How Does the Tax Litigation Process Work?

Tax litigation is the formal legal process for resolving disputes between a taxpayer and a tax authority, like the Internal Revenue Service (IRS). It is the final course of action when disagreements over tax liability cannot be settled through administrative channels, such as an audit or the appeals process. The journey begins after the IRS has examined a taxpayer’s return and proposed changes that the taxpayer does not accept.

Following an unsuccessful attempt to find a resolution with the IRS Independent Office of Appeals, the dispute moves from an administrative setting to a judicial one. This transition shifts the dynamic from negotiation with the IRS to a formal lawsuit where established court rules and procedures govern every step.

Prerequisites for Initiating Litigation

Before a taxpayer can formally challenge the IRS in court, specific procedural requirements must be met. The most common trigger for litigation is the issuance of a Notice of Deficiency by the IRS. This document, often called a “90-day letter,” is a legal notice sent by certified mail informing the taxpayer of the IRS’s determination of a deficiency in their income, gift, or estate tax. It gives the taxpayer the right to contest the proposed tax in court before it is assessed.

The Notice of Deficiency details the amount of the proposed additional tax, penalties, and interest, and provides an explanation of the adjustments made by the IRS. Upon receiving this notice, the taxpayer has 90 days to file a petition with the U.S. Tax Court. This period is extended to 150 days if the notice is addressed to a person outside the United States.

These deadlines are strict; failure to file within the applicable window results in the assessment of the tax, and the taxpayer forfeits the right to sue in Tax Court. An alternative path to court exists for those who miss the deadline or wish to litigate in a different forum. This route requires the taxpayer to first pay the full amount of the disputed tax.

After payment, the taxpayer must file a formal Claim for Refund with the IRS, using a form like the Form 1040-X, Amended U.S. Individual Income Tax Return. If the IRS denies the claim or fails to act on it within six months, the taxpayer can then initiate a lawsuit for a refund.

Selecting the Proper Forum

Choosing the right court is a strategic decision with significant implications. Taxpayers have three potential forums: the U.S. Tax Court, a U.S. District Court, or the U.S. Court of Federal Claims.

• Prepayment of Tax: A primary factor is the requirement to pay the disputed tax before filing a lawsuit. The U.S. Tax Court is the only forum where a taxpayer can litigate a deficiency without first paying the contested amount. To sue in a U.S. District Court or the U.S. Court of Federal Claims, the taxpayer must first pay the tax in full and then sue for a refund.
• Jury Trial: The availability of a jury trial is another major difference. Only U.S. District Courts offer the option for a case to be heard by a jury. In both the Tax Court and the Court of Federal Claims, cases are decided by a judge alone in a bench trial, which may be a consideration if the facts are more sympathetic to a jury.
• Judicial Expertise: The judges of the U.S. Tax Court are specialists who exclusively handle tax cases, giving them a deep understanding of complex tax law. In contrast, judges in the District Courts and the Court of Federal Claims are generalists who preside over a wide variety of legal disputes, not just tax matters.
• Legal Precedent: Each court is bound by its own prior decisions and the decisions of the specific U.S. Court of Appeals to which its rulings are appealed. A case with similar facts may have been decided favorably in one court’s circuit but unfavorably in another, making an analysis of relevant precedents part of a sound litigation strategy.

The Tax Court Petition Process

Initiating a case in the U.S. Tax Court begins with the timely filing of a petition. This document is the taxpayer’s formal request for the court to review the IRS’s determination as stated in the Notice of Deficiency. The petition must contain specific information, including the petitioner’s full name, address, the tax years in dispute, and a clear statement of the errors the taxpayer believes the IRS made.

The petition must also state the facts that support the taxpayer’s position. The official form for this is Form 2, Petition (Simplified). A complete copy of the Notice of Deficiency must be attached to the petition when it is filed.

The court offers an electronic filing system, known as DAWSON, which is the preferred method for submission. A filing fee, which is currently $60, must be paid at the time of filing. As an alternative, the petition can be sent by mail to the Clerk of the U.S. Tax Court in Washington, D.C. When mailing, it is recommended to use U.S. Postal Service certified or registered mail, as the postmark date will be treated as the filing date.

Key Stages of a Tax Court Case

Once a petition is successfully filed, the case enters a structured timeline. The first step is the government’s formal response. The IRS, represented by its legal counsel, is required to file an “Answer” to the petition, typically within 60 days, responding to each allegation made by the taxpayer.

Following the Answer, the case moves into the discovery phase, a period where both parties formally exchange information. While an informal exchange is encouraged, formal discovery tools can be used. These include interrogatories (written questions that must be answered under oath), requests for production of documents, and in some cases, depositions (sworn testimony taken out of court).

A unique feature of Tax Court practice is the requirement for a Stipulation of Facts. Under Tax Court Rule 91, both the taxpayer and the IRS must meet and agree in writing on all undisputed facts and the authenticity of all relevant documents before the trial. This process narrows the issues and makes the proceedings more efficient.

As the trial date approaches, either party may file pre-trial motions. These are formal requests asking the court to rule on an issue before trial, such as a motion to dismiss the case or a motion for summary judgment on issues where the facts are not in dispute.

If the case is not settled, it will proceed to trial. Tax Court trials are conducted before a single judge without a jury. During the trial, both sides will make opening statements, present evidence, call witnesses to testify, and cross-examine the other party’s witnesses.

Resolution and Post-Trial Procedures

The conclusion of a