Tax Court Litigation

Tax litigation (also referred to as tax controversy) is a catch-all term that refers to the broad practice of resolving civil and criminal tax matters with government tax authorities.  These tax authorities include the federal government, state agencies, and international jurisdictional bodies.  By way of example, tax litigation includes resolution of federal tax disputes (e.g., income tax, employment tax, estate and gift tax, or applicability of civil penalties) with the Internal Revenue Service (IRS).

Very generally, a tax litigation attorney is any professionally-licensed attorney who focuses his or her practice and efforts on representing taxpayers before government tax authorities.  Often times, these tax litigation attorneys are highly credentialed and may have other professional licensures or advanced tax educations, such as being a licensed Certified Public Accountant (CPA) or having obtained an LL.M. in Taxation.

No, not always.  In fact, most tax matters can be resolved through proper invocation of various administrative processes and appeals offered by government tax authorities.  In these instances, a tax litigation attorney may be necessary to ensure that all arguments are properly raised and preserved and to further ensure that certain discussions between the taxpayer and the attorney are protected by attorney-client privilege or the attorney work-product doctrine.

Often times, the IRS will assert that a taxpayer owes additional tax for a particular tax year.  For many types of taxes, the IRS must issue a Notice of Deficiency to the taxpayer prior to assessing the tax and engaging in collection actions.  The Notice of Deficiency provides taxpayers with important procedural rights, including the right to file a petition with the United States Tax Court.  However, to preserve these rights, taxpayers are required to file the petition within a certain amount of time—generally, 90 days.  Taxpayers who fail to timely file a petition with the Tax Court effectively waive these rights, permitting the IRS to assess the tax and move to collection of the tax through lien filings and levies.  If a taxpayer misses the 90-day deadline and wants to contest the tax, the taxpayer must generally pay the full amount of the asserted tax, file a claim for refund, and, in many cases, file a lawsuit against the IRS in federal court.  Thus, responding timely to a Notice of Deficiency can avoid hardships a taxpayer may suffer through the alternative “full-payment rule.”

It depends.  If the amount at issue is small and there are no criminal issues associated with the IRS audit, it may make more sense to either handle the audit on your own or with the assistance of a tax professional who is not licensed in law.  Be cautious, though, that many communications you may have with your tax professional will not have the same protections afforded to communications you would have with an attorney.

Very basically, an IRS “eggshell” audit is a civil audit that has the potential to turn into a criminal matter.  For example, the taxpayer may have engaged in tax fraud or other legal violations—including money laundering or structuring—that the IRS auditor may discover.  In some cases, the IRS may also conduct what is known as a “reverse eggshell audit,” which is a civil tax audit that is being conducted alongside a parallel criminal investigation.  Because these issues make the civil audit more difficult, it is generally advisable for taxpayers to hire a tax litigation attorney to assist in these types of audits.

In most cases, taxpayers find comfort in hiring a tax litigation attorney to represent them in a federal court.  First, tax litigation attorneys are familiar with the various evidentiary and procedural rules that apply in each court.  Second, because tax litigation attorneys are familiar with these rules and court processes, they are often able to demystify the process and better inform the client on the various risks and hazards of litigation in their case.  Third, tax litigation attorneys are trained on substantive areas of tax law and can often times better communicate difficult subject matter and tax case precedent to the decision-maker, whether that is the government attorney or a federal judge.

The IRS can impose a litany of civil penalties against taxpayers.  These include penalties for failure to file certain international reporting forms (IRS Forms 8938, 5471, 5472, 3520 and FBARs); failure to timely file a tax return; failure to timely pay a tax or deposit; and failure to properly remit and pay over certain withholding taxes (known as a trust fund recovery penalty).  Tax litigation attorneys—including attorneys at our firm—routinely handle these and other civil penalty matters before the IRS.

Title 31 of the United States Code contains penalties associated with FBAR penalties.  Under Title 31, civil penalties are broken down into two categories:  those for non-willful conduct and those for willful conduct.  Civil penalties for non-willful violations are generally $10,000 per violation (adjusted for inflation).  But because there is a current split in the proper interpretation of what a violation represents, taxpayers, depending on their location, may either have to pay the $10,000 civil penalty on a per year or per bank account basis.  Conversely, willful violations may subject taxpayers to civil penalties of the maximum of $100,000 (adjusted for inflation) or 50% of the amount in the account at the time of the violation, which is generally the reporting deadline.

If an entity fails to withhold and remit employment taxes to the IRS, the IRS may impose a trust fund recovery penalty against “responsible persons” who “willfully” failed to withhold and remit the employment taxes.  Significantly, any officer, employee, or member of an entity (and even third parties, in some instances) may be deemed “responsible persons”.  If a trust fund recovery penalty is imposed against a taxpayer, the IRS may initiate collection actions (liens and levies) against the taxpayer to collect the amount directly from such person.  In addition, the trust fund recovery penalty is not dischargeable in bankruptcy.

