Suing the IRS for an Unlawful Bank Levy: Damages Under IRC 7433

Let me be clear up front: most bank levies are lawful, even when they are painful. A levy you hate is not a levy you can sue over.

But some levies cross the line. A levy served while you had a timely Collection Due Process request pending. A levy issued while an installment agreement was in effect. A levy on an account after the IRS was told about your bankruptcy. When an IRS employee disregards the law and it costs you real money, Congress gave you a damages remedy. It is IRC § 7433.

The statute

IRC § 7433(a) says that if, in connection with collecting federal tax from a taxpayer, an IRS officer or employee "recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title," the taxpayer may sue the United States in federal district court for damages. Except for § 7432 (wrongful failure to release a lien), it is the exclusive remedy for those damages.

Notice what the statute names: the Internal Revenue Code and Treasury regulations. The Internal Revenue Manual is not on that list. An IRM violation can still matter as evidence or as a basis for other relief, but a § 7433 claim is built on a provision of the Code or the regulations.

How much

Section 7433(b) caps damages at the lesser of:

• $1,000,000 for reckless or intentional conduct, or $100,000 for negligence, or
• The sum of actual, direct economic damages proximately caused by the conduct, plus the costs of the action.

The regulation narrows "actual, direct economic damages" to actual pecuniary damages. Inconvenience, emotional distress, and loss of reputation count only to the extent they result in actual monetary loss (Treas. Reg. § 301.7433-1(b)(1)). Litigation and administrative costs, including attorney's fees, are not damages, though some litigation costs may be recoverable under IRC § 7430 (Treas. Reg. § 301.7433-1(b)(2), (h)).

And § 7433(d)(2) reduces damages by what you could reasonably have mitigated. If you could have gotten the levy released with one phone call and did not, expect that to come up.

What a bank levy damages claim looks like

For a bank levy, actual economic damages might include:

• Bank charges and overdraft fees caused by the unlawful levy (though small bank charges may be easier to recover with Form 8546; see bank fees and Form 8546).
• Late fees and penalties charged by landlords, lenders, or vendors because payments bounced.
• Documented business losses, such as a lost contract when payroll could not be met.

The levied money itself is usually recovered through release or return under IRC § 6343, not as damages. See getting levied funds returned.

Step one: the administrative claim

You cannot go straight to court. Section 7433(d)(1) says no damages judgment unless the court finds you exhausted your administrative remedies within the IRS. The regulation spells out the claim.

Where it goes

The claim must be sent in writing to the Area Director, Attn: Compliance Technical Support Manager, of the area where you currently reside (Treas. Reg. § 301.7433-1(e)(1)).

What it must contain

Under Treas. Reg. § 301.7433-1(e)(2):

1. Your name, current address, home and work phone numbers, convenient times to be contacted, and taxpayer ID.
2. The grounds for the claim, in reasonable detail, with copies of supporting documents and IRS correspondence.
3. A description of your injuries, with supporting documents.
4. The dollar amount, including reasonably foreseeable future damages, with support.
5. Your signature or your authorized representative's.

The IRM points taxpayers to Publication 5390 for instructions on administrative damages claims under §§ 7426(h), 7432, and 7433 (IRM 5.11.2.3.2.1).

Get the number right

Under § 301.7433-1(f), you generally cannot sue for more than the amount in your administrative claim, unless the increase is based on newly discovered evidence or intervening facts. Include future damages you can reasonably foresee.

Step two: wait, then sue

Under Treas. Reg. § 301.7433-1(d), you can file in district court after the earlier of the IRS's decision on the claim or six months after filing it. If you file the claim during the last six months of the limitations period, you may sue any time after filing the claim and before the period ends.

The limitations period is two years after the right of action accrues (§ 7433(d)(3)). The regulation says it accrues when you have had a reasonable opportunity to discover all essential elements of the claim (§ 301.7433-1(g)).

Bankruptcy stay violations

If the IRS levies your account in violation of the automatic stay or the discharge injunction, the route is different. Section 7433(e) says that if an IRS employee willfully violates 11 U.S.C. § 362 (the automatic stay) or § 524 (the discharge injunction) in connection with collection, you may petition the bankruptcy court to recover damages. See bankruptcy and bank levies.

Third parties use § 7426

If the levy took someone else's money for your tax, such as a co-owner or a parent, that person's lawsuit is a wrongful levy action under IRC § 7426. Section 7426(h) allows damages in that action if an IRS employee recklessly, intentionally, or negligently disregarded the Code, with the same $1,000,000 and $100,000 caps, and with the § 7433(d) exhaustion, mitigation, and timing rules applying. Publication 4528 warns that a third party may not seek § 7426(h) damages without first filing an administrative claim. See wrongful levy claims.

Build the record from day one

Because § 7433 damages are limited to actual, direct economic damages proximately caused by the violation, proof is everything. Keep the levy, your bank's freeze notice, every statement showing fees and returned payments, every late notice from a landlord or lender, and a written log of every IRS contact with the date, the employee's name and ID number, and what was said. If you asked for a release and were refused, write down when and why. That same record supports a release request, a return of funds under § 6343(d), and a Form 8546 claim.

Is it worth it?

Honest answer: sometimes. A § 7433 case requires a clear violation of the Code or regulations, provable damages, and a completed administrative claim. Many bad levies are better handled by getting the levy released fast, getting the money returned, getting bank charges reimbursed, and moving on.

But when the IRS ignored a statutory bar, such as § 6330(e) during a timely CDP request or § 6331(k) during a pending installment agreement, and you lost real money, the claim exists for a reason. Document everything from day one: dates, names, calls, letters, and every dollar of loss.

The best damages case starts the day of the levy, with a notebook.

For more about the firm's collection practice, see getirshelp.com. Related: getting the levy released.