Audits by the Internal Revenue Service (IRS) are conducted to verify whether the information a taxpayer provided when filing his or her income taxes was accurate and if the tax amount reported was accurate.
During an IRS audit and if they determine that your return was inaccurate, you may face one of the following scenarios: additional interests, civil penalties, civil fraud penalties, or criminal penalties. An audit case can be appealed by the taxpayer, which may result in some relief from potential tax adjustments, interest, and penalties incurred by the auditor.
In some cases, taxpayers may find themselves in a situation where an appeals officer doesn’t agree with their position, or only reduces their assessment by a small amount. Taxpayers in this situation have some additional options. U.S. Tax Court may be a good place to start if you are seeking to overturn an unfavorable IRS audit ruling. As a federal trial court, the U.S. Tax Court gives taxpayers a fair hearing in the tax dispute.
What You Should Know
- The U.S. Tax Court can be an excellent place to start if you wish to overturn an unfavorable IRS audit ruling.
- Penalties and back taxes can be collected by IRS lawsuits.
- The IRS can also be sued, but only for technical matters such as collecting a refund or defending against a lawsuit.
- Taxpayers are entitled to a fair hearing at the U.S. Tax Court.
- You can petition for a hearing in another federal court, such as a U.S. District Court or a U.S. Court of Federal Claims, if you do not receive a favorable ruling in a U.S. Tax Court (and your case qualifies for regular tax court proceedings).
The U.S. Tax Court in brief
Each U.S. state has a branch of the U.S. Tax Court located in the largest city. Hearings are held monthly in most states except during the summer months. Some states, however, may only conduct hearings for a few weeks per year due to their smaller populations.
1 A tax court judge is appointed by the President of the United States. Tax court judges do not have juries; they are appointed by the President. They usually serve 15-year terms.2 Those who are considered for these positions are either attorneys who have previously worked for the IRS or those who have practiced tax law privately.
Tax courts are separate from the IRS, ensuring taxpayers receive an impartial hearing. There are two branches of the U.S. Tax Court: small tax cases (S cases) for amounts less than $50,000 and regular tax cases for amounts over $50,000.
The benefits of the U.S. Tax Court
A very high probability exists that taxpayers who sue the IRS in U.S. Tax Court will succeed at least partially. Most tax court cases settle before they go to trial. In general, taxpayers who use this route are very serious about reducing or eliminating their assessments. As a result, it is conceivable that the IRS doesn’t want to risk losing any more revenue in court than it forfeits through a settlement.
Due to the fact that it is not particularly difficult to present a case in tax court, some taxpayers decide they do not need a lawyer when they petition for tax court. Additionally, the appeals process is not necessary before submitting a petition for a hearing in tax court (although some tax advisors may recommend it).
Moreover, requesting a hearing in tax court can give you more time to decide how to pay off the amount owed. All other U.S. courts require you to pay the tax you have been assessed before you appear in court; the U.S. Tax Court does not require you to do so.
Tax Court Cons
There is no fixed timeframe during which a judge will decide on a tax case, which is one of the biggest disadvantages of U.S. Tax Court proceedings. The time it takes for a judge to make a decision will usually take at least six months from when you file your petition until you are called to trial. It usually takes about one year for small cases to be decided, and it takes a long time for regular cases.
The tax balance may continue to accrue interest during the process, but if you make a payment and label it as a deposit, it may be possible to stop the interest from accruing.
Tax court cases involving small amounts
Generally, taxpayers will qualify for S cases if they have a tax year in which the amount is less than $50,000. Regular tax cases are for much larger amounts, but most taxpayers qualify for S cases. An IRS 90-Day Letter gives you 90 days to file a small tax court petition within 90 days of receiving the Notice of Deficiency.
The instructions for petitioning the U.S. Tax Court for a S case can be found on the U.S. Tax Court website. If you are out of the country when the letter arrives, you have 150 days to file a case. A section of the website is entitled “Taxpayer Information: Starting a Case.”
It is the taxpayer’s responsibility to complete the forms as instructed and to make three copies of each form. The taxpayer may pay the filing fee either by check, money order, or other draft.
After you submit your petition, you will receive three forms in the mail. Upon submitting your petition, the IRS will send you a settlement offer. You can accept or reject this offer.
