Taking the IRS to Tax court

By John Ellsworth, Esq June 17th, 2010


In my Tax Court practice I file many Tax Court petitions for my clients. Filing a Tax Court petition is simpler than filing a protest with Appeals. A tax practitioner who can prepare a protest can surely prepare a Tax Court petition. Over 50% of all Tax Court cases and over 90% of “small tax cases” under Sec. 7463 are pro se. For the attorney tax practitioner, being able to prepare and file a Tax Court petition is a useful skill against the tolling of a 90-day letter.

Under normal tax audit procedures, the IRS issues a 30-day letter, giving a taxpayer 30 days to file a protest and request an Appeals hearing. On the taxpayer’s failure to request a hearing or following an Appeals hearing, the Service issues a 90-day letter, giving the taxpayer 90 days to file a Tax Court petition before collection proceedings begin.

With the reduction in the number of IRS audits and a reliance on computer matching, some taxpayers are facing automatic computer-generated 90-day letters, without first receiving a 30-day letter. Service personnel call this practice, “smokeout”: the 90 days will toll around the time the IRS finally determines whether the tax is due, so that it can institute collection proceedings without delay.

Writing letters and contacting the Service through its hotline usually resolve disputes before the IRS issues a 90-day letter. However, once issued, a taxpayer has only 90 days to resolve the case or to file a petition in Tax Court. In less serious disputes the Taxpayer Advocate Service may help; nevertheless, it is difficult for this office to resolve a dispute within the 90-day window.

As a matter of grace, the Service may–or may not–continue to resolve the issue after the 90 days expire. Filing a Tax Court petition before the 90 days runs out is the only way a taxpayer can preserve his rights.

Once a taxpayer’s tax audit lawyer files a Tax Court petition, IRS District Counsel has jurisdiction. Counsel refers the Tax Court case to the IRS Appeals Office to determine whether Appeals can settle it (Rev. Proc. 87-24). Appeals and District Counsel will deal directly with a taxpayer’s representative who holds a power of attorney. But beware: Tax Court refuses to recognize a holder of a Power of Attorney as the taxpayer’s Tax Court representative, unless the holder is admitted to practice in Tax Court.

If the Tax Court case is settled in a client’s favor, an adviser can help him submit a motion for fees and expenses under Sec. 7430 and TC Rule 231, for all services associated with the proceeding; services include accountants’ fees. If the taxpayer did not receive a 30-day letter, filing a Tax Court petition cannot be used against him on grounds of protracting the proceedings (Reg. 301.7429-1(e)(2)). Fee awards are rare, however, and the Service vigorously opposes them regardless of the amount claimed. Even though the 1998 liberalization of Sec. 7430 may make fee award judgments easier to obtain, the IRS has not eased its opposition (IRM

Filing Requirements

A taxpayer must meet three requirements for filling a petition in Tax Court:

  1. 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.
  2. 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.
  3. 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. (Sec. 6213(a) and TC Rules 20–34). The deficiency notice specifies the deadline for filing the petition. If the deadline is later than 90 days, the later deadline is binding (Sec. 6213(a)).

Procedures for Small Cases

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. (Sec. 7463 and TC Rules 170–179).

Special Tax Court judges hear S cases. The cases can be found at the Tax Court’s web site http://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 Tax Court cases.

S cases also have disadvantages; they are final, without appeal. Further, taxpayers lose S cases more often than regular Tax Court cases. This is attributable to the nature of the Tax Court cases brought, as well as the lack of solid support to overcome the “burden of persuasion” imposed on the taxpayer in Tax Court. Of 99 Tax Court Summary decisions for S cases issued between January and June 2001, taxpayers were pro se (acted as their own lawyer) in 88 cases, and won only five outright (none with attorney representation).

Venue Considerations

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 (Rev. Proc. 2000-43).

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 (Sec. 6503(a)). Therefore, the Service can raise new issues, which may increase the deficiency. In addition, after Tax Court litigation is over, the limitations period is still open for certain assessments (Sec. 6212(c)). Further, except for S cases, the Tax Court can determine a deficiency in excess of the amount the IRS claims. (Sec. 6214). 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.

How to File

Four steps make a complete Tax Court petition:

  1. Prepare the Tax Court petition in triplicate. Form 2 is a pre-printed fill-in-the-blanks Tax Court form, which may be used in cases that involve deficiencies of $50,000 or less for any one year. Taxpayers can find this form online at http://www.ustaxcourt.gov/forms/Petition_Kit.pdf. The small-tax-case procedure is the default on Form 2, unless the taxpayer checks the appropriate box. (Form 1 may also be used. Form 1 is a standard legal petition (and must be filed in quadruplicate), available at http://www.ustaxcourt.gov/rules/append01.PDF. If the case requires Form 1, it may be advisable to have a lawyer handle it.)
  2. Attach a copy of the deficiency notice to each copy of the petition. Failure to attach this notice is a correctable error, but may result in a motion by District Counsel to dismiss the case.
  3. Attach a request for Designation of Place of Trial (Form 5) to each copy of the petition. This consists of a legal heading and a single sentence: “Petitioner(s) hereby designate(s) [city and state] as the place of trial of this case,” signed and dated. Failure to make the designation allows IRS to choose the location for the trial.
  4. Enclose a $60 check for the filing fee payable to “Clerk, United States Tax Court”.

