When a Notice of Deficiency (NOD) is issued by the Internal Revenue Service, you have 90 days to file a United States Tax Court Claim. A NOD is issued for many reasons. Usually a NOD is issued after an audit or an appeal of an audit. For instance, if you were audited by the IRS, and you disagreed with a position the auditor took, you would have 30 days to appeal the decision. If your position is not agreed to in appeals, the IRS will issue a NOD. Once the NOD is issued, you have 90 days to petition the United States Tax Court to hear your case. In order to petition the United States Tax Court, you need to fill out a petition, enclose your NOD, request where you want your trial to be heard, and pay a $60 filing fee. Most cases that go to U.S. Tax Court are pro se, meaning the taxpayer represents themselves. Only an attorney or someone that has been granted permission by the U.S. Tax Court can represent you. That isn’t to say that your accountant can’t go with you to court. In fact, the court applauds this. They just can’t represent you without you being present, and they cannot negotiate or agree to terms on your behalf.
A taxpayer must meet three requirements for filling a petition in Tax Court:
- The IRS must determine a deficiency, a tax balance due that does not include interest and penalty. If it assesses only interest and penalties, but no additional tax (or after tax payments and credits there is no additional tax due), the case does not qualify for Tax Court.
- The IRS must issue a deficiency notice, a 90-day letter. (This is easily recognized by the wording, “This letter is a NOTICE OF DEFICIENCY….you have 90 days…to file a petition with the United States Tax Court…” on the IRS notice.) Without a deficiency notice, the taxpayer has no admission ticket for taking the case to Tax Court.
- The taxpayer must file a timely petition, within 90 days of the deficiency notice’s date (150 days, if the deficiency notice is addressed to a taxpayer outside the U.S.), giving some indication that he contests the deficiency. The taxpayer must attach the deficiency notice to the petition.
A taxpayer may elect the “small tax case” procedure, known as S case procedures, for cases involving up to $50,000 in deficiency per year (including penalties and other additions to tax, but excluding interest). In rare instances, the Tax Court, on its own or in granting the Service’s motion, can remove S case designation.
Special trial judges hear S cases. The cases can be found at the Tax Court’s web site www.ustaxcourt.gov. Taxpayers cannot cite them as precedent (Sec. 7463(d)). S cases have advantages; they are less formal, and can be heard in many more cities than regular cases.
S cases also have disadvantages; they are final, without appeal. Further, taxpayers lose S cases more often than regular cases. This is attributable to the nature of cases brought, as well as the lack of solid support to overcome the “burden of persuasion” imposed on the taxpayer. Of 99 Tax Court Summary decisions for S cases issued between January and June 2001, taxpayers were pro se in 88 cases, and won only five outright (none with attorney representation).
When filing a Tax Court petition, the taxpayer should be aware of the differences among venues. The Tax Court may be preferred over the District Court or Court of Federal Claims because it is the only court in which a taxpayer does not have to pay a deficiency prior to filing a petition. Other courts have discovery rules that can make litigating cases expensive and time-consuming. Despite this, there are times when taxpayers should avoid Tax Court.
For certain types of cases, Tax Court can be a hostile forum, while District Court or Court of Federal Claims can be “friendlier” Claims Court is only appealable to the Federal Circuit, which can be an advantage when the regional Appeals Court is known to be hostile to a taxpayer’s case. Trial by jury is available only in District Court.
Typically, a taxpayer would avoid Tax Court S case status if his case involved contingent fees withheld by an attorney as income to his client. The Tax Court consistently rules against taxpayers on that issue. The taxpayer would have no appeal rights.
The IRS District Counsel’s office handles Tax Court cases. Paralegals usually handle S cases. The Tax Division of the Department of Justice or the United States Attorney’s office handles District Court and Claims Court cases, an advantage when a completely new team reviews a marginal government case. Appeals does not observe the prohibition against ex-parte communication with other Service employees in docketed Tax Court cases.
When there is a possibility that the IRS can raise new issues, the Tax Court may not be the proper venue. The statute of limitations (SOL) is suspended while a case is pending in Tax Court. Therefore, the Service can raise new issues, which may increase the deficiency. In addition, after litigation is over, the limitations period is still open for certain assessments. Further, except for S cases, the Tax Court can determine a deficiency in excess of the amount the IRS claims. Filing a petition after expiration of the SOL is possible when the case is in District Court or Claims Court, where new issues are limited to reducing the refund claim.
We have filed about a hundred Tax Court petitions for our clients, and have gone with them when they have had their case heard, and represented their interests. Typically, before the case goes to court there is a pre-trial conference where most issues are settled. All of the cases I have taken to court have been settled in this pre-trial conference. All of the court’s decisions are public record, so everyone will know what is going on with your case, so you have to know that going in.
All in all, going to court is not a bad option only if you have to go. It is not something that you go to first. Typically, you should go through the proper channels of appeals first. In appeals the IRS is more apt to settle a case because they weigh something called the “Hazards of Litigation.”