Going to Tax Court: No Lawyer Necessary
- Tax Court Facts
- Small Tax Cases—People’s Court
- Preparing and Filing a Small-Case Petition
- Completing the Tax Court Forms
- Filing the Tax Court Forms
- Meeting With IRS Appeals Officers and Attorneys Before the Trial
- Settlement Before Trial Is Likely
- Notices From the Court Before Your Trial
- Preparing Your Case for Trial
- Awaiting the Judge’s Decision in a Small Case
- The Tax Bill
- Regular Tax Court Cases—Over $50,000
- Other Federal Courts—Paying First Is Required
- Bankruptcy Court
- Appealing to Higher Courts
You lost your audit and did not reach a settlement with the IRS on appeal. What’s next? You have two choices—you can accept your fate or you can go to court.
In one recent year, more than 30,000 taxpayers filed petitions in tax court after losing their audits and appeals. (There are three other federal courts in which you can contest your tax liability, but only in tax court can you contest without first paying.) Taking your case on to tax court is usually not difficult and in many cases can be done without a lawyer. And your chance of winning—at least partially reducing an audit bill—is excellent. Once you file a petition in tax court, the IRS knows you mean business and will often settle for less than the tax claimed due. Over 90% of tax court cases filed settle before trial!
While it is not necessary to have appealed within the IRS before going to tax court, it’s a good idea. Remember—the job of the appeals office is to settle. You can also contest an automated mail adjustment notice you receive from the IRS in tax court. (See Chapter 3.) And tax court can be used to challenge IRS decisions in several other situations—for instance, when the IRS reclassifies a worker in your business from an independent contractor to an employee (see Chapter 11) or if you are denied innocent spouse relief (see Chapter 9).
And even if the IRS doesn’t settle before your trial, you have a good chance of having your tax liability reduced once you talk to a judge. More than 50% of all petitions filed in tax court bring some tax reduction. In cases under $50,000 (called small cases), 47% of all taxpayers win at least partial victories. In cases involving $50,000 or more (called regular cases), 60% come out ahead. Tax court isn’t a total panacea—the chance of a complete victory over the IRS is only 5%.
When Not to Go to Tax Court
You can be fined for filing a petition to tax court without legal grounds. This is not normally something to worry about, however. There is always legitimate reason for disagreeing with an audit report. Only by filing a petition that is clearly frivolous or done for the sole purpose of delay do you risk a fine.
Don’t file a tax protestor type of petition; you may get coded into the IRS computer system in the same category as dangerous and potentially violent taxpayers. In IRS computerese, these people are called PDTs. People who use the court to protest government policy or because they don’t believe the tax system is constitutional are typically fined up to $5,000 for filing frivolous petitions.
So don’t let the fear of a fine keep you from going to tax court unless you are a tax protestor or are being foolish—like the man who deducted the costs of keeping a mistress as a business expense on the theory that she made him more productive.
Filing a petition in tax court buys time. Just filing will delay an audit bill for at least a year. You can use this time to get your finances in order without worrying that the tax collector will seize your assets. But interest is running.
Tax Court Facts
In the most populous states, tax court hearings are held monthly throughout the year, except summer, in major cities. In smaller states, the tax court may meet only once a year for a week or two, usually in the state’s largest city. Sessions are usually held at the local federal building.
The president appoints tax court judges for 15-year terms. Judges are lawyers and come from senior IRS legal staffs or from private law firms. Special temporary judges also regularly serve as small-case judges. Although many tax court judges are ex-IRS employees, they are not especially pro-IRS. Judges do not like to see the IRS cut corners in audits or mistreat taxpayers. Tax court is completely independent from the IRS. You will get as fair and impartial a hearing in tax court as you would in any other federal court.
After you file your petition, it will be at least six months until you are called for trial. While most small cases (see immediately below) are decided within one year, regular cases take much longer.
A minor drawback of tax court is that interest continues to run on your tax bill if the court decides you owe the IRS.
Technically, you can’t pay a proposed tax bill and then go to tax court. You can, however, stop the interest accrual before suing in tax court by making a payment and labeling it a deposit or cash bond. Send a check to the IRS with the words “deposit/cash bond” written in the lower left-hand corner of the check and send a cover letter with the payment. This stops the interest accrual. But if you win, you don’t get interest back from the IRS for the time the government had your money.