Information on the petition includes:

  1. Spouse’s name (if deficiency notice was addressed to both), together with Social Security or other taxpayer identification number(s), addresses and original signatures.
  2. The years of the claimed deficiencies, the date of the deficiency notice and the location of the IRS office issuing the notice.
  3. A table, listing by year the amount of deficiency and additions to tax assessed, and any overpayment counterclaimed by the taxpayer.
  4. An explanation of the IRS adjustments and changes in the deficiency notice that the taxpayer disagrees with, and the reasons.

The taxpayer should sign the Tax Court petition; both spouses should sign if petitioning jointly. An officer may sign for a corporation, a fiduciary for an estate or trust. Someone not admitted to practice lacks a Tax Court bar number, and risks rejection of a Tax Court petition not signed by the taxpayer. So take care when seeking tax audit representation; be sure that person is also admitted to Tax Court to practice. The package should be mailed by certified mail to:

United States Tax Court
400 Second Street NW
Washington, D.C. 20217

Even though certified mail is not required, it is the best way to avoid disputes over timely filing. Alternatively, overnight private delivery services are acceptable under Sec. 7502(f).

The Tax Court clerk will mail the taxpayer a docket number promptly. The number contains an “S” suffix (e.g., 4878-00S) if the taxpayer elected the small-tax-case procedure. This number must appear on all correspondence and documents regarding the case. Within a short time, the taxpayer will be contacted by IRS Appeals or the District Counsel’s office; this initial contact will be to determine whether the case has merits that warrant negotiating a settlement.

The taxpayer may be granted an Appeals hearing and if there are merits, a settlement may be offered. Over 90% of docketed cases are settled without going to trial. Though a trial date may be months away, the paperwork for any settlement is usually not completed until the eleventh hour.

The attorneys and paralegals in District Counsel’s office are very professional. They will assist the inexperienced non-admitted practitioner with procedural matters. They will prepare and file motions for matters agreed on.

If the case moves beyond to trial in Tax Court, certain cases can be argued with briefs and stipulations, thereby avoiding a court appearance (TC Rule 122). Except for the form, a brief can be similar to writing an Appeals protest. Stipulations are facts, opinions and legal positions on which the parties agree in writing, and thus do not need to be proven at trial.

Practice in Tax Court, even in an S case, is much more adversarial than practice before IRS Appeals. District Counsel will move to dismiss a case for late filing of a petition, failing to state a complaint on which relief can be granted, lack of jurisdiction, or for several other reasons.

A Tax Adviser Is the Front Line

It is not just that simple Tax Court cases, especially for low assessments, are not cost-efficient to take to trial with an attorney. If the IRS is simply being unreasonable or unresponsive, it may be cheaper to file a Tax Court petition, moving the case into Appeals where the Service may immediately recognize the merits of the issues and drop the assessment.

Congress granted the IRS an expedited method of assessment for mathematical or clerical errors on a return. When faced with a math error notice, unless the client’s tax adviser requests abatement of the assessment under Sec. 6213(b)(2) within 60 days of the notice, the Service will not issue a 90-day letter, leaving the taxpayer with no recourse to Tax Court. The IRS staff that handles correspondence is not familiar with handling Sec. 6213(b)(2) requests, so practitioners should be persistent. The Economic Growth and Tax Relief Reconciliation Act of 2001 expands IRS authority to assess issues involving tax rebates (new Sec. 6428(d)(1)(A)) and earned income tax credits (new Sec. 6213(g)(2)(M)) as math errors.

When a dispute is genuine, only a tax adviser will be aware that the Tax Court will be unavailable without swift action. Typically, lawyers are not involved at the 60-day deadline stage.

When the Service issues a 90-day letter, it has the authority to rescind the notice under Sec. 6212(d) (see Rev. Proc. 88-17, and Form 8626, Agreement to Rescind Notice of Deficiency). Outside of the Appeals Office, IRS staff is not familiar with handling a Sec. 6212(d) request, and it is difficult (if not impossible) to obtain a rescission of deficiency notices when Appeals is not involved.

Someone with Tax Court experience should be available for questions about strategy, evidence or procedures. If the case goes to trial, the client may require someone admitted to Tax Court practice, especially if calling witnesses or if knowledge of rules of evidence becomes critical.

Generally, a petition is ripe for filing by a tax adviser when the amount involved is so small that it might be cheaper to pay the deficiency than hire an attorney, or when the IRS is wrong and bringing the issue to better-trained personnel at Appeals will resolve the case.

Only the taxpayer or a professional admitted to practice before the Tax Court may present the case at trial. When a non-admitted tax adviser requests to represent a client in Tax Court, the judge politely advises the taxpayer that he may consult as much as necessary with his adviser, but must represent himself.

Is filing a Tax Court petition considered unauthorized practice of law? Probably not, for the limited purpose of preserving a client’s appeal rights when the non-attorney will not represent his client in court. (A much broader Tax Court practice was rejected as unauthorized practice by a committee of the Texas Supreme Court, which dismissed charges against Arthur Andersen LLP in 1998.) A greater concern may be malpractice, and whether a practitioner’s insurance will cover a claim, particularly if he picked the wrong venue. An adviser should consult his malpractice insurance carrier.

The Tax Court Rules of Practice provides general information. The Tax Court clerk’s office will answer simple practice and procedure questions by telephone (202-606-8754). There are also several treatises dealing with the complexities of Tax Court practice.

Filing a Tax Court petition, however, does not make a non-attorney an attorney. Rather, learning how to file petitions is an extension of a practitioner’s professional skills in preserving a client’s rights, properly pleading his case before Appeals and (as a last resort) helping him obtain a favorable court ruling.

This entry was posted on Thursday, June 17th, 2010 at 6:48 pm and is filed under tax court. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Leave a Reply

You must be logged in to post a comment.