- Preliminary trial notice
- Pre-trial orders that are standing
- Trial memorandum
Depending on whether your case was filed as a small tax case or a regular tax case, you must complete and return these forms at least seven or at least 14 days before the trial.
Trials of small claims
The IRS attorney may request a meeting if your case goes to trial. At this meeting, you will be asked to discuss the case and agree on certain basic facts. The facts that cannot be agreed upon must then be shown to the judge. Your trial is likely to be scheduled in the months ahead, so it’s important to put together a detailed outline of what you want to say to the judge, get all the necessary documentation, and select your witnesses.
When you represent yourself, it is important to prepare an opening statement, testimony, evidence, and witnesses. Bring the information with you to an IRS lawyer before the trial. You may be able to convince the attorney to offer a settlement based on your efforts and organization in this regard.
After the trial, the judge may render a decision right away, but it is more likely that a few months from now you will receive your decision by mail. A small tax case in the U.S. Tax Court cannot be appealed if the judge makes a decision.
To prove that the IRS is wrong, the taxpayer has the burden of proof.
Typical tax court cases
The procedures for regular tax cases are more complicated than those for S cases. Many regular tax cases settle before going to trial, just like small tax cases. The taxpayers can also appeal losing decisions to higher federal courts in regular cases, whereas small cases cannot.
Because of this, it may be necessary to forgot a hearing at the U.S. Tax Court if a taxpayer meets the requirements for a regular tax case and proceed directly to the federal court system in some cases. Tax attorneys, accountants, or a similar professional can assist you in deciding what the best course of action is.
A tax attorney usually has to prepare formal legal briefs for both the taxpayer and the IRS attorney in regular cases, which are complex and technical documents. You can request a bench decision instead if you cannot write this brief or cannot afford to hire someone else to do it for you. In spite of the fact that bench decisions aren’t required by law, you will lose your case if the judge rejects your request for a bench decision unless you write a brief.
Various federal courts
Appeals to a higher federal court after a losing decision are the final step in the appeals process for regular case taxpayers. The final stop in the appeals process for regular case taxpayers is the U.S. District Court or the U.S. Court of Federal Claims. The courts can overturn adverse decisions rendered by U.S. Tax Court, but you will need to pay all the debts assessed in your audit before either court can hear your case.
The U.S. District Court requires a lawyer to conduct a hearing, but the U.S. Court of Federal Claims doesn’t. Legal fees in these courts can be outrageous. Taxpayers can also request the court to reimburse them for their legal fees (although this is very uncommon). You may have to appeal your case to the U.S. appeals courts if you do not get a successful outcome in these courts. However, you are highly unlikely to be successful.
Appeals to the Supreme Court are also theoretically possible, but they have virtually no chance of success.
Court of Bankruptcy
When other courts fail, bankruptcy courts may be able to get amounts due from taxes dismissed. However, to pursue this course of action, the taxpayer must file for bankruptcy first, and it is not a recommended way to avoid taxation because bankruptcy has many far-reaching ramifications.
Is it possible to sue the IRS?
There are certain circumstances in which taxpayers may sue the IRS, but they cannot sue the IRS for emotional distress or punitive damages since it is a federal government agency. If the IRS sues you for back taxes, you can sue as a countersuit for technical matters.
Are people sued by the IRS?
Those who owe back taxes can be sued by the IRS for collection. Proceedings are usually conducted in U.S. Tax Court, but federal appeals are also available.
What is the number of judges on the U.S. Tax Court?
Tax Court judges serve 15-year terms appointed by the President and sit on the U.S. Supreme Court17.
Tax Courts vs. District Courts: What’s the Difference?
Both U.S. Tax Court and District Court hear matters pertaining to the Internal Revenue Code (IRC). Both are non-trial venues where a judge and no jury are present. It is reported in the CPA Journal that the [Tax] Court enforces the rules of evidence more leniently than the District Court and Claims Court. Tax payers may be permitted to enter marginally questionable evidence due to this leniency, but if the taxpayer’s case rests on barring certain IRS evidence, the Tax Court may not be the best choice.”
For taxpayers who wish to appeal a ruling that is unfavorable, there are several federal courts where hearings may be held. Generally speaking, the U.S. Tax Court receives appeals, but there are times when other federal courts will also hear appeals.