Small Tax Cases—People’s Court
There is a small-case division of the tax court for audits in which the IRS claims the taxes and penalties owed for any one tax year are $50,000 or less. For example, if you’ve been audited for three years and the amount the IRS claims you owe for each year is $30,000—meaning the total is $90,000—your case will still qualify as a small case. This small claims court-type case is called an S case.
S-case election is made on the tax court petition form by checking a box (see the filled-in sample form below).
The filing fee is $60, and normally you’ll have no further court costs.
No jury trials are allowed in tax court. Judges can rule on the spot, although they usually mail their decisions to you a month or so after the hearing. You cannot appeal the decision in an S case.
With S cases, tax court operates much like your local small claims court. You tell the judge your story, show your evidence, and are not expected to know legal procedures. Even if you lose, you have the satisfaction of having your day in court.
If you’re going to court on your own, it’s highly recommended that you file a small case. Otherwise, get an attorney to represent you.
Strict 90-Day Limit for Going to Tax Court
Once the IRS issues a letter called a Notice of Deficiency, you have only 90 days to file a petition in tax court. The deadline for filing must be stated clearly in the letter. The 90-day period begins on the date in the letter, not on the date you receive it. If you are out of the United States when the letter is sent, you have 150 days. The law does not require that you actually receive the notice, only that the IRS mail it to your last known address.
Because of the 90-day deadline, you will want to act quickly. Don’t wait until day 83 to contact the court clerk and get the current forms. If you don’t have time to get the current forms, see a tax professional. The tax court may accept an out-of-date petition form, but the IRS will object to a late filing and the court will dismiss your case.
This 90-day deadline is one good reason to let the IRS know of your new address whenever you move. Use IRS Form 8822, Change of Address (available on the IRS’s website at www.irs.gov). If you miss the deadline, you can file in another federal court, but you will have to pay the tax first and sue the government for a refund.
Preparing and Filing a Small-Case Petition
You will need a petition, a Request for Place of Trial, and a Statement of Taxpayer Identification Number. The forms and instructions are available online from the U.S. Tax Court website at www.ustaxcourt.gov. Contact the clerk of the tax court, U.S. Tax Court, 400 Second Street, NW, Washington, DC 20217, 202-521-0700, and ask for a petition kit. Unlike many other government agencies, the tax court office is very responsive and efficient. There is no charge for these items, which will be sent promptly.
Completing the Tax Court Forms
First, read the Information About Filing a Case in the United States Tax Court. This is the first page of the petition kit and is available from the U.S. Tax Court or its website at www.ustaxcourt.gov. You can fill in the forms online or print them out and fill in the hard copy.
Look at the completed sample forms and line-by-line instructions below. The Request for Place of Trial and Statement of Taxpayer Identification Number forms are self-explanatory. Don’t worry about typos or minor errors—the tax court will usually overlook them.
Complete the form. Type or write your name. If a joint tax return was audited, type in your name and your spouse’s name exactly as they appear on the tax return.
Place a check in the box for “Notice of a Deficiency” (for appealing an audit).
In the next blank space, type in the date of the notice. Next, check the box for either “small tax case” or “regular tax case.” In the next section, explain briefly why you disagree with the IRS. Finally, state the facts on which you rely.
The tax court doesn’t expect you to sound like a tax lawyer. Just make sure your point is clear. For example, “I disagree with the $1,200 deduction disallowed by the IRS. I incurred this expense as the rent I pay on the portion of my apartment I use for my home office.”
Sign and date the petition. After completing the petition, check the box of the nearest city from the list of cities in which tax court trials take place. Type your name and your spouse’s if a joint tax return was audited. Then sign and date the form. Again, both spouses must sign if a joint return was audited.
Filing the Tax Court Forms
To file your petition, follow these steps (after making sure the filing requirements haven’t changed—see warning below):
Make three copies (or five if it’s a regular case) of your:
- Completed petition
- Statement of Taxpayer Identification Number
- Completed Request for Place of Trial
- Notice of Deficiency—90-Day Letter—that you received from the IRS.
Keep one copy of the petition, Request for Place of Trial, and Notice of Deficiency for your records.
Attach the original Notice of Deficiency to the original petition, and attach the remaining copies of the Notice of Deficiency to the remaining copies of the petition.
