U.S. Tax Court: Your Last Resort

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U.S. Tax Court: Your Last Resort

An Internal Revenue Service (IRS) audit is an examination of an individual’s accounts and financial information to confirm that the information they supplied when filing their income taxes was accurately recorded and to check whether the tax amount submitted is right.

If the IRS audits you and finds that your tax return was incorrect, you may face one of the following penalties: extra interest, a civil penalty, a civil fraud penalty, or a criminal penalty. Taxpayers have the ability to appeal an audit case, which may result in some relief from the auditor’s proposed tax adjustments, interest, and penalties.

However, a taxpayer may find himself in a scenario where an appeals officer does not agree with their stance or only decreases their assessment by a minor amount. Taxpayers have various more options in this case. If you want to appeal an adverse IRS audit judgment, the U.S. Tax Court is a smart place to start. The United States Tax Court is a federal trial court that is designed to provide taxpayers with a fair hearing.

Key Takeaways

  • If you want to appeal an adverse IRS audit judgment, the U.S. Tax Court is a smart place to start.
  • The IRS has the authority to sue taxpayers in order to recover past taxes and penalties.
  • Taxpayers may also sue the IRS, but only for technical reasons, such as collecting an overdue refund or as a countersuit to an IRS action.
  • The United States Tax Court is a federal trial court that is designed to provide taxpayers with a fair hearing.
  • If you do not obtain a favorable decision from the United States Tax Court (and your case qualifies for standard tax case processes), you may be able to apply for a hearing in another federal court, such as the United States District Court or the United States Court of Federal Claims.

Overview of the U.S. Tax Court

Branches of the United States Tax Court are typically housed in the federal building of the state’s biggest city. Except during the summer months, several states have monthly hearings all year. Hearings may, however, only be held for a few weeks each year in certain states with lower populations.

In tax court, there is no jury; just a judge. The President of the United States appoints tax court justices. They are elected for 15-year terms. The majority of the applicants for these jobs are attorneys who have previously worked for the IRS or have privately practiced tax law.

Because the U.S. Tax Court is distinct from the IRS, taxpayers are given as unbiased a hearing as feasible. The court is split into two sections: small tax cases (S cases) for sums less than $50,000 in any one tax year and ordinary tax cases for amounts more than $50,000.

Advantages of U.S. Tax Court

Taxpayers who fight the IRS in U.S. Tax Court have a very good chance of at least partial victory. Approximately 85% of tax court matters are resolved before getting to trial. In general, taxpayers who choose this approach are highly serious about reducing or eliminating their assessments by all legal methods feasible. So, obviously, the IRS does not want to risk losing any further income in court beyond what is surrendered via a settlement.

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Some taxpayers who file a tax court petition may conclude they do not need a lawyer since presenting a case in tax court is not difficult. It is also not essential to go through the appeals procedure before filing a petition for a tax court hearing (although some tax advisors may recommend that you proceed this way).

Another benefit of asking for a hearing in tax court is that it may offer you extra time to develop a payment plan for the amount owing as a result of your reassessment. You are not needed to pay the tax imposed before coming to court in the United States Tax Court; nevertheless, all other U.S. courts will force you to do so.

Disadvantages of U.S. Tax Court

The waiting time that may be necessary is one of the most significant drawbacks of US Tax Court procedures. There is no set time for a judge to make a ruling. In most situations, it will take at least six months from the moment you submit your petition to the time you are eventually summoned for a trial. Small cases often take a year to resolve, whereas typical ones might take considerably longer.

During the procedures, interest may continue to accumulate on your unpaid tax bill. However, if you make a payment and identify it as a deposit, you may be able to prevent interest from collecting on your amount while you wait for your trial.

Small Tax Court Cases

S cases are hearings for sums less than $50,000 in any one tax year. Regular tax lawsuits include greater sums. The majority of taxpayers will be eligible for S case procedures. If you get an IRS 90-Day Letter, you have 90 days from the date of the Notice of Deficiency to reply by filing a modest tax court petition.

If you are out of the country when the letter comes, you have 150 days. The guidelines for petitioning for S case proceedings are available on the US Tax Court website. The instructions are available on the website in a section titled “Taxpayer Information: Starting a Case.”

A filing fee of $60 is also needed. Taxpayers should complete the forms as directed and make three copies of each form: one for themselves and the others for the address indicated on the website.

