Why You Need to Exhaust Administrative Claims in IRS Cases

When it feels like the IRS isn’t treating you fairly, it can be tempting to immediately turn to the courts for help. However, by law, you need to exhaust administrative claims in IRS cases before you can file a complaint in federal court. The recent decision, Taylor v USA, explains why.

Taxpayers Say IRS Won’t Take Their Money

In the unusual case of Taylor v USA, Marvin and Laura Taylor filed a complaint in the United States District Court for the Eastern District of Michigan saying that the IRS had “wrongfully obstructed their efforts to pay back taxes that they admittedly owe.” The Taylors acknowledged that they owed approximately $1,000,000 in unpaid tax liabilities from 2009 through 2017, but said their efforts to negotiate an installment agreement and make substantial payments toward their tax debt had been refused.

The Taylors said they had hired a tax attorney in July 2021 to submit a proposed installment agreement to the IRS, but the government hadn’t even considered their proposal.

In June 2022, the Taylors mortgaged their home. They tried to send the IRS $575,000 to pay down their past-due tax liabilities, but the IRS applied the payment to 2009, a tax year for which the liability had already been fully paid, resulting in an overpayment.

At the same time, the Taylors said the Government was actively pursuing collections efforts, including levies on their bank accounts, threats of criminal prosecution, and “at least 17” administrative summons to third parties, which the Taylors said hurt their dental practice. The Taylors blamed the IRS’s bad behavior on a belief that the investigator they spoke with felt the Taylors held “illegitimate religious beliefs.”

All this happened while Mrs. Taylor was enduring brain cancer. According to the parties’ Administrative Claim, filed January 17, 2023,

• This persecution exacerbated Laura Taylor’s battle with a brain tumor, and the financial chaos that ensued hindered their ability to make the best medical decisions possible for Laura Taylor.

They said she suffered emotional and mental distress as a result, and “irreparable harm to Mrs. Taylor’s physical and mental health as well as the Taylors’ dental practice.” After listing a variety of claims (described below), the Taylors requested $1,000,000 in damages based on the Government’s misconduct.

Taxpayers Try to Sue the Government for Unpaid Taxes

Once the IRS denied the Taylors’ Administrative Claim, the Taylors filed a complaint against the USA in federal court, repeating their request for $1,000,000 in monetary damages “under [26 U.S.C. § 7433] for damages resulting from the reckless, intentional and/or negligent disregard of the Internal Revenue Code and its regulations by officers, agents and/or employees of the Internal Revenue Service.”

However, even after accepting the Court’s invitation to file an amended complaint, the Taylors lumped all their concerns into a single paragraph, listing a number of actions the IRS had done that they said were “all intentionally or negligently done in order to harass Plaintiff and oppress and abuse Plaintiff and intending to cause Plaintiff Laura Taylor severe mental distress…” They said these claims arose under “26 USC 6331(k), 6325(a), 6301, 6304, 6103, and Revenue Procedure 2002-26, and the Taxpayer’s Bill of Rights.”

Court Says Taxpayers Must Exhaust Administrative Claims in IRS Cases

The Government filed a motion to dismiss the Taylors’ Amended Complaint, saying that they had failed to state a claim upon which relief could be granted. In other words, the Government said even if the Court assumed the factual statements were correct, there was no law that said they were entitled to the $1,000,000 they sought.

Judge Matthew F. Leitman issued his decision on March 24, 2025. He started by saying that “The allegations the Taylors make in their Amended Complaint raise serious questions about whether they have been treated fairly by the Government.” However, he found that the Taylors had failed to exhaust their administrative claims remedies on some allegations.

The Court said that before pursuing a claim under Section 7433, a taxpayer must “‘file[] an administrative claim’” with the appropriate IRS division stating “‘[t]he grounds, in reasonable detail, for the claim.’” This is a strict requirement, and even substantial compliance is insufficient. Because taxpayers must exhaust administrative claims in IRS cases, the Court had to dismiss their complaint for anything not included in their Administrative Claim.

Administrative Claim Grounds Aren’t Enough to Grant Relief

In light of that restriction, the Court looked at the “grounds” listed in the Taylors’ Administrative Claim, to see if any of those could give them the relief requested.

Refusal to Consideration of Proposed Installment Payments

The Taylors said that the IRS led their attorney to believe their installment payment plan was being considered when it was not. However, the Court said that doing so did not violate Section 6331(k). That section says that the Government shall not levy a person’s property while certain offers-in-compromise or installment agreements are pending. However, the statute did not apply to the consideration of a proposed installment plan, just the levy of property after an installment agreement was in place. The claim that the Taylors’ June 2022 installment agreement was “never processed” failed for the same reason.

Refusing to Apply Tax Payments

Next, the Taylors said the IRS had violated Sections 6325(a) and 6301 when it “refuse[d] to apply the $575,000 to the family’s outstanding balance.” But, the statute did not prohibit that action. Instead, it requires the IRS to release a lien within 30 days of the tax liability being fully satisfied. However, even if the full $575,000 had been applied to the Taylors’ balance, they would still owe at least $200,000, so their lien need not have been released. Nor had the Government violated the statute authorizing it to collect taxes generally, or any implementing regulations in the Internal Revenue Code.

Refusing to Accept an Amended Tax Return as Harassment

The Taylors had tried to file an amended tax return for 2015, but the IRS had refused to accept it. They said that violated Section 6304(b). That section prohibits the Government from harassing or abusing taxpayers in collecting taxes by using threats or criminal means, obscenities, repeated or continuously calling the taxpayer, or otherwise violating the Fair Debt Collections Practices Act. Nothing in the statute applied to refusing an amended tax return. Similarly, the Taylors said the IRS had “refused to communicate” with them about their tax liability, but this was also not harassment or abuse.

The Court’s decision in Taylor v USA show how important it is to exhaust administrative claims in IRS cases by working with an experienced tax attorney who can clearly and correctly document your claims. Failure to follow IRS procedures and exhaust your administrative claims could prevent you from collecting relief, even, as here, where the Government has treated you unfairly.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 35 years experience. If you have questions about IRS administrative claims and lawsuits, contact Joe Viola to schedule a free consultation.