Make out a personal check or money order for $60 payable to Clerk, U.S. Tax Court.
Enclose the original and copies of the petition and the Notice of Deficiency, the original and copies of the Request for Place of Trial, Statement of Taxpayer Identification Number, and your check or money order in a large envelope. Send to Clerk, U.S. Tax Court, 400 Second Street, NW, Washington, DC 20217, by U.S. mail—certified and return receipt requested.
To timely and legally file your petition to the tax court, the envelope must bear a U.S. mail postmark dated within 90 calendar days of the date on the Notice of Deficiency. Or you can use Federal Express, DHL, or Airborne Express. Currently, you cannot file electronically in tax court. If it arrives after day 90, that’s okay as long as the postmark is within 90 days. And bear in mind that 90 days does not mean three calendar months.
Check for any changes to the filing requirements. Call 202-521-0700 or check online at the U.S. Tax Court’s website at www.ustaxcourt.gov.
Within seven days of receiving your petition, the tax court will send you a confirmation of receipt and assign you a case number. If you ever write to or call the IRS or the tax court about your case, you will have to refer to your case number.
You don’t need to file anything else, unless the IRS files a written response, called an answer, stating that you committed fraud. In this highly unlikely event, you must file a legal paper called a reply. You should consult a tax attorney before filing a reply.
A Tax Professional on the Sidelines
If you file a tax court case yourself, consider using a tax professional as a coach or adviser. The tax professional can work in the background or can go with you to meetings with an appeals officer or IRS attorney. The IRS will usually welcome your bringing in a tax professional if it may help reach a settlement and keep your case from going to trial. The tax professional doesn’t have to be admitted to practice before the tax court, which is usually limited to attorneys, as long as she doesn’t actually sign papers in the case on your behalf.
Meeting With IRS Appeals Officers and Attorneys Before the Trial
After you file your tax court petition, your case will probably be sent from the IRS’s lawyers (district counsel) to the nearest IRS appeals office—often in the same building. The appeals office considers your file if you didn’t appeal before. If you did appeal, but went on to tax court, your case may be re-reviewed by the appeals office if the IRS lawyer thinks settlement is possible.
Small cases—under $50,000—usually sit in an appeals office for about six months—shorter if your trial is set for an earlier date. If you don’t settle with an appeals officer, IRS lawyers prepare the case for trial.
Within 30 days before the trial date, the IRS attorney may ask that you meet at her office. The purpose is to discuss the documents and other evidence—both yours and the IRS’s—in the case. She will explain how she plans to label the documents, called exhibits. You must give her the names and addresses of any witnesses you plan to call, and she must do the same.
The IRS attorney will also ask you to agree in writing to certain undisputed facts about your case. These are forms called Stipulations of Facts. Tax court rules require both sides to agree, or stipulate, to as many facts as possible before coming to court. The purpose is to save the judge’s time. Any facts not agreed to in a written stipulation must be proven in court. Judges get upset if you have refused to agree to obvious facts, like “Is this your signature?”
Written stipulations cover routine things like identification of your tax return, that receipts and various documents are yours, and that bank records are genuine and accurately reflect your deposits and withdrawals.
Read carefully before signing a stipulation of fact. Ordinarily, you should sign a stipulation just to keep on the judge’s good side. Occasionally, however, the IRS attorney may try to slip something by you. If there are items in the stipulation that you don’t agree with, ask the IRS lawyer to revise them accordingly. Or see a tax professional for advice before you sign.
Don’t over-worry about anything going wrong at this meeting. The attorney shouldn’t raise new issues, make threats or try to trap you into saying something harmful to your case. If you ask—and you should—she will tell you what she expects her witnesses to say at the trial.
The IRS attorney may not say it, but what she would really like to do is settle the case, not go to trial. This meeting is another chance for you to make a deal rather gamble on the outcome in court. Review Chapter 4 before going to the meeting. Present your case as you did with the auditor or appeals officer. Bring up any new documents, witnesses, or information supporting your case. You and the IRS lawyer can settle the case at any time—even after you have been in front of the judge—as long as the court has not issued a decision.
Settlement Before Trial Is Likely
Well over 90% of all cases settle without a trial. An IRS lawyer may initially turn down your settlement offer and later change her stance. She may have reviewed the case and decided you have a better chance to win than first thought. Or the IRS lawyer might find that a government witness is not available or an IRS document has been lost, so that her case is weaker than first believed.
