An Internal Revenue Service (IRS) audit is a review of an individual's accounts and financial information to ensure that the information they provided when they filed their income taxes was reported correctly and to verify if the reported amount of tax is correct.

If you are audited by the IRS and they determine that your tax return was inaccurate, you may be subject to one of these scenarios: additional interests, a civil penalty, a civil fraud penalty, or criminal penalty. Taxpayers have the option to appeal an audit case, which may result in some relief from the potential tax adjustments, interest, and penalties that may have been assessed by the auditor.

Key Takeaways

  • If you are seeking to overturn an unfavorable IRS audit ruling, the U.S. Tax Court is one place that you can start.
  • The U.S. Tax Court is a federal trial court that is intended to give taxpayers a fair hearing.
  • If you do not receive a favorable ruling in a U.S. Tax Court (and your case qualifies for regular tax case proceedings), you may be able to petition for a hearing in another federal court, such as a U.S. District Court or a U.S. Court of Federal Claims.

However, it's possible that a taxpayer may find themselves in a situation where an appeals officer doesn't agree with their position either, or only reduces their assessment by a small amount. In this situation, taxpayers have some additional courses of action. If you are seeking to overturn an unfavorable IRS audit ruling, U.S. Tax Court may be a good place to start. The U.S. Tax Court is a federal trial court that is intended to give taxpayers a fair hearing.

Overview of the U.S. Tax Court

Branches of the U.S. Tax Court are usually located in the federal building of the largest city in every U.S. state. In many states, monthly hearings are held year-round except during the summer months. However, in some states with smaller populations, hearings may only be conducted for a few weeks every year.

There is no jury in tax court; there is only a judge. Tax court judges are appointed by the President of the United States. They serve 15-year terms. Most of the candidates for these positions are lawyers who have either worked for the IRS in some capacity before or have privately practiced tax law.

The U.S. Tax Court is a separate entity from the IRS, so taxpayers are offered an impartial hearing as is possible. The court is divided into two branches: small tax cases (S cases) for amounts of less than $50,000 for any single tax year and regular tax cases for larger amounts

Advantages of U.S. Tax Court

Taxpayers who sue the IRS in U.S. Tax Court can expect a very high probability of at least partial success. Approximately 85% of tax court cases reach a settlement before even going to trial. In general, taxpayers who take this route are very serious about getting their assessments reduced or eliminated using any legal means possible. So presumably, the IRS doesn't want to take a chance on losing any further revenue in court than what is forfeited via a settlement.

Some taxpayers who petition for tax court may decide they don't need a lawyer because presenting a case in tax court is not particularly difficult. It is also not necessary to go through the appeals process before submitting a petition for a hearing in tax court (although some tax advisors may recommend that you proceed this way).

An additional advantage of petitioning for a hearing in tax court is that it can give you more time to create a payment plan on the amount owed via your reassessment. For the U.S. Tax Court, you are not 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 U.S. Tax Court

One of the biggest disadvantages of U.S. Tax Court proceedings is the waiting period that may be required. 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 a trial. Small cases often take a year to decide, and regular cases can take much longer. Interest may continue to accrue upon your unpaid tax balance during the proceedings. However, it may be possible to stop the interest from accruing on your balance while you are waiting for your trial if you make a payment and label it as a deposit.

Small Tax Court Procedures

Small tax cases (S cases) are hearings for amounts of less than $50,000 for any single tax year. Regular tax cases are for larger amounts. Most taxpayers will 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 by petitioning for small tax court. You have 150 days if you are out of the country when the letter arrives. The instructions for how to petition for S case proceedings can be accessed from the U.S. Tax Court website. The instructions are provided in a section of the website with the heading "Taxpayer Information: Starting a Case." 

A $60 filing fee is also required. The filing fee is payable by check, money order, or other draft, Taxpayers should complete the forms as instructed and make three copies of each form: one for yourself and the others for the address listed on the website.

Your case will be sent to the Office of Appeals first. At this point, the IRS may offer a settlement. You have the right to accept or reject the settlement offer. 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

You must complete and return these required forms either at least seven or at least 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 goes to trial, an IRS attorney may request a meeting. During this meeting, you may discuss the case and be asked to agree upon certain basic facts pertaining to the case. The facts not agreed upon must then be proven before the judge. In the months before your trial, it's important to take the time 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. It's possible that your efforts and organization in this regard 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 process for a decision made by a judge in small tax cases in the U.S. Tax Court.

Regular Tax Court Proceedings

Like small tax cases, most regular tax cases settle before going to trial. The procedures for regular cases are more complex than for S cases. Another difference between small cases and regular cases is that taxpayers can appeal losing decisions to higher federal courts in regular cases. For this reason if a taxpayer meets the qualifications for a regular tax case, in some instances it may be recommended that they forgo a hearing at the U.S. Tax Court and proceed directly to the federal court system. However, a tax attorney, your accountant, or a similarly qualified professional is in the best position to help you 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 typically requires a tax attorney to complete. If you cannot write this brief–or afford the price of hiring someone else to do it for you–you can request a bench decision at the end of the trial instead. While a bench decision does not require briefs, if the judge rejects your request for a bench decision–and you don't have a brief written–your case will be lost.

Other Federal Courts

If your case meets the qualifications for a regular case, and you decide to appeal a losing decision to a higher federal court, the final stop in the appeals process for regular case taxpayers is either one of the U.S. District Courts or the U.S. Court of Federal Claims. These courts can overturn an adverse decision made in U.S. Tax Court, but you must pay the entire balance that was assessed in your audit before either of these courts will hear your case. 

A hearing in a U.S. District Court requires a lawyer, while the U.S. Court of Federal Claims may not. Legal fees can be astronomical in these courts. It is also possible (although it is very uncommon) that a taxpayer can convince the court to charge their legal fees to the IRS. If you do not get a successful decision in these courts, you could take your case to the U.S. courts of appeals. However, you are highly unlikely to be successful. Theoretically, you can also appeal your case to the Supreme Court, but your odds of success are also very low.

Bankruptcy Court

Bankruptcy courts may be able to get amounts that are due from taxes dismissed that other courts are not successful at. However, this course of action requires that the taxpayer file for bankruptcy before the case can be tried. Bankruptcy has many far-reaching ramifications, and it is not a recommended option for avoiding taxation

Conclusion

There are several courts where hearings can take place for taxpayers seeking to overturn an unfavorable IRS audit ruling. The U.S. Tax Court is usually the first to receive an appeal, but there are times when other federal courts may be used instead.