The United States Tax Court was established by Congress to provide a judicial forum in which taxpayers have the opportunity to dispute proposed federal tax deficiencies, penalty assessments, and certain collection of tax matters.
The Tax Court is composed of 19 judges appointed by the president. By virtue of their tax careers prior to being appointed to the Tax Court, Tax Court judges only hear cases involving federal tax controversies and federal tax procedural matters. The United States Tax Court is located in Washington D.C. However, each judge travels nationwide so that tax disputes can be adjudicated in a federal courtroom that is reasonably close to the taxpayer and his lawyer or wherever it makes the most sense (i.e., closer to witnesses, budget, etc.).
Types of Tax Matters
- Tax Deficiencies – Notices of Deficiencies
If the taxpayer has filed a tax return, the Internal Revenue Service (IRS) must send a taxpayer a Statutory Notice of Deficiency before assessing and collecting income taxes, estate, and gift taxes. Typically this is issued after other IRS administrative procedures, including but not limited to, IRS audits, appeals, etc. (see our website here for more information about IRS Administrative Procedures in Tax Disputes). It is this Notice of Deficiency that provides the taxpayer the right to contest the alleged additional tax and related penalties before the Tax Court. A taxpayer must file a petition with the United States Tax Court within 90 days of receiving the Statutory Notice of Deficiency. If a taxpayer fails to timely petition the Tax Court, he or she may be forever barred from contesting the IRS determination prior to satisfying the liability in full.
There are certain exceptions to this general rule. For example, the following assessments may be contested in Tax Court on a case-by-case basis. These limited exceptions to the above rule are:
- Penalty Assessments
- Collection Matters – Collection Due Process
Certain types of collection matters can be ‘appealed’ to the U.S. Tax Court. In general, when the IRS takes collection actions, a Collection Due Process Hearing may be utilized. These hearings are subject to judicial review. This means that a taxpayer can appeal a determination made at a collection hearing to Tax Court for review.
Examples of penalty assessments and Collection Due Process Hearings being appealed to the Tax Court are:
- Cases in which the taxpayer did not have the opportunity to contest and IRS determination;
- Innocent Spouse – Relief from joint and several liabilities;
- Declaratory Judgments.
Other Considerations
- Payment of the tax debt is not required for Tax Court determinations
One major advantage, depending on your case, is that in the U.S. Tax Court, taxpayers can commence a case tax case before paying the tax liability asserted by the IRS. Before a tax case is commenced in other kinds of federal courts authorized to hear taxpayer disputes with the IRS, the taxpayer must pay the amount in dispute and then sue for a refund. A payment of the entire IRS assessment prior to petitioning the United States Tax Court may foreclose the Court from having jurisdiction over the controversy.
- Precedent
The Tax Court is not bound by decisions other courts hearing tax matters, such as the Court of Federal Claims or Federal District Courts. However, the Tax Court is bound by the United States Court of Appeals for the Circuit in which the taxpayer resides. The consideration of the substantive tax law in the Appeals Circuit, as well as the Tax Court’s prior opinions, are useful, but not the only consideration a tax practitioner should consider when advising their client about Tax Court options. Therefore, a taxpayer and the taxpayer’s tax lawyer should carefully review any decisions promulgated by the United States Tax Court, Court of Federal Claims, and the Federal District Court before filing a petition. There are numerous contested federal tax matters in which these courts have issued contradictory opinions. These decisions must be taken into consideration before petitioning the Tax Court. A taxpayer must also understand that all trials before the Tax Court are bench trials. This means that a taxpayer will not be afforded the opportunity to have a jury preside over the case. This will reduce the over cost litigation before the Tax Court. However, eliminating a jury will also reduce or even eliminate any possible equity arguments. A taxpayer must carefully weigh these considerations before making a decision which forum to litigate a tax controversy.