If you agree to a settlement, the IRS district counsel’s office will prepare a document called a Stipulated Tax Court Decision. This paper is signed by you, the IRS attorney, and the judge. Signing means you usually don’t have to appear in court. This is a brief, but sometimes fairly technical, document. Ask to have it explained, or have it reviewed by a tax professional before you sign it. Once you have signed a Stipulated Tax Court Decision, it’s nearly impossible to back out.
Notices From the Court Before Your Trial
Approximately four to ten months after you file your tax court petition, you will receive the following items:
Notice Setting Case for Trial. This is a form letter from the tax court setting the place, date, and time of your trial. It also orders you to cooperate with the IRS in certain matters before the trial and warns that if you don’t show up for the trial, your case will be dismissed.
Standing Pretrial Order. This is a writing from the judge assigned to your case. It orders you and the IRS to discuss settlement, and if you can’t settle, to prepare written stipulations. The order warns that getting a continuance, or postponement, of the trial date is not favored. You and the IRS must exchange lists of witnesses who may testify at least 15 days before the trial date.
Trial Memorandum. You must fill out and send this form to the tax court at least 15 days before the trial. State the issues to be decided by the court, the names of witnesses you will have at the trial, a brief summary of what they will say, and an estimate of how long the trial will last. Most small cases can be tried in two to four hours, so you can put something in this range. Don’t worry about precision when filling out this form. The judge knows you aren’t an attorney.
Preparing Your Case for Trial
By now, you should have the facts of your case down cold. You may have already told your story to an auditor, her manager, the appeals officer, and the IRS lawyer. But tax court is a whole new ballgame. You are not limited by what went on with the IRS before you came to court. You are given a de novo, or brand new, hearing before a judge who has not seen the IRS file.
Begin preparing several months before your trial date. Make an outline of what you want to tell the judge and list your documents and witnesses backing up each point. You must convince the judge that the IRS is wrong—the IRS doesn’t have to prove it is right.
Your Trial Notebook
Arrange your materials the way lawyers do, with a trial notebook—a three-ring binder or a folder with a series of files. Use it to practice your presentation in front of family or friends. Make sure your points are clear and your documents are understandable. Rehearsing gives you confidence in court.
Your trial notebook should contain the following:
Opening statement. The first item should be an opening statement, which you will make at the beginning of the trial. This is your summary of what the case is about and an outline of what you intend to show the judge to prove that the IRS is wrong. It should be brief—five to ten minutes—and to the point. Tell it to the judge as if you were speaking to a friend. Here are two samples:
Your Honor, the IRS auditor found that I was not serious about making money in my side business of a Scamway home products distributorship in 2005. She said that the presentations I made in my home were really social gatherings, so she disallowed my $2,492 in business losses. I will show the court that I always had a profit motive and that I operated in a businesslike manner, even though my business showed a loss that year.
Your Honor, the examination report is incorrect in finding that I was not entitled to take my two children, Tammy and Jimmy, as exemptions on my 2005 tax return.
I will testify that the children lived with me for the greater part of 2005. I will show the court copies of school records showing that the children were in school next door to my home, and that my address was their home address. I will present canceled checks showing that I paid most of their clothing, medical care, and other needs in 2005. My next door neighbor, Corrine Busybody, will testify that the children were living with me.
Your testimony. Anytime you speak to the judge, you will be testifying. Before going to court, write down the testimony so you won’t forget any points. For example, in proving that you tried to make a profit with your Scamway distribution, you might write as follows:
I first started selling Scamway products in 2005. In the first two years, I made small profits. In my home presentations, I strictly followed the guidelines given to me by Scamway. Although the business lost money, I did make sales at the February, May, June, and October presentations.
Evidence. Luckily for you, formal rules of evidence don’t apply in small cases. You can forget all about the TV lawyers who are forever objecting on the grounds of hearsay, relevancy, and other similar legalese. Small-case judges want to get to the bottom of the dispute and will generally consider anything you want to show them.
Arrange your papers in your trial notebook in the order you want to show them to the judge. Keep the originals and make two sets of copies, one to give the judge and one for the IRS attorney.
