Steps to Filing a Lawsuit Against the IRS in Tax Court

You may not file suit against the IRS until you have received an IRS “notice of deficiency,” also referred to as a “letter of deficiency” or “90-day letter.” The reason is that, until you have received a notice of deficiency, the United States Tax Court simply does not have jurisdiction over your case.

The latter nickname arises from the fact that the notice – which outlines any additional taxes, interest, or civil penalties the IRS has determined are due upon the conclusion of a tax audit – grants the recipient a 90-day period in which to file a petition in U.S. Tax Court. If the taxpayer fails to do so within the allotted timeframe, the debt will become valid and enforceable once the 90-day period elapses – even if the IRS made errors in calculating the taxpayer’s liabilities. However, there is an exception for taxpayers who receive deficiency letters while living outside the United States. Such taxpayers have 150 days, rather than the standard 90, in which to file their petitions.

Once your petition has been timely filed, the IRS will have an opportunity to respond by filing what is known as an “answer” to your petition. The IRS’ answer must be filed within either 45 or 60 days after the petition, depending on the circumstances. In its answer, the IRS will systematically address each statement made in your petition (unless the answer claims that the IRS lacks knowledge or information about your tax issue, which is tantamount to denying the statements you asserted in your petition). Generally speaking, the taxpayer need not file a reply to the answer, unless the IRS specifically files a “motion,” or formal request, asking the taxpayer to admit to whichever statements the IRS has asserted. If this occurs, the taxpayer will have an additional 45-day window in which to reply.

Technically speaking, a taxpayer may attempt to manage these tasks without representation, which is known as pro se (“for oneself”) representation. However, this is extremely inadvisable due to the immense legal and technical complexity of the facts, laws, and procedures in dispute. When he or she is facing down the IRS’ high-powered, sophisticated network of investigators, attorneys, and technological resources for gathering and analyzing evidence, a taxpayer should simply not enter the ring alone.

Refund Claims vs. Deficiency Suits Against the IRS

Be advised that the aforementioned process applies specifically to lawsuits involving notices of deficiency, which are aptly called “deficiency suits” or “deficiency actions.” Though less common than deficiency suits, in which taxpayers dispute the tax assessments, penalties, and interest charges arising from IRS tax audits, some taxpayers instead file what are called “refund actions.” These are the two types of tax issues most likely to be litigated successfully.

In contrast to a deficiency suit, the purpose of a refund claim is to recover an improper tax payment that has already been made to the IRS. To bring a refund action successfully, the taxpayer must meet the following standards:

1. First, the taxpayer must have paid an alleged tax debt in full.
2. Next, the taxpayer must attempt to resolve the issue through every available administrative channel. This may involve filing Form 1040X (Amended U.S. Individual Income Tax Return) or Form 1120X (Amended U.S. Corporation Income Tax Return), as appropriate.
3. Finally, the taxpayer must wait for a period of six months to elapse before initiating litigation. The six-month clock begins counting down from either (1) the date on which the original refund claim was filed, or (2) the date on which the taxpayer received a notice of disallowance from the IRS.

At this point, you are likely wondering about the probable fate of cases like yours. Much like criminal cases and personal injury cases, the vast majority of Tax Court cases are resolved via settlement well before the trial stage – which occurs late in the legal process, after the aforementioned procedures and an information-gathering stage called “discovery” – is ever reached. Statistically speaking, approximately 96% of cases are settled prior to trial, without actually going to Tax Court. Settlement negotiations with taxpayers are handled by the Appeals Division of the IRS, to which taxpayers’ cases are generally referred once the IRS has filed an answer in response to the taxpayer’s petition.

In the rare instance where appeals cannot resolve the issue, litigation may prove to be the only effective means of resolution. However, as we noted in our article discussing the audit and litigation cycle, our aggressive tax litigation attorneys have a total success rate in resolving disputes at appeals, meaning we have never needed to bring a client’s case all the way to Tax Court but are ready willing and able to do so.