3 WAYS TO FIGHT IRS IN COURT
Yes, you can sue the IRS. But it can be as complicated a process as the U.S. Tax Code. This quick guide can help you find your way around the court system and choose the best forum for winning your case.
Sometimes, IRS agents just don’t listen. Often, when they do listen they just don’t understand. The typical auditor has just three years of training — by decidedly one-sided in-house instructors. Many of them feel this qualifies them to “determine” what the law means. I’m sorry folks, but in our constitutional system only courts of law “determine” the meaning of laws. Even to engage in the practise of federal law, the states are the licensing authority. Practicing law without a license is generally a felony. Yet, I have never met an IRS agent who was openly practicing law AND who was licensed to practise law by the state in which he was doing it. In cases where the IRS agent deviates from his actual job — the examination of records — and engages in “determining” the meaning and application of laws, we have to take the government to court.
But how? To which court? And how much will it cost?
If you and the Internal Revenue Service can’t agree, they will send you a “Notice of Deficiency,” sometimes referred to as a 90-Day Letter. This is because once the notice has been issued, you have 90 days from the date on that notice to file a petition with the Tax Court.
If you miss the 90-day cutoff, you lose! No ifs, ands or buts. The statute of limitations has run out and you must pay the tax. You may be able to sue for a refund, but you have to pay the tax first. So, first and foremost, if you disagree with the IRS, don’t just sit on the notice. Respond, saying that you disagree with their findings. Now, let’s see what to do once we’ve decided to go to court.
U.S. Tax Court
Most taxpayers choose the U.S. Tax Court as their forum to litigate tax issues. Established in 1923, it’s made up of 19 judges who travel around the country and hear cases on a regular basis. It handles only tax litigation, and the judges are tax experts.
The major advantage of electing this forum is that it is the only court that will decide your case before you pay the tax. All other options require you to pay the disputed amount upfront. If you can’t pay, you won’t be able to get into any of the other courts, as those are intended as refund disputes. (For more about what to do if you can’t pay, see the accompanying article at this web site What if you can’t afford to pay?.)
If your argument is based on technical analysis, this is the courtroom for you. You want a judge who understands the minutić of the law.
If your argument is based on fairness or equity, you don’t want to be in the Tax Court. You should file your petition in U.S. District Court, discussed below. In district court, a jury of your peers decides the verdict. Remember, Tax Court cases are decided exclusively by judges; there are no Tax Court juries.
Although you may represent yourself at the Tax Court, it is best to have an attorney specializing in taxation to handle the case.
A simplified process is available if the disputed tax amount is $50,000 or less for any taxable year. Here, you may want to represent yourself.
Cases under the Small Claims division are heard by special trial judges in informal settings, and the formal rules of evidence don’t apply. But if you lose, you can’t appeal. Their decision is final and binding. Regular Tax Court decisions can be appealed to the U.S. Courts of Appeal, and then to the U.S. Supreme Court. Not so the decisions of the Small Claims division.
The fee for all cases is $60. You send it, with an original and two copies of your petition, a copy of the Notice of Deficiency, and your pick of the city where you want the case to be heard.
U.S. District Court
If you missed the 90-day time limit, or want a jury to hear your case, you may choose to go to U.S. District Court. It’s the only forum where a jury is available. That’s great if your argument is more about fairness than technical compliance. Juries are more receptive and sympathetic to the equities of a case than to the letter of the tax law.
To get into a District Court, you must first pay your tax deficiency and then file a claim for a refund with the IRS. The IRS then has six months to act on your claim. When it is rejected, you can then file suit for a refund in U.S. District Court. (I should note that, rarely, does the IRS say, “Oops, we goofed!” and give you a refund.)
The District Court hears all kinds of litigation involving federal laws and any kind of law, state or federal, if the litigants are citizens of different states. The District Court judges are rarely tax experts. If your position is technical, go to Tax Court. You can represent yourself in the U.S. District Court, but judges frown on it.
District Court decisions can be appealed to the U.S. Courts of Appeals, and then to the U.S. Supreme Court.
U.S. Court of Federal Claims
This is your third choice of forums, and in my opinion, the least desirable, unless you have a lawyer who successfully “shops” for the right venue. (I’ll explain that in a moment.)
The U.S. Claims Court is a special court that hears all sorts of claims against the United States, including your claim of overpaying your taxes and wanting your money back. Claims Court judges only hear case arguments in Washington, D.C.
However, before the arguments, there is a fact-finding hearing before a trial judge in a city near where you live. The trial judge will file the findings and the recommended decision. If either you, or the IRS, disagrees, the case will come up for arguments before the full court in Washington, D.C.
Decisions can be appealed to the federal Circuit Court of Appeals, and then to the U.S. Supreme Court.
But why go here if you don’t get a jury, don’t get a tax expert as a judge, and still have to pay the tax first? In addition, the litigation is complex and you most certainly will need an attorney.
The answer lies in the quirky nature of our legal system. Our federal judiciary divides the country geographically into different circuits. Unless the Supreme Court has ruled on the specific issue, judges in different circuits are free to decide a case based on the legal precedent in that specific circuit’s Court of Appeals. So one circuit’s decision could be completely opposed to what another circuit’s Court of Appeals has ruled in the past.
In the legal world, this is called “forum shopping.” A sharp lawyer will pick the circuit in which the past rulings have been most sympathetic to your cause. The U.S. Claims Court may be able to follow a legal precedent in your favor that the other courts have ruled against.