The most common evidence is canceled checks, receipts, bills, photographs, tax returns, and witness statements. (A sample witness statement is in Chapter 4.) But be creative. Bring anything that helps tell your story. For example, continuing with the Scamway dealership, to show your profit motive, you might bring to tax court the following items:
- Schedule C, Business Income and Expense Form, of your 2004 and 2005 tax returns showing your profit for those years
- the Scamway home presentation guidelines
- a videotape of one of your presentations, and
- guest lists of the people attending the presentations.
Witnesses. Many small cases involve oral testimony of only one person, you. Written witness statements—declarations or affidavits—are usually satisfactory to the judge instead of live witnesses. In some cases, however, live witnesses are more effective. If you bring people to court to testify, list them in your trial notebook and summarize what each will say.
Before the trial, review with each witness what she plans to tell the judge. For example, to bolster your claim that you tried to make a profit in your Scamway side business, ask your neighbor Scarlet to testify. Scarlet could state that she attended Scamway parties at your home, that they were businesslike with only slight social overtones, that she bought some products and saw your Scamway inventory stored in your house.
If you are not sure a witness will show up, or she needs an official court paper to get off from work, you can get an order for her appearance—called a subpoena. You must request a subpoena form from the tax court clerk in Washington, DC. Get it at least two weeks before the trial. You can also get a subpoena at the last minute from the local tax court clerk if the court is sitting in your city.
The subpoena must be served on—meaning given to—the witness. Because there are strict rules of what constitutes proper service, this is best done by the U.S. Marshal’s office. However, anyone over 18 and not a party to the case can legally serve the subpoena. You can’t—you’re a party to the case. Neither can your spouse. You must also pay a witness fee in advance, and mileage for the distance from her house to the tax court. Ask the clerk for the current witness fee and mileage rate when you request the subpoena.
Legal authority. If legal research is necessary to prove your case, include in your trial notebook copies of cases or other legal authority you or your tax professional found. (See Chapter 13 for information on doing legal research.) Most tax court cases are factual, rather than legal, disputes, so legal research isn’t always necessary. If in doubt, ask a tax professional.
Closing statement. The last item for your trial notebook is your closing statement. This is the summing-up presentation you will make to the judge at the end of the trial. Like the opening statement, it should be brief and to the point. Here’s a sample:
Your Honor, you have heard the evidence and can understand why I disagree with the IRS. I do not believe I owe the government any amount of money as a result of the audit or my tax returns for 2008.
I explained how I have tried to make money in the music business for many years. I showed the court my receipts and canceled checks for all of my music expenses. I showed flyers I had printed to promote my appearances. I presented the declaration of my booking agent, Irving R. Clark, stating that he made valiant efforts to get me into more nightclubs.
It should be clear to your honor that I always had a profit motive. I operated in a businesslike manner and not as a hobby, as the IRS contends. Therefore, my business losses should have been allowed by the auditor, and I should owe no additional taxes for 2008.
Thank you for hearing my case.
Show your trial notebook to the IRS attorney if you meet before trial. If it is well organized and shows that you are serious, there is a good chance the IRS attorney may be impressed and agree to a settlement.
Your First Day in Court
On the date that you’re scheduled for court, show up on time. Expect to see lots of other folks on the same trial calendar in the courtroom. The court clerk will take roll call.
The clerk or judge will likely assign you another date and time to come back for your actual court trial, usually later that week or in the next one. Or you may be put on telephone notice—told to call in or expect to receive a phone message giving you the precise date and time of your hearing. If the date is impossible for you or your witnesses, ask for a change. Your request may or may not be granted, but most judges are understanding.
If you live far from the tax court, call the court clerk or IRS lawyer in the week prior to your scheduled court date. Ask for permission not to appear until the day your case will actually be heard. This can save you a trip if the judge allows it.
Your Trial Day
For your court date, don’t put on fancy clothes or airs. Be yourself. Come early and watch another small-case trial, if possible. You probably won’t learn anything helpful to your case, but the preview should put you at ease. If you and your spouse were both audited, only one of you is required to attend the trial. It makes a better impression when both of you show up, however.
Should You Bring a Tax Professional to Court
If you get cold feet at the last minute, you can always bring a tax professional to court with you. The best choice is a lawyer—but you can also bring an enrolled agent or CPA if they are admitted to practice before the tax court. (See Chapter 13.) Even if your tax professional is not allowed to practice in tax court, she may still sit with and advise you during the trial with the permission of the judge.
