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Tax Court: How the IRS Handles ‘Regular Cases’

If you want to contest in tax court an audit outcome of over $50,000 for any one year, your case will be considered a regular case. Most people hire a tax pro to represent them when arguing a regular case.

A Trial in Tax Court

If your case reaches the trial stage, the judge may not be that patient with a taxpayer representing him- or herself. Strict court procedures and rules of evidence apply.

After the trial, you must submit a formal legal brief. This is a highly technical document and anything but brief. You must comment on evidence produced at trial, legal theories, and tax law precedents.

The only way to avoid the complicated brief writing is by asking the judge for a bench decision at the end of the trial. If the IRS attorney doesn’t object, the judge can rule without legal briefs if satisfied that the facts and law are clear-cut—either for or against you. If the IRS attorney objects or the judge denies your request for a bench decision, you will probably lose if you don’t submit a brief.

TIP:

If your audit bill is over the limit for an S case, you might still use the S case procedure.You must give up disputing anything over $50,000 per year.

EXAMPLE:

Ronnie’s audit report claims he owes $62,000 for 2007 and $29,500 for 2008. Ronnie can proceed with an S case if he contests only $50,000 for 2007, agreeing to owe the $12,000 overage. He can contest all of the $29,500 for 2008.

If you decide to hire a lawyer to represent you, understand that it probably won’t be cheap. You are not entitled to a court-appointed attorney in tax court, although a nearby law school may offer free student help or a legal clinic. You might also check with your local bar association for a free or low-cost lawyer referral service for advice.

If you win the case, you might be able to get the IRS to pay your lawyer’s fees. (Internal Revenue Code § 7430.) Your lawyer must show that the IRS position is not substantially justified. This means convincing a judge the IRS knew or should have known that it was dead wrong—on either the facts or the law.

While there is no maximum you can get, you won’t be entitled to more than $125 per hour for the attorney’s time. There is one exception:

You might qualify for a higher rate if the case was unusually difficult and your attorney normally charges more. The second part is easy—tax attorneys charge from $250 to $600 per hour. Ouch.

EXAMPLE:

Tom lost his audit after supplying documents that were ignored by the IRS. He showed the same records to a tax court judge and won. The judge awarded him $17,000 in legal expenses incurred in fighting the unreasonable tax assessment.

Tinsley v. Commissioner of Internal Revenue, TC Memo 1992-195 (1992).

Other Federal Courts

Instead of going to tax court, you can contest an audit from the IRS in two or possibly three other federal courts: a U.S. District Court, the U.S. Court of Federal Claims, or a U.S. Bankruptcy Court. (Bankruptcy courts are covered in the next section.)

District courts follow strict rules of procedure, even more intense than tax court regular cases—you’ll need a tax lawyer from start to finish.

The court of federal claims is more like the tax court, with somewhat relaxed rules of procedure. Its judges are friendlier to people representing themselves than are district court judges.

The unpopular feature of these two forums is that before suing, you must pay the tax bill, file IRS Form 843, Claim for Refund (a copy is available on the IRS website at ww.irs.gov), and then wait six months until the IRS officially denies your request. Your lawsuit then becomes one for a refund of overpaid taxes.

Unlike tax court, where some CPAs and enrolled agents can appear on your behalf, only a lawyer can represent you in a district court or the court of claims. If you win, however, the IRS may be ordered to pay your attorney’s fees.

If you are disputing $50,000 or more and can pay first, talk to a tax attorney about filing in a district court or the court of claims.

There are several potential advantages to filing in one of these courts:

  • First, they rule in favor of taxpayers more often than the tax court does.
  • Second, because of the quirkiness of our judicial system, you might be able to shop around for the federal court that has historically been most kind to your tax situation.
  • Third, you get a jury trial in a district court (but not the court of claims)—a jury of your peers who might be sufficiently upset with the IRS or the tax law to give you a break.
  • Finally, unlike tax court, the government lawyers defending the IRS in district court or the court of claims do not work directly for the IRS. They work for the Justice Department and often are more reasonable in settling cases than are the IRS lawyers.

Bankruptcy Court

If you have a tax dispute with the IRS and are a serious candidate for bankruptcy, talk to a bankruptcy lawyer with tax experience or a tax lawyer with bankruptcy experience. In a bankruptcy court, the judge can decide an IRS dispute. Bankruptcy courts have made some very favorable tax rulings. Another advantage of bankruptcy court—you don’t have to pay the IRS first.

Appealing to Higher Courts

As mentioned earlier, you cannot appeal a tax court S case. All other cases—tax court regular cases and those filed in a district court, a court of federal claims, or bankruptcy court—can be appealed to a U.S. Circuit Court of Appeals. You will need a lawyer and can expect to pay legal fees starting at $50,000.

Your statistical chance of winning is less than 10%. If you lose again, the U.S. Supreme Court might agree to hear your case, but your chance of winning ranks up there with winning your state lottery.

Bishop Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida. He helps clients with their various estate planning needs and helps clients navigate the Medicaid system here in Florida. He also represents clients nationwide and worldwide in front of the IRS. Bishop is also a V.A. accredited attorney and helps Veterans obtain benefits from the Department of Veterans Affairs.