Your case will be sent first to the Office of Appeals. The IRS may propose a settlement at this stage. You have the option of accepting or rejecting the settlement offer. Following the submission of your petition, you will get three forms in the mail:

  1. A notice of trial
  2. A standing pre-trial order
  3. A trial memorandum

You must complete and send these needed paperwork at least seven or fourteen days before the start of the trial, depending on whether your case was filed as a minor tax case or a standard tax case.

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Small Cases at Trial

An IRS attorney may seek a meeting if your case goes to trial. During this meeting, you may be required to discuss the issue and agree on some fundamental facts relevant to the case. Unagreed-upon facts must then be proved in front of the court. In the months leading up to your trial, it’s critical to establish a thorough outline of what you want to tell the court, gather all required paperwork, and schedule your witnesses.

You must prepare an opening statement, testimony, evidence, and any witnesses if you are representing yourself. Bring this information with you if you meet with an IRS attorney before the trial and present it to the agent. Your efforts and organization in this respect may persuade the attorney to propose a settlement.

The judge may issue a ruling immediately after the trial, but it is much more probable that you will get your judgment in the mail a few months later. Unfortunately, there is no appeal mechanism for a judge’s ruling in a minor tax matter in the United States Tax Court.

The taxpayer has the burden of proving that the IRS is incorrect.

Regular Tax Court Cases

Most ordinary tax matters, including minor tax cases, settle before coming to trial. Regular cases have more complicated processes than S cases. Another distinction between tiny and regular lawsuits is that taxpayers in regular cases may appeal losing rulings to higher federal courts.

As a result, if a taxpayer fits the standards for a conventional tax case, it may be suggested in certain cases that they forego a hearing before the US Tax Court and continue straight to the federal court system. However, a tax attorney, your accountant, or another similarly competent expert will be able to advise you on the best course of action to pursue.

Regular cases sometimes need the submission of formal legal pleadings by both the taxpayer and the IRS attorney—a complicated and technical document that is normally completed by a tax attorney. If you cannot prepare this brief or afford to hire someone to do it for you, you may instead seek a bench decision at the conclusion of the trial. While briefs are not required for a bench decision, if the judge denies your request for a bench decision and you do not have a written brief, your case will be lost.

Other Federal Courts

If your case qualifies as a regular case and you opt to appeal a losing judgment to a higher federal court, the ultimate stage in the appeals process for regular case taxpayers is either one of the United States District Courts or the United States Court of Federal Claims. These courts have the authority to reverse an unfavorable judgment issued by the United States Tax Court, but you must pay the whole sum assessed in your audit before any of these courts would consider your case.

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A lawyer is required for a hearing in a U.S. District Court, but not in a U.S. Court of Federal Claims. In these courts, legal expenses might be exorbitant. It is also feasible (though very unlikely) for a taxpayer to persuade a judge to bill their legal expenses to the IRS. If you do not get a favorable result in these courts, you may appeal to the United States Courts of Appeals. You are, however, very unlikely to succeed.

In theory, you may even appeal your case to the Supreme Court, although your chances of success are nearly nil.

Bankruptcy Court

Bankruptcy courts may be able to dismiss sums owed from taxes that other courts are unable to do. However, this approach necessitates that the taxpayer declare for bankruptcy before the matter can be heard. Bankruptcy has numerous long-term consequences, and it is not a good way to escape taxes.

Can You Sue the IRS?

Taxpayers may sue the IRS, but only for certain reasons. Because it is a federal government organization, it has sovereign immunity, which means you cannot sue for things like emotional distress or punitive damages. You may instead litigate for technical issues such as obtaining an owed refund or as a countersuit if the IRS sues you for back taxes.

Does the IRS Sue People?

Yes, the IRS has the authority to sue you in order to recover unpaid back taxes. Although most proceedings take occur in the United States Tax Court, appeals may be brought to the Federal Court system.

How Many Judges Are on the U.S. Tax Court?

The US Tax Court system currently has 19 judges. These persons are appointed by the President and serve for a period of 15 years.

What Is a Tax Court vs. a District Court?

Internal Revenue Code (IRC) cases may be handled in either U.S. Tax Court or a District Court. Both are non-trial settings with just a judge and no jury. According to an article in the CPA Journal, “In applying evidentiary requirements, the [Tax] Court is more forgiving than the District Court or Claims Court. This tolerance may allow the taxpayer to include moderately dubious evidence as proof. However, if the taxpayer’s argument hinges on the exclusion of specific IRS information, the Tax Court may not be the best option.”

The Bottom Line

There are many courts where people seeking to appeal an adverse IRS audit finding might request a hearing. The United States Tax Court is normally the first to hear an appeal, although other federal courts may be utilized in its place.

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