Again, representatives are not necessary in most small tax cases, although it’s wise to consult with one before trial.
Tax court meets during normal business hours—no evenings or weekends. Most court sessions are held at a local federal building. Because the tax court has only a few permanent locations outside Washington, DC, the facility won’t necessarily be a courtroom.
The judge will sit in the elevated area, called the bench, or at the end of a conference table. It’s hard to generalize about tax court judges—each is an individual. Most are patient and will give you all the time you need to present your case. Judges are assigned randomly and there is no way you can pick a particular judge, or request a different one once he’s assigned. It’s doubtful you’d ever know a tax court judge, anyway. Address the judge as “your honor” or “judge.”
Also present will be the judge’s clerk, a court reporter, and the IRS lawyer. When the clerk calls your case, answer that you are present and ready for trial. If you’re not ready, ask that your case be continued, or postponed. You must have a very, very good reason, such as a serious illness, death in the family, or that a crucial witness can’t come to court that day. The judge came all the way from Washington, DC, to hear your case, and may insist that it go forward.
Once the trial starts, you will be summoned forward to sit at a table in front of the judge or at a large conference table. The IRS lawyer will probably already be ensconced at another table across from you.
Bring your trial notebook and all papers with you. If you have witnesses, ask them to sit nearby. When the case begins, tell the judge that these people will be testifying.
Although tax court trials are open to the public, few spectators attend. You can bring friends and loved ones for support, but they cannot sit at your table without permission from the judge. Rarely are tax court trials reported in the news.
The judge will not know the facts of your case before your trial begins. His file contains only your petition, the IRS’s answer, and any stipulation of facts. The judge doesn’t work for the IRS and won’t have IRS files or anything that you submitted to the auditor or appeals officer. Your slate is clear—start from scratch in educating the judge about your case.
To begin the trial, the judge will ask if you and your witnesses swear or affirm to tell the truth. The judge will then ask you to present your case.
Ask permission to give a brief opening statement. It’s rare that the judge will deny your request. The opening statement is the preview and should be the first item in your trial notebook. Don’t read it word for word—that’s stiff and artificial.
Next, tell the judge your full story and show your evidence to back up each issue. As you present each document, give a copy to the judge and a copy to the IRS attorney. You won’t get these documents back, so don’t give away your originals. The judge may want to see the originals to compare them to the copies, however. So bring the originals to court. Give the judge copies of any legal authority you have found as you discuss each item.
As you give your documents and legal authority to the judge, you may call witnesses to testify. Ask permission to call each witness to the witness stand. To get their story, you must ask them questions. In the example of the Scamway distributor whose losses were not allowed by the IRS, here are sample questions to ask Scarlet, the neighbor and friend:
Are you familiar with my Scamway business?
Did you come to my home for presentations?
Please describe the sales presentations.
How many other people were present?
Were you a customer in 2008?
How many times have you bought Scamway products from me?
Did other people buy products at the presentations you attended?
Have you seen where the products are stored in my house?
Do you know if I have a home office?
The IRS attorney may cross-examine each witness and call its own witnesses and present evidence.
After you and the IRS have presented your documents, testimony, and witnesses, ask permission to sum up your case. Now is the time to present your closing statement, the last item in your trial notebook.
The typical small-case trial lasts an hour or two, although you will be given more time if you need it. Try not to be nervous. The judge doesn’t expect you to be a lawyer or tax law expert.
- Stand when you speak, unless you are sitting at a conference table with the judge close by or the judge tells you to remain seated.
- Avoid reading aloud to the judge; it’s boring. Just speak in your own words.
- Be as brief as possible, but fully explain your case, as if you were talking to a friend.
- Be polite. Never interrupt the judge or disparage the IRS or its lawyer.
- Be well organized. Don’t fumble with your papers or otherwise waste the judge’s time.
The Burden of Proof
In our legal system, the “burden of proof” is a rule that says that in order to win a civil lawsuit, you must present more evidence in court than the other side. But keep in mind that courtrooms aren’t laboratories in which evidence can be scientifically weighed.
In 1998, Congress amended the tax code to allow courts to shift the burden of proof from the taxpayer to the IRS, but only when the taxpayer and the IRS are in court (not at an audit), and then only under certain conditions.
