)(1) of this section shall be 
maintained in any bankruptcy court before the earlier of the following 
dates--
    (i) The date the decision is rendered on a claim filed in 
accordance with paragraph (e) of this section; or
    (ii) The date that is six months after the date an administrative 
claim is filed in accordance with paragraph (e) of this section.
    (2) When administrative claim filed in last six months of period of 
limitations. If an administrative claim is filed in accordance with 
paragraph (e) of this section during the last six months of the

[[Page 9934]]

period of limitations described in paragraph (g) of this section, the 
taxpayer may petition the bankruptcy court any time after the 
administrative claim is filed and before the expiration of the period 
of limitations.
    (e) Procedures for an administrative claim--(1) Manner. An 
administrative claim for the lesser of $1,000,000 or actual, direct 
economic damages as defined in paragraph (b) of this section shall be 
sent in writing to the Chief, Local Insolvency Unit, for the judicial 
district in which the taxpayer filed the underlying bankruptcy case 
giving rise to the alleged violation.
    (2) Form. The administrative claim shall include--
    (i) The name, taxpayer identification number, current address, and 
current home and work telephone numbers (with an identification of any 
convenient times to be contacted) of the taxpayer making the claim;
    (ii) The location of the bankruptcy court in which the underlying 
bankruptcy case was filed and the case number of the case in which the 
violation occurred;
    (iii) A description, in reasonable detail, of the violation 
(include copies of any available substantiating documentation or 
correspondence with the Internal Revenue Service);
    (iv) A description of the injuries incurred by the taxpayer filing 
the claim (include copies of any available substantiating documentation 
or evidence);
    (v) 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 documentation or evidence); and
    (vi) The signature of the taxpayer or duly authorized 
representative.
    (3) Duly authorized representative defined. For purposes of this 
paragraph (e), 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.
    (f) No action in bankruptcy court for any sum in excess of the 
dollar amount sought in the administrative claim. No action for actual, 
direct economic damages under paragraph (a) of this section may be 
instituted in federal bankruptcy court for any sum in excess of the 
amount (already incurred and estimated) of the administrative claim 
filed under paragraph (e) 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.
    (g) Period of limitations--(1) Time for filing. A petition for 
damages under paragraph (a) of this section must be filed in bankruptcy 
court within two years after the date the cause of action accrues.
    (2) Right of action accrues. A cause of action under paragraph (a) 
of this section accrues when the taxpayer has had a reasonable 
opportunity to discover all essential elements of a possible cause of 
action.
    (h) Recovery of litigation costs and administrative costs under 
section 7430--(1) In general. Litigation costs, as defined in 
Sec. 301.7433-1(b)(2)(i), including attorneys fees, not recoverable 
under this section may be recoverable under section 7430 if a taxpayer 
challenges in whole or in part an Internal Revenue Service denial of an 
administrative claim for damages by filing a petition in the bankruptcy 
court. If, following the Internal Revenue Service's denial of an 
administrative claim for damages, a taxpayer files a petition in the 
bankruptcy court challenging that denial in whole or in part, 
substantially prevails with respect to the amount of damages in 
controversy, and meets the requirements of section 7430(c)(4)(A)(ii) 
(relating to net worth and size requirements), the taxpayer will be 
considered a prevailing party for purposes of section 7430, unless the 
Internal Revenue Service establishes that the position of the Internal 
Revenue Service in the proceeding was substantially justified. Such 
taxpayer will generally be entitled to attorneys' fees and other 
reasonable litigation costs not recoverable under this section. For 
purposes of this paragraph (h), if the Internal Revenue Service does 
not respond on the merits to an administrative claim for damages within 
six months after the claim is filed, the Internal Revenue Service's 
failure to respond will be considered a denial of the claim on the 
grounds that the Internal Revenue Service did not willfully violate 
Bankruptcy Code section 362 or 524.
    (2) Administrative costs--(i) In general. Administrative costs, as 
defined in Sec. 301.7433-1(b)(2)(ii), including attorneys' fees, not 
recoverable under this section may be recoverable under section 7430. 
See Sec. 301.7430-8.
    (ii) Limitation regarding recoverable administrative costs. 
Administrative costs may be awarded only if incurred on or after the 
date of filing of the bankruptcy petition that formed the basis for the 
stay on collection under Bankruptcy Code section 362 or the discharge 
injunction under Bankruptcy Code section 524, as the case might be.
    (i) Effective date. This section is applicable to actions taken by 
the Internal Revenue Service officials after July 22, 1998.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-5113 Filed 3-4-02; 8:45 am]
BILLING CODE 4830-01-P