There are a host of defenses that taxpayers may raise regarding any civil penalty asserted against them under either the Internal Revenue Code or Title 31 of the United States Code.  Generally, the applicable defenses will depend largely on the specific penalty at issue.  For example, some civil penalties permit taxpayers to raise so-called “reasonable cause” defenses whereas others depend on whether the taxpayer acted “willfully.”  In addition to these defenses, there are a variety of procedural defenses that taxpayers may raise, depending again, on the specific penalty at issue.

Yes, there are various options depending on your particular tax situation.  For example, the IRS offers a program known as the Voluntary Disclosure Program (VDP), which permits taxpayers to regain compliance and potentially avoid a criminal tax referral if certain requirements are met.  In addition, the IRS offers a program under its Streamlined Filing Compliance Procedures for certain non-domestic taxpayers who have not filed United States tax returns due to non-willful actions.  Because of the criminal sensitivity associated with not filing a tax return, taxpayers should carefully consider speaking with a tax litigation attorney about their case.  Taxpayers should also note that many of the IRS’s programs are not available after the IRS initiates an examination or otherwise obtains information regarding the tax non-compliance from another source.

There are significant differences between both IRS programs.  The primary difference is that willful taxpayers must file a disclosure under the VDP whereas non-willful taxpayers may file a disclosure under the IRS’s Streamlined Filing Compliance Procedures.  Willful taxpayers risk significant criminal exposure and increased civil penalties if they inappropriately file a disclosure under the IRS’s Streamlined Filing Compliance Procedures.

Generally, the taxpayer must file a claim for refund within three years from the time he files his return or within two years from the time the tax was paid, whichever is later. Section 6511(a). If no tax return was filed, a claim must be filed within two years from the time the tax was paid. If a taxpayer files a claim for refund during the three year period prescribed by section 6511(b)(1), the amount recoverable is limited to the amount paid during the three years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. Section 6511(b)(2)(A). In administrative actions and litigation, the Service can refund a taxpayer’s withholding and estimated taxes if the taxpayer files an original delinquent return/claim for refund more than two but less than three years after the due date of the return. Under section 6513(a), prepaid taxes, such as withholding and estimated taxes, are deemed paid on the last day prescribed for filing the return.

Under section 6700, the Service can assess civil penalties against promoters of abusive tax shelters and under section 7408 can enjoin these promoters from engaging in any further activity. The Service can assess these penalties without going through normal deficiency procedures. Section 6703(b). Under section 6703(c), when a taxpayer pays 15 percent of the penalty within 30 days after the day on which the notice and demand is made and files a claim for refund in that amount, the Service will suspend the collection of the remainder of the penalty until there is a final resolution of the taxpayer’s suit for the determination of his liability for the penalty. The taxpayer must file suit in U.S. district court within (1) 30 days after the Service denies his or her refund claim, or (2) 30 days after the expiration of 6 months from the day the taxpayer files his or her claim, whichever is earlier.

The United States Tax Court is established as a court of record under Article I of the Constitution by section 7441 of the Internal Revenue Code. The Tax Court’s jurisdiction is generally prescribed by section 7442, but specific grants of jurisdiction are interspersed throughout the Code. The procedure under which the court operates is prescribed in sections 7451 through 7465. Pursuant to its statutory authority in section 7453, the court has promulgated Rules of Practice and Procedure under which it operates. Except in proceedings conducted under sections 7436(c) and 7463, the rules of evidence applicable in the Tax Court are the rules of evidence applicable in trials without a jury in the United States District Court for the District of Columbia. Section 7453. The specific Internal Revenue Code provisions conferring Tax Court jurisdiction are discussed in subsequent text.

The Tax Court has jurisdiction to redetermine whether deficiencies determined by the Commissioner are correct. The provisions of sections 6211 through 6216 relate to deficiency proceedings.

Other jurisdictional grants by Congress to the Tax Court are listed below:

• Claims for relief from joint and several liability (section 6015(e))
• Review of final partnership administrative adjustments (section 6226)
• Review where an administrative adjustment request is not allowed in full (section 6228)
• Review of partnership adjustments of a large partnership (section 6247)
• Review where an administrative adjustment request is not allowed in full for a large partnership (section 6252)
• Redetermination of interest on deficiencies or overpayments determined by the Tax Court (section 7481(c))
• Interest abatement claims (section 6404(i))
• Actions for administrative costs (section 7430(f)(2))
• Enforcement of overpayment decision by the Tax Court if not refunded by the Service within 120 days after the decision of the court has become final (section 6512(b)(2))
• Modification of final decision in an estate tax case to reflect interest paid pursuant to section 6166 (section 7481(d))
• Review of the reasonableness and appropriateness of a jeopardy assessment where taxpayer has petitioned the Tax Court to redetermine a deficiency (section 7429(b)(2)(B))
• Review of sale by the Service of seized property pending decision by the Tax Court in a deficiency proceeding (section 6863(b)(3)(C))
• Review of collection due process cases (sections 6320 & 6330)
• Disclosure actions (section 6110(f)(3))
• Review of Whistleblower Office determinations (section 7623(b)(4))