The Cost of Litigating Against the IRS

Gray Reed
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Gray Reed

Litigation in all forms is becoming extremely expensive to clients. This is not only because of legal fees, but also because of the penalties and interest that continue to accrue when dealing with the IRS. A taxpayer has three forums to choose from when challenging IRS audit adjustments.  In both the United States District Court and the Claims Court, the taxpayer must pay the taxes before suit can be brought against the government.  The third forum is the United States Tax Court, which does not require payment of the tax before suing the government.  In order for the Tax Court to have jurisdiction over a tax dispute, a deficiency must be determined by the IRS against the taxpayer.  Once the deficiency is determined, a deficiency notice must be sent by either registered or certified mail to the taxpayer.  The taxpayer must file a petition with the Tax Court within 90 days after the date of the statutory notice of deficiency.  Failure to file the petition within this period means that the taxpayer will have to pay the tax before suit can be brought against the government to challenge the audit adjustments.

Small Tax Cases

The Tax Reform Act of 1969 established a Small Tax Cases procedure which is a simplified, informal, and elective procedure for handling federal income, gift, and estate tax disputes involving deficiencies of $10,000 or less.  The cases cannot be appealed by either party and the decisions are not to be treated as precedents for other cases.  The taxpayer can represent himself in such proceedings.  Under the Small Tax Cases procedure, it is the responsibility of the taxpayer to elect to have the proceedings conducted, and the election must be made at the time the petition is filed.

The trials of Small Tax Cases are conducted as informally as possible before the Tax Court.  The Court does not require briefs or oral arguments, but they may both be allowed.  Although the Small Tax Cases are reported, a transcript is not part of the record unless the Tax Court so directs.  As soon as practical after the trial, the Commissioner must prepare a summary of facts and reasons for the proposed disposition of the case and submit it to the judge in charge of the Small Tax Cases Division of the Tax Court, which was formed to oversee the Small Tax Cases procedure, or the Chief Judge.  The opinions rendered by the Commissioner have no precedential value and cannot be appealed.

The Tax Court has developed a comprehensive procedure for handling Small Tax Cases and has secured the cooperation of the Commissioner of Internal Revenue.  When a taxpayer writes the Tax Court and requests information about the Small Tax Cases procedure, he or she is sent a “kit” which contains all the information and forms for following the Small Tax Cases procedure.  Most Small Tax Cases are set for trial within 30 to 60 days after the Commissioner files his answer.

The Small Tax Cases procedure is a good alternative if the taxpayer has less than $50,000 at issue and cannot, or does not, want to pay the legal fees required to properly prepare the case.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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