The information provided on this page is believed accurate, and is provided not as legal advice, but for awareness of options you have when a tax dispute is not resolved administratively with the Internal Revenue Service. Please be advised that you should seek legal counsel if you are contemplating litigating a case before the United States Tax Court or any other Court that has jurisdiction over tax disputes.
If your income tax audit with the IRS is not resolved, you most likely will have the right of appeal to the United States Tax Court. Generally, you do NOT have to pay any of the proposed deficiency (the balance due that the IRS wants you to pay…) before the Tax Court hears your case. That is not true with other courts – such as the District Court – where you must first pay some or all of the amount, then file a claim for refund.
There are some procedural “hoops” you need to leap through before you may qualify to have your case heard by the US Tax Court.
The jurisdiction of the United States Tax Court can be divided into twenty five unique categories based on a combination of three criteria:
- the type of item in dispute;
- procedural prerequisites; and
- time limitations.
All three of the criteria must be met before the Tax Court will have jurisdiction to determine the disputed matter between you and the IRS.
For example, the Tax Court has jurisdiction over income tax deficiencies (the item in dispute) but only if the IRS has properly issued a notice of deficiency (the procedural prerequisite – often called the “90-day letter”) and the taxpayer filed a timely petition with the Tax Court. This is almost always 90-days from the date of the Notice of Deficiency letter – not when you received it!!!!!! It is 150 days if the letter is addressed to the taxpayer outside of the United States.
Similarly, the Tax Court has jurisdiction over a dispute involving an IRS levy or notice of federal tax lien (the item in dispute), but only if the taxpayer received an adverse determination with respect to a properly filed request for a Collection Due Process hearing (the procedural prerequisite) and the taxpayer filed a petition with the Tax Court within the required time (the limitation).
Cases involving $50,000 or less in deficiency (the amount owed) for a single tax period can be considered under the “Small Tax Case” procedure. Taxpayers can represent themselves in such proceedings, although that is usually not a good plan. Cases involving deficiencies in excess of $50,000 are handled very formally (e.g., strict application of the rules of evidence) and typically require a representation by a Tax Attorney.
If you receive a Notice of Deficiency (90-day letter), the clock begins ticking on the date listed in the notice, and stops on the 90th day from that date (150 days if addressed to a taxpayer outside of the U.S.). A Notice of Deficiency can be rescinded if certain requirements are met. One scenario justifying a rescission would be where the taxpayer was denied an administrative appeal.
If you miss the 90-day deadline, the IRS will assess the tax shown on your Notice of Deficiency. You must pay the tax. You may be able to sue for a refund, but you have to pay the tax first. So, first and foremost, if you disagree with the IRS, don’t just sit on the notice. You must respond timely, saying that you disagree with their findings and explain why.
Your petition (the document you file with the Tax Court) should contain all reasons why you are contesting the Notice of Deficiency. If you forget to raise a reason or argument, the Court may not let you raise it during the litigation of your case.
It is generally recommended that you have a tax attorney review a petition you prepare yourself, or that is prepared with the assistance of someone who is not an attorney. This is particularly true where the issues are complex and simply filling in the blanks on the Tax Court’s standard forms is insufficient.
Advantages of Tax Court.
Similar to the appeals process, taxpayers who sue the IRS in U.S. Tax Court can expect a very high probability of at least partial success. It is reported that over 90% of tax court cases settle before going to trial. This is because the IRS knows that taxpayers who take this route are very serious about getting their assessments reduced or eliminated using any legal means possible, and it doesn’t want to take a chance on losing further revenue in court than is forfeited via settlement. Furthermore, many taxpayers who petition for tax court in a Small Tax Case do not need a lawyer, as presenting a case in tax court is not particularly difficult. Still, it is always a good idea to consult an attorney when filing a legal document with the Court. It is also not necessary to go through the appeals process before choosing this option, although most tax advisors will recommend that you do so. As with the appeals process, petitioning for tax court buys you time to make payment plans on your assessment. One of the greatest advantages of tax court is the fact that you aren’t required to pay the tax you were assessed before going to court; all other U.S. courts will require you to do this. In fact, you cannot take your case to tax court if you have already paid the IRS.
Disadvantages of Tax Court
One of the biggest drawbacks to tax court is the wait time. In most cases, at least six months will elapse between the time you file your petition and when you are finally called for trial. Small cases often take a year to decide, and regular cases can take much longer. Interest also continues to accrue upon your unpaid tax balance during the proceedings. However, you can stop the interest accrual before going to tax court by making a payment and labeling it as a deposit.
Small Tax Court (S Case) Procedure
The majority of taxpayers who take the IRS to court qualify for S case proceedings. If you have been issued an IRS 90-Day Letter, you have 90 days from the date on the Notice of Deficiency to respond (150 days if you are out of the country when the letter arrives) by petitioning for small tax court. You can download the forms and instructions (Election of Small Tax Case Procedures and Preparation of Petitions) from the U.S. Tax Court website at www.usataxcourt.gov. A $60 filing fee is also required – the only court cost that you will have to pay for the entire process. Complete the forms as instructed and make three copies of them: one for yourself and the others for the address listed on the website.
Your case will be sent first to the Office of Appeals. After meeting with an Appeals Officer, he or she may make a settlement offer, which you can accept or reject. After you have submitted your petition, you will receive three forms in the mail: A Notice of Trial, a Standing Pre-Trial Order and a Trial Memorandum, which you must complete and return at least 15 days before the trial begins. If your case gets on the Court Calendar for a trial date, an IRS attorney may request a meeting, where you will discuss the facts in the case and agree (stipulate) to certain facts pertaining to the case. The facts not agreed upon must then be proven before the judge. Take the time in the months before the trial to create a detailed outline of what you want to tell the judge. Obtain all necessary documentation and get your witnesses lined up.
The burden of proof for all issues except for additional income is upon the taxpayer to prove that the IRS is wrong. If you are representing yourself, then you need to prepare an opening statement, testimony, evidence, witnesses, legal authority and a closing statement. If you meet with an IRS attorney before the trial, bring this material with you and show it to him or her, as your effort and organization may prompt the attorney to offer a settlement. At the trial itself, the judge may render a decision immediately after the proceedings, but it is far more likely that you will receive your judgment in the mail a few months later. About 60 days later, the court will mail you a bill for any remaining adjustment amount (plus interest) that you must pay. Unfortunately, there is no appeal for a decision in Small Tax Court.
Regular Tax Court Proceedings
Similar to S cases, most regular cases settle before going to trial. The procedures for regular cases are more complex than for S cases, but taxpayers can appeal losing decisions to higher federal courts (in some cases, it is recommended that taxpayers skip Regular Tax Court altogether and proceed directly to the federal court system). Regular cases often require that both the taxpayer and the IRS attorney submit formal legal briefs – a complex and technical document that usually must be written by a tax attorney. If you cannot write this brief or afford to hire someone to do it for you, you can request a bench decision at the end of the trial instead. This does not require briefs, but if the judge rejects your request and you don’t have the brief, your case is lost. Another alternative is to request that your case be reclassified as an S case. However, in order to do this, you must waive your right to contest any amount of tax assessed above $50,000.
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