For example, if a taxpayer did not comply with all reasonable requests by IRS auditors for information, or did not keep good records, the court can place the burden of proof on the taxpayer. Also, a corporation, trust, or partnership with a net worth exceeding $7 million that sues the IRS in court is not entitled to the shift of the burden of proof. And the burden shifts only as to factual issues—the taxpayer still has the burden of proof in contesting legal issues. If this is too confusing, see a tax attorney for an analysis of how it might apply to your situation.
Awaiting the Judge’s Decision in a Small Case
While the judge may announce a decision at the end of your trial, don’t count on it. Usually, you’ll get a ruling in the mail about a month or two later. Judges don’t like to announce decisions in court to avoid debates with sore losers.
Judges’ rulings in small cases seldom give explanations as to why you won or lost. Futhermore, the decision won’t compute the exact amount you owe. This comes in a later bill from the IRS campus center computer.
The Tax Bill
Assuming you still owe some taxes, you will get a bill from the IRS within about two months of the judge’s decision. This bill is always higher than indicated in the decision because the court’s order will state the tax and any penalties, but not any interest or late payment penalties due. By law, the IRS must charge interest from the date the tax was originally due.
You don’t need to pay right away, but interest continues to accrue on the balance until you do. (See Chapter 6 for options in dealing with a tax bill.)
Regular Tax Court Cases—Over $50,000
Note: Skip this section if your case is a small case.
If the taxes and penalties from an audit total more than $50,000 for any one audited year, your case is called a “regular tax court case.” This means you won’t qualify for the simplified small-case procedures. But unlike a small case, you may appeal a regular-case decision to a higher court if you lose.
Most people hire a lawyer for cases over $50,000, but about 40% of all regular-case petitions are filed by taxpayers without lawyers. Most of these cases settle before ever reaching a judge, without any legal expenses being incurred other than the court filing fee.
Like a small case, there is no jury, and one judge hears the case. Tax court judges are not as patient with taxpayers representing themselves on a regular case as they are with small-case people. The rules are much more formal.
For a regular case, you and the IRS’s attorney may be required to submit formal legal briefs within a few months after your day in court. A legal brief is a highly technical document and anything but brief. You must recite and comment on the evidence produced at trial, supporting legal theories, and tax law precedents. A tax professional—most likely an expensive tax attorney—is required for writing a decent brief.
There are no free, government-appointed attorneys in tax court. But you might check with a nearby law school to see if it has a free or low-cost legal clinic.
In two situations, it makes economic sense for you to handle a regular case dispute without an attorney: One is by asking for a bench decision; the other is by dropping down to the small-case category.
An alternative to the complicated post-trial brief writing is to ask the judge for a bench decision at the conclusion of the trial. If the IRS agrees, the judge can dispense with legal briefs. The judge may go along if he is satisfied that the facts and law are clear-cut—either for or against you.
If your request is rejected and you don’t submit an adequate legal brief, you will lose. You will have delayed the final tax bill, but you will incur extra interest. If buying time is enough of a victory for you, then congratulations.
Not Contesting Amounts Over $50,000
If your audit bill for any single year is over the $50,000 threshold, you may still be able to utilize the simplified S case procedures. The catch is that you must give up your right to contest amounts over $50,000 in taxes and penalties for any one tax year.
Ronnie gets an audit report claiming he owes $62,000 for 2008 and $9,500 for 2009. Ronnie can proceed as a small case in tax court if he contests only $50,000 for 2008, agreeing he owes the $12,000 overage. Of course, he can contest all of the $9,500 for 2009. The total amount contested is $59,500, and this is still a small case under tax court rules.
Other Federal Courts—Paying First Is Required
Instead of going to tax court, you can proceed to one of two other federal courts: a U.S. District Court, located throughout the country, or the U.S. Court of Federal Claims. (If you’re in bankruptcy, there’s a third option, discussed below.) District courts follow strict rules of procedure—meaning you will need a tax lawyer from start to finish. The court of federal claims is more like the tax court in that its judges travel throughout the country to hear cases, and its rules and hearings are less formal than in district court.
Unlike tax court, where some CPAs and enrolled agents are allowed to represent taxpayers, only a lawyer can represent you in other federal courts—and the legal fees can be staggeringly high. If you win, however, you may be able to persuade the judge to order the IRS pay your attorney’s fees. (See “Can You Get the IRS to Pay Your Attorney’s Fees?” above.)
