United States Tax Court
If your income tax audit with the IRS is not resolved, you most likely will have the right of appeal to the United States Tax Court. Generally, you do NOT have to pay any of the proposed deficiency (the balance due that the IRS wants you to pay...) before the Tax Court hears your case. That is not true with other courts - such as the District Court - where you must first pay some or all of the amount, then file a claim for refund.
There are some procedural "hoops" you need to leap through before you may qualify to have your case heard by the US Tax Court.
The jurisdiction of the United States Tax Court can be divided into twenty five unique categories based on a combination of three criteria:
All three of the criteria must be met before
the Tax Court will have jurisdiction to determine the disputed matter
between you and the IRS.
Cases involving $50,000 or less in deficiency (the amount owed) for a single tax period can be considered under the "Small Tax Case" procedure. Taxpayers can represent themselves in such proceedings, although that is usually not a good plan. Cases involving deficiencies in excess of $50,000 are handled very formally (e.g., strict application of the rules of evidence) and typically require a representation by a Tax Attorney.
If you receive a Notice of Deficiency (90-day letter), the clock begins ticking on the date listed in the notice, and stops on the 90th day from that date (150 days if addressed to a taxpayer outside of the U.S.). A Notice of Deficiency can be rescinded if certain requirements are met. One scenario justifying a rescission would be where the taxpayer was denied an administrative appeal.
If you miss the 90-day deadline, the IRS will assess the tax shown on your Notice of Deficiency. 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. You must respond timely, saying that you disagree with their findings and explain why.
Your petition (the document you file with the Tax Court) should contain all reasons why you are contesting the Notice of Deficiency. If you forget to raise a reason or argument, the Court may not let you raise it during the litigation of your case.
It is generally recommended that you have a tax attorney review a petition you prepare yourself, or that is prepared with the assistance of someone who is not an attorney. This is particularly true where the issues are complex and simply filling in the blanks on the Tax Court's standard forms is insufficient.
Advantages of Tax Court.
Similar to the appeals
process, taxpayers who sue the IRS in U.S. Tax Court can expect a very
high probability of at least partial success. It is reported that over
90% of tax court cases settle before going to trial. This is because the
IRS knows that taxpayers who take this route are very serious about
getting their assessments reduced or eliminated using any legal means
possible, and it doesn't want to take a chance on losing further
revenue in court
than is forfeited via settlement. Furthermore, many taxpayers who
petition for tax court in a Small Tax Case do not need a lawyer, as
presenting a case in tax court is not particularly difficult. Still, it
is always a good idea to consult an attorney when filing a legal
document with the Court. It is also not necessary to go through
the appeals process before choosing this option, although most tax
advisors will recommend that you do so. As with the appeals process,
petitioning for tax court buys you time to make payment plans on your
assessment. One of the greatest advantages of tax court is the fact that
you aren't required to pay the tax you were assessed before going to
court; all other
Disadvantages of Tax Court
One of the biggest drawbacks to tax court is the wait time. In most cases, at least six months will elapse between the time you file your petition and when you are finally called for trial. Small cases often take a year to decide, and regular cases can take much longer. Interest also continues to accrue upon your unpaid tax balance during the proceedings. However, you can stop the interest accrual before going to tax court by making a payment and labeling it as a deposit.
Small Tax Court (S Case) Procedure
The majority of taxpayers
who take the IRS to court qualify for S case proceedings. If you have
been issued an IRS 90-Day Letter, you have 90 days from the date on the
Notice of Deficiency to respond (150 days if you are out of the country
when the letter arrives) by petitioning for small tax court. You can
download the forms and instructions (Election of Small Tax Case
Procedures and Preparation of Petitions) from the U.S. Tax Court website
A $60 filing fee is also required - the only court cost that you will
have to pay for the entire process. Complete the forms as instructed and
make three copies of them: one for yourself and the others for the
address listed on the website.
Similar to S cases, most
regular cases settle before going to trial. The procedures for regular
cases are more complex than for S cases, but taxpayers can appeal losing
decisions to higher federal courts (in some cases, it is recommended
that taxpayers skip Regular Tax Court altogether and proceed directly to
the federal court system). Regular cases often require that both the
taxpayer and the IRS attorney submit formal legal briefs - a complex and
technical document that usually must be written by a tax attorney. If
you cannot write this brief or afford to hire someone to do it for you,
you can request a bench decision at the end of the trial instead. This
does not require briefs, but if the judge rejects your request and you
don't have the brief, your case is lost. Another
alternative is to request that your case be reclassified as an S case.
However, in order to do this, you must waive your right to contest any
amount of tax assessed above $50,000.
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