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Suing the IRS may sound formidable. Litigation can be time consuming and costly. This is particularly true for large and complex cases. However, for more modest and routine cases, there are shorter and more cost-effective options. It should also be noted that most tax litigation cases are settled with the IRS before trial.
Tax litigation cases are usually handed by the U.S. Tax Court, U.S. District Courts, and the Federal Court of Claims. You may have one or more of these forums available to hear your case.
U.S. Tax Court
The U.S. Tax Court is a national court that is based in Washington D.C. The court travels to larger cities several times each year to hear cases. Taxpayers can request one of 74 cities as the place of trial.
There is no jury option with the U.S. Tax Court. The judges decide the cases. The President of the United States appoints the U.S. Tax Court judges, and they serve 15-year terms. Most of the judges are former IRS chief counsel attorneys and have extensive tax backgrounds.
What Types of Cases Does the Court Hear?
The U.S. Tax Court hears several different types of tax cases, including cases to:
- Determine deficiencies in tax,
- Adjust partnership items,
- Determine relief from joint and several liabilities on a joint return, and
- Review certain collection actions.
- The U.S. Tax Court’s jurisdiction also includes the authority to:
- Redetermine transferee liability,
- Make certain types of declaratory judgments,
- Order abatement of interest,
- Award administrative and litigation costs,
- Redetermine worker classification, and
- Review the IRS’s liability for awards to whistleblowers, who provide information to the IRS.
The U.S. Tax Court handles more tax litigation than any of the other types of courts. It is primarily due to the ability to litigate the tax dispute without having to pay the tax liability upfront. This feature is unique to the U.S. Tax Court. It provides a pre-payment forum for litigating tax disputes.
The cases the U.S. Tax Court hears can be divided between those involving a tax liability under $50,000 for any one tax year and elect small tax case status and those over $50,000. Those that elect small tax case status are handled less formally. The rules of evidence are relaxed for these smaller cases. The Special Trial Judges may hear the cases. The holdings cannot be appealed, so you and the IRS are stuck with the decision.
Larger cases and those that do not make a small tax case election are more formal. The Federal rules of evidence are applied. The decisions are appealable to the U.S. Court of Appeals in the Federal circuit in which you reside. This means that you or the IRS can appeal the decision.
What Law and Rules Apply?
The U.S. Tax Court applies the law for the U.S. Court of Appeals in the Federal circuit in which you reside. This raises difficulties if you rely on a U.S. Tax Court case for your position. You may find that the U.S. Tax Court applied the law in another Federal circuit in the prior court case. If you do not reside in that circuit, you may find that the U.S. Tax Court may reach a different result in your case.
The U.S. Tax Court has its own procedural rules. These rules can be found on the court’s website. These rules explain how the court functions and how you are to interact with the court. For example, the rules explain how to file a petition, when a petition has to be filed, what rights you have to ask the IRS to produce documents, etc.
Litigating Cases in the U.S. Tax Court
Taxpayers are only entitled to bring suit in the U.S. Tax Court if they timely file a petition. The petition generally has to be filed within 90 days of the date the IRS issues its Statutory Notice of Deficiency or 90-Day Letter. This notice may be issued by the IRS auditor or, in some cases, by Appeals. This notice is often referred to as a “ticket to tax court.” The U.S. Tax Court only gains jurisdiction over a case, if you timely file a petition and pay the filing fee.
In response to your petition, the IRS Office of Chief Counsel will file an answer. The answer will respond to each statement in your petition by noting whether the IRS agrees, disagrees, or objects to the statement.
The case can then move into the discovery phase. The discovery process is also unique for U.S. Tax Court cases. Discovery and Requests for Admission are permitted under Rules 70-104 of the Tax Court’s Rules of Practice and Procedure. The U.S. Tax Court strongly encourages the parties to conduct discovery informally, exchange documents, and stipulate or agree to the facts to the greatest extent possible and is usually accomplished by the IRS issuing a Branerton letter, in compliance with the court’s Standing Pretrial Order. You do not have to wait for the IRS’s attorney to send you a Branderton letter. You can send your requests directly to the IRS attorney.
