When a taxpayer receives a notice from the IRS proposing an additional assessment of tax, the taxpayer can often work administratively with the IRS to resolve the dispute. However, many times, the taxpayer and IRS are not able to come to an agreement. In those instances, there are four different forums which can be utilized to litigate a Federal civil tax case: the United States Tax Court, United States District Courts, the United States Court of Federal Claims, and United States Bankruptcy Courts.
The United States Tax Court is based in Washington, D.C., but conducts trials and hearings in 74 cities nationwide. All of the judges on the Tax Court have expertise in tax law. Outside of bankruptcy, the Tax Court is the only forum in which taxpayers may dispute their tax liability without having first paid the disputed tax in full. By far, most tax cases are litigated in the Tax Court. For this reason, unrepresented (or pro se) litigants are common and welcome.
When a petition is filed in the Tax Court, the case is placed on the Court’s general docket and not assigned to a trial judge immediately. When enough cases accumulate for any given trial city, those cases will be calendared for trial and assigned to a trial judge at that time. Most cases will not be calendared for trial for at least one year.
The Tax Court follows the Federal Rules of Evidence, but utilizes its own Rules of Practice and Procedure. The government will be represented by attorneys from the IRS Office of Chief Counsel, and a jury trial is not available. The parties are expected to engage in informal discovery and are required to stipulate to undisputed facts prior to trial. Formal discovery is prohibited until informal discovery is exhausted, and depositions are rarely used.
Typically, a statutory notice of deficiency is a pre-requisite to filing suit in the Tax Court. However, a taxpayer may also invoke the Court’s jurisdiction in various other areas, e.g., appeals from CDP hearings, review of interest abatement claims, review of administrative costs, whistleblowers actions, innocent spouse claims, worker classification claims, and various declaratory judgment actions.
Tax Court cases are generally appealable to the Court of Appeals for the circuit where the taxpayer resides at the time the petition is filed and the Tax Court will follow the precedent of that circuit in deciding each case.
United States District Courts are located throughout the nation, with at least one court located in each state, and the District of Columbia. District Court judges are generalists and often do not have expertise in tax law.
District Courts are refund forums. Before a refund suit may be filed in District Court, a taxpayer must fully pay the tax in dispute and file a timely administrative claim for refund. Thereafter, a refund suit may be filed at any time beginning six months after the claim is filed, up to two years after the denial of the claim by the IRS. If the refund claim is never denied by the IRS, the taxpayer theoretically has forever to file a refund suit in District Court. However, there is a school of thought that the cause of action expires six years after the refund claim is submitted.
At the time a refund suit is filed, the case is immediately assigned to a judge who will ultimately be the trial judge. Department of Justice (DOJ) attorneys will represent the government and a jury trial is available. A taxpayer in District Court should expect to undergo extensive discovery by the government in the form of interrogatories, depositions, requests for the production of documents, and requests for admissions.
The Court of Federal Claims is based in Washington, D.C., but may hear trials in other cities at the request of the parties. The Court of Federal Claims is the primary Federal court that hears money claims against the government, including tax refund suits. Court of Federal Claims judges do not usually have extensive expertise in tax law, but given that one-fifth of the cases before the court are tax related, Court of Federal Claims judges are more familiar with tax issues than District Court judges.
As a refund forum, all of the jurisdictional prerequisites of a refund suit (described above) must be met to file a suit in the Court of Federal Claims. The government will be represented by DOJ attorneys and extensive formal discovery will be utilized. However, unlike District Court, no jury trial is available.
While refund suits in District Court and the Court of Federal Claims are very similar, a taxpayer may opt to file a refund suit in the Court of Federal Claims versus his local district court to avoid local attention. Moreover, a taxpayer may choose this forum as opposed to District Court as the law of U.S. Court of Appeals for the Federal Circuit is binding as opposed to the law in the taxpayer’s circuit.
Besides the Tax Court, U.S. Bankruptcy Courts are the only other pre-payment forum available to taxpayers. As part of a taxpayer’s bankruptcy, the court may determine the amount or validity of a tax deficiency claimed by the IRS. Bankruptcy Court tax cases are heard by a single bankruptcy judge and there are no juries.
The choice of litigation of forum needs to be determined on a case-by-case basis, largely turning on the facts and circumstances of the case. Given the several options available to tax litigants, it is strongly advisable to consult with a tax professional before proceeding in a specific forum.