If you came out on the losing end of an audit and took your case to appeals, you may have been accorded some relief from the tax adjustments, interest, and penalties that were assessed by the auditor. But if the appeals officer didn't agree with your position either, or only reduced your assessment by a small amount, you still have further recourse available to you in court.
Although there are other federal courts that you can use, the U.S. Tax Court should probably be your first option. This article examines this special court and the role it plays in giving taxpayers a fair hearing.
Branches of the U.S. Tax Court are usually located in the federal building of the largest city in each state. In many states, monthly hearings are held year-round except during the summer. However, this may not be the case in those states with low populations, where hearings may only be conducted for a few weeks each year.
There is no jury in tax court, only a judge. Tax court judges are appointed by the President for 15-year terms. Most of these candidates are lawyers and usually have either an IRS background or prior experience in private tax law.
The tax court is totally separate from the IRS and gives taxpayers as impartial a hearing as is possible. It is divided into two branches:
- Small Tax Cases (S cases) for amounts of less than $50,000 for any single tax year
- Regular Tax Cases for larger amounts
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 may be surprising to learn that 85% of tax court cases reach a settlement before even 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. Also, the IRS 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 don't even need a lawyer, as presenting a case in tax court is not particularly difficult. 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 the 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.
Disadvantages of Tax Court
One of the biggest drawbacks to tax court is the wait time. There is no fixed time in which a judge will make a decision. 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 Procedures
Most taxpayers who decide to take the IRS to court could 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 instructions (Election of Small Tax Case Procedures) from the U.S. Tax Court website.
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. At this point, the IRS may come back with 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,
- Standing Pre-Trial Order
- Trial Memorandum
You must complete and return any of these required forms at least seven or 14 days before the trial begins, depending on whether your case was filed as a small tax case or a regular tax case, respectively.
If your case makes it to trial, an IRS attorney may request a meeting, where you will discuss the case and agree upon certain basic 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 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, and any witnesses. If you meet with an IRS attorney before the trial, bring this material with you and show it to the agent, 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. Unfortunately, there is no appeal for a decision in Small Tax Court.
Regular Tax Court Proceedings
As with 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. Talk to a tax attorney or your accountant to determine the best path for you to take.
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. The bench decision does not require briefs, but if the judge rejects your request and you don't have the brief, your case is lost.
Other Federal Courts
The last stop in the appeals process for regular case taxpayers is either one of the U.S. District Courts or else the U.S. Court of Federal Claims. These courts can overturn an adverse decision made in tax court, but you must pay the entire balance assessed in your audit before either of these courts will hear your case.
District court requires a lawyer while claims court is less formal. Legal fees can be astronomical in these courts, but it is also possible (although not common) to convince the court to charge your legal fees to the IRS. If you don't get the decision you want in these courts, then the U.S. Circuit Court of Appeals can hear your case. Unfortunately, you are highly unlikely to be successful. Theoretically, you can appeal your case to the Supreme Court, but your odds of success are very low.
These courts may be able to get taxes dismissed that no other courts can. Of course, the taxpayer must file for bankruptcy before the case can be tried here. Taxpayers are advised to think carefully before choosing this option merely as a means of avoiding taxation, as bankruptcy has many far-reaching ramifications.
There are several court venues available for taxpayers seeking to overturn an unfavorable IRS ruling. The U.S. Tax Court is usually the first to receive an appeal, but there are times when other federal courts should be used instead. For more information on tax courts, visit the tax court website or read Stand Up to the IRS, 11th edition (Feb. 23, 2012).