Deficiency Litigation

If a civil tax dispute is not settled in appeals, taxpayers have two types of litigation processes from which to choose: Deficiency Litigation in U.S. Tax Court and Refund Litigation in the U.S. Court of Federal Claims or U.S. District Court. This blog post will focus on Deficiency Litigation and the benefits and disadvantages of pursuing a case in the Tax Court.

The U.S. Tax Court

The Tax Court is currently composed of 19 members appointed by the President. One judge presides over each trial, and there is no jury. Many taxpayers represent themselves, although they may be represented by counsel (and this is generally advised).

A taxpayer may challenge an IRS tax deficiency determination in U.S. Tax Court following receipt of a 90-day letter (statutory notice of deficiency). The petition must be made within the prescribed 90 days, and after filing, the Tax Court will have exclusive jurisdiction over the matter. This means that the taxpayer will not have the option of withdrawing their petition and refiling in the U.S. Court of Federal Claims or in a U.S. District Court.

Benefits and drawbacks of U.S. Tax Court litigation

The overwhelming majority of tax cases are filed in the U.S. Tax Court for the following reasons:

  • As opposed to the other tax litigation forums, taxpayers are generally not required to pay any disputed amount before litigating it in Tax Court – payment of any tax is usually postponed until the case has been decided. Note, however, that interest will accrue unless a deposit is made, per 26 U.S. Code 6603 or under 26 U.S. Code 6213(b).
  • All of the judges are highly knowledgeable experts in tax law and practice.
  • The judges travel to cities nationwide.
  • There is typically less backlog in the Tax Court than in the other forums, so the taxpayer’s case is likely to be heard sooner (often within 12 months)
  • The rules of evidence are relaxed and discovery rules generally favor taxpayers.

Litigation in Tax Court does have its drawbacks as well:

  •  The Tax Court takes some time to issue its opinions – often for well over a year.
  • By filing a petition in Tax Court, the statute of limitations is suspended and the IRS is free to raise new issues that could increase the tax deficiency.

Note that there are some tax disputes that must be heard by the Tax Court, such as an appeal from a collection due process determination (a case involving a lien or levy).

Settlements and Small Tax Cases

Note that settlement proposals made in appeals may still be considered during Tax Court proceedings and a compromise made through the IRS Appeals Office. In addition, where a tax dispute is valued at $50,000 or less, taxpayers may opt for litigation under the Court’s faster and less formal Small Tax Case proceedings – however, the Court’s decisions in small tax cases cannot be appealed.

The next blog in this series will cover U.S. Court of Federal Claims tax litigation considerations.