The IRS Office of Chief Counsel attorneys do have the ability to settle cases. When they do, they will send you a document called a “stipulation” and ask that you sign it. This document is presented to the court to conclude the matter.
If the case does not settle, then the court will notify you of your hearing date and you will need to file your pretrial memorandum. This memorandum lists the parties’ positions, what witnesses the parties expect to call, etc. On the trial date, the court will have a calendar call. This refers to the day the court goes through each case that it will hear on the docket. The judge will call each case and ask the parties to identify themselves, explain the case to the judge, and help the judge figure out how many days are needed to have the trial. This is the same information you should have included in your pretrial memorandum.
The trial date will then be set and the court will proceed with the trial. The trial itself involves an opening statement, admitting records into evidence, calling witnesses to testify under oath, and then a closing statement. You will go first with each of these steps and then the IRS attorney will do the same.
The Tax Court will eventually issue an opinion in the case. The U.S. Tax Court may issue one of the following types of options in your case:
- Regular opinion – which addresses more critical or novel issues.
- Memorandum opinion – which addresses issues already considered in prior cases.
- Summary opinion – which addresses cases where the taxpayer elected small tax status.
The regular opinions can be reviewed or division opinions. Reviewed opinions are signed off on by all of the tax court judges. Division opinions are the opinion of the judge that issued the opinion.
The IRS will then prepare computations and, eventually, the IRS will send you a bill, if any amount is due.
U.S. District Court
The U.S. District Courts can hear tax refund claims brought by taxpayers. These courts are not frequently used because taxpayers have to first pay the tax liability assessed and sue for a refund.
While paying the tax up front is probably not something you want to do, there are some benefits to bringing suit in this forum. The availability of jury trials is a big one. Jury trials are a possibility in district court.
The U.S. District Courts are located in most urban areas across the United States, and a court may serve several nearby cities. You can file your petition in the U.S. District Court where you reside or where your business is located.
The District Court judges are lifetime appointments. They are generalists, hearing all kinds of cases (not just tax cases). Typically, criminal cases (all types of federal crimes, not only federal tax crimes) will be given priority and heard before civil cases. Therefore, civil tax litigation can often take more time in these courts than in other courts.
Since the opposing counsel will be from the Justice Department’s Tax Division’s regional litigation section and not the IRS, he or she is more likely to settle than an IRS attorney working a case in the U.S. Tax Court.
The rules of evidence and court formalities are strictly adhered to in U.S. District Courts. Therefore, most U.S. District Court judges will generally not allow taxpayers to try their case without the assistance of counsel. We’ll forego a discussion of how these cases are litigated, given that you’ll have to hire an attorney to represent you in cases before these courts.
Court of Federal Claims
The Court of Federal Claims hears cases against the United States, including federal tax, contract, patent, and customs claims. Like the Federal District Courts, taxpayers must prepay their tax liability before bringing suit in the Court of Federal Claims for a refund.
The Court of Federal Claims can hear cases anywhere in the U.S., although many taxpayers choose to have the trial in Washington D.C. for the judge’s convenience. The court is one with national jurisdiction, but it is located in Washington D.C.
The judges decide the cases. There is no option for a jury. The judges are appointed by the President of the United States and serve 15-year terms.
Like in Federal District Courts, the opposing counsel is part of the Justice Department’s Tax Division. These attorneys are also more inclined to settle than IRS attorneys working cases in the U.S. Tax Court.
The Court of Federal Claims’ decisions can be appealed to the U.S. Court of Appeals for the Federal Circuit in Washington, D.C.
Proceedings in this court are more formal than those in the U.S. Tax Court but less formal than those held in the Federal District Courts. We’ll forego a discussion of how these cases are litigated, given that you’ll have to hire an attorney to represent you in cases before this court.