Only 5% of all tax disputes for regular cases go to a district court or the court of claims instead of tax court. Usually, these cases involve large corporations. The unpopular feature of these two forums is that you must first pay the tax bill before filing your lawsuit. Technically, you are bringing a refund lawsuit against Uncle Sam for the taxes you contend were overpaid. Before suing, you must file IRS Form 843, Claim for Refund, and either have it rejected (available on the IRS’s website at www.irs.gov) or wait until at least six months passes without the IRS taking any action on your refund claim.
Can You Get the IRS to Pay Your Attorney’s Fees?
If you hire an attorney to represent you, it is possible, but difficult, to get the IRS to pay your attorney’s fees. (IRC § 7430.) Not only must you win, but also you must show that the IRS’s position was not “substantially justified.” This means proving that the IRS knew or should have known that it was wrong on either the facts or the law. This is hard.
Although there is no maximum amount of legal fees you can collect, you are limited to recovering $125 per hour for the attorney’s time unless you can show the case was unusually difficult and your attorney normally charges more. The second part will be simple—most tax attorneys charge from $150 to $400 per hour.
Example: Thomas lost his audit after supplying documents which were ignored by the IRS. He brought the same records to his trial before a tax court judge and won his case. The tax court awarded Thomas $17,000 in legal expenses incurred in fighting the unreasonable tax assessment. (Tinsley v. Commissioner of Internal Revenue, TC Memo 1992-195 (1992).)
If you don’t hire an attorney, you are not entitled to compensation for your time in fighting the case—even if you are a lawyer.
Sometimes other federal courts are better than tax court. If the IRS claims you owe a lot—$50,000 or more—and you disagree and can pay first, see a tax attorney. Consider filing in a district court or the court of federal claims. You might have a better chance in these two courts than in tax court, depending on the tax issues involved.
The advantage of these alternative courts lies in our sometimes inconsistent judicial system. The tax court, district courts, and the court of federal claims, as well as some bankruptcy courts, all have the power to decide tax cases, but sometimes decide the same tax issue differently. Because their decisions are published online and in casebooks found in law libraries, it is no secret how each court has ruled in the past.
Although judges can change their minds, and the makeup of courts changes over time, courts seldom go against their own precedents. This means you can choose the court that has been most kind to your tax situation in the past. Perhaps of greater importance is that you can request a jury trial in a district court. If a jury is upset with the IRS or the tax law, it can give you a break.
There is another reason why some people sue in a court other than tax court. The district court and court of federal claims lawyers do not work for the IRS and are often more reasonable in settling cases than are the IRS’s tax court lawyers. The primary disadvantage of going to these other courts is the legal expenses.
Bankruptcy judges also have the power to decide IRS disputes. I have seen some very favorable tax decisions made in a bankruptcy court adversary proceeding. Of course, you must file bankruptcy first to get your IRS dispute heard. If bankruptcy is a serious option for you, see both a bankruptcy and a tax lawyer, or one who works in both areas.
For an overview of taxes and bankruptcy, see Chapter 6. Also, detailed information, including the forms and instructions for filing for bankruptcy, can be found in How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard (Nolo); Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Robin Leonard (Nolo); and The New Bankruptcy: Will It Work For You? by Stephen Elias (Nolo).
Appealing to Higher Courts
Small cases (under $50,000) heard in tax court are final and cannot be appealed. All other cases—regular cases heard in tax court, as well as cases brought in a district court, the court of federal claims or bankruptcy court—can be appealed to a U.S. Circuit Court of Appeals. A lawyer is needed to handle this highly technical process, and you can expect legal fees starting at $10,000. Your statistical chance of winning is about 10%. If you lose, you can ask the U.S. Supreme Court to hear your case, but your odds are better for winning your state’s lottery.
The tax court’s address is U.S. Tax Court, 400 Second Street, NW, Washington, DC, 20217, telephone number 202-521-0700. The court also has a helpful website at www.ustaxcourt.gov, where you can find all of its decisions as far back as 1995.
- The tax court hears disputes between taxpayers and the IRS.
- It’s often easy and inexpensive to go to tax court without a lawyer.
- IRS lawyers settle most cases without ever going to court by reducing an individual’s or business’s tax bill.