Because a taxpayer does not need to prepay a disputed tax deficiency prior to filing suit, the most common type of tax lawsuit is a deficiency action. To bring a deficiency suit the taxpayer must have received a notice of deficiency. Taxpayers that opt to dispute an IRS notice of deficiency usually decline to pay the additional tax, penalties and interest and timely file a petition for redetermination of the deficiency with the Tax Court. (Note: Interest will continue to accrue and thus taxpayer’s should consider posting a bond for the amount disputed) The Tax Court’s jurisdiction turns on the IRS’s issuing a notice of a deficiency and the timely filing of a petition by the taxpayer with the Tax Court.

DEFICIENCY NOTICE (90 DAY LETTER)

An IRS notice of deficiency, commonly referred to as the statutory notice or “90 day letter”, because a taxpayer has 90 days to respond to it or the deficiency becomes legally enforceable, is the taxpayer’s “ticket to Tax Court” because without it the Tax Court will not hear the case because it lacks jurisdiction. The deficiency notice typically states that the taxpayer owes additional taxes, penalties and interest and includes a description of the legal basis for the additional amounts sought and is typically sent at the conclusion of an audit. The IRS is required to include in the deficiency notice the last day on which the taxpayer can file a petition in the Tax Court.

The federal courts will find a deficiency notice to be valid if the IRS sends it to the taxpayer’s last known address by certified or registered mail, even if the taxpayer never physically receives the notice. A taxpayer’s last known address is the address which appears on the taxpayer’s most recent federal tax return, unless the IRS is given clear and concise notification of a different address. Notice supplied with the post office of a change of address is usually found insufficient for this purpose.

TIMELY FILING OF DEFICIENCY SUIT

The petition for redetermination of a deficiency must be filed with the Tax Court within 90 days of the date the notice of deficiency is mailed to the taxpayer. If the deficiency notice is mailed to a taxpayer who is outside of the United States then the petition must be filed within 150 days of the date the notice is mailed to the taxpayer.

WHO CAN REPRESENT A TAXPAYER IN THE TAX COURT?

The taxpayer may represent himself, referred to as pro se, or he may be represented by a person admitted to practice before the Tax Court. The IRS is represented in the Tax Court by the Chief Counsel for the IRS or his delegate (Said simply – the IRS is represented by IRS attorneys).

An attorney who is licensed to practice law must file an application for admission to practice before the Tax Court. A non-attorney must take an examination (which is nearly possible to pass without legal training) in addition to completing an application. The non-attorney must also be sponsored by two persons who are admitted to practice before the Tax Court and each sponsor must send a letter of recommendation to the Admissions Clerk of the Tax Court.

WHERE TO FILE THE PETITION?

The Tax Court petition must be filed with the Clerk of the Tax Court in Washington, D.C.

JURY TRIAL

A taxpayer is not legally entitled to a jury trial in the Tax Court.

PETITION

The petition should be sent to the Tax Court via United States Postal Service registered or certified mail, return receipt requested, or by another Tax Court approved delivery service. The date of mailing, as evidenced by a United States postmark or acceptable substitute, is treated by the Tax Court as the date of filing. Since timely filing is a jurisdictional requirement, having available proof of timely mailings is paramount in the event the petition is held to be received late, or worse yet, does not arrive at all.

The petition must comply with the Tax Court Rules and must contain a clear and concise assignment of each error (allegation of mistakes made by the IRS in law or fact in arriving at their contested position) that the petitioner alleges that the IRS committed in determining the deficiency. Any issue not raised as an assignment of error is deemed conceded (as if the taxpayer accepts the IRS’s position). These rules are the reason why at a minimum, even if a taxpayer intends to represent themselves before tax court (which is a terrible idea), an attorney should be consulted to make sure significant legal rights are not lost with the filing of the petition. The filing of the petition is also the practice of law and should not be filed by non-attorneys (i.e. CPAs and E.A.’s) or the tax practitioner risks being prosecuted for the unauthorized practice of law.

The taxpayer must submit a statement of taxpayer identification that associates the taxpayer’s social security number with the petition but is not a public document. This statement is necessary because the taxpayer’s social security number is required to be removed or redacted from all documents sent to the Tax Court and are considered public documents. The taxpayer must include the $60 filing fee with the filing of the Petition. The taxpayer is also required to designate the place where he/she prefers that the trial be held. If the petitioner fails to designate a trial location, the IRS will select the location when the answer is filed which may not be convenient to the taxpayer.

ANSWER

The IRS will respond to the Tax Court petition by filing an answer. The IRS must either file an answer to the petition within 60 days after the petition is served, or make a motion with respect to the petition within 45 days after the petition is served. The IRS must specifically admit or deny each material allegation in the petition. The answer may also state a lack of information or knowledge, which is treated as a blanket denial to the allegations included in the Petition. If any material allegation is not expressly admitted or denied, it will be considered admitted by the Tax Court. The answer must give notice to the petitioner of any IRS defense and clearly and concisely present the related supporting facts to the defense. The answer must include any affirmative defenses and or allegations of fraud. The affirmative defenses available to the IRS include res judicata, collateral estoppel, estoppel, waiver, duress, fraud and the statute of limitations.

REPLY

The petitioner is not required to file a reply to the IRS’s answer. All the allegations that the IRS has asserted in the answer are deemed to be denied by the petitioner. However, the IRS may file a motion asking that its allegations in the answer be admitted by the petitioner. If this action is taken, the petitioner then has 45 days from the date of the IRS’s answer to file a reply.

SETTLEMENTS

The vast majority (96%) of Tax Court cases are settled without a formal trial. Both the IRS and the Tax Court encourage settlement to reduce the burden on the court system. Ordinarily, after the IRS counsel files an answer, the case is referred to the IRS Appeals Division for settlement consideration. IRS Appeals assumes exclusive jurisdiction to settle the case initially but will generally return the case to IRS counsel approximately six months prior to the trial date if no settlement has been reached by that time.

See Appeals Representation services offered by the Tax Law Office of David W. Klasing :

IRS Appeals Representation

and

IRS Appeals Representation FAQ

SMALL TAX CASES

The Tax Court has available a small tax case division for cases involving $50,000 or less. The rules of procedure and evidence are very relaxed and informal and no briefs are required. This keep the cost of litigation down where compared to large cases. The $50,000 limit applies only to the amount that is contested by the taxpayer. If the deficiency notice is for $58,000 and the taxpayer agrees to all but $50,000 of the deficiency, he is entitled to have the case heard as a small tax case.

As part of filing the petition the taxpayer may elect small tax case status and select the place where he prefers the trial to be held. A list of cities in which the court hears small tax cases is available from the Clerk of the Tax Court. If the taxpayer’s issues are factually or legally complex, proceeding without an attorney may be short sighted. One major disadvantage of electing small tax case status is that the decision of the Tax Court is final and there is no right to appeal and thus this decision should not be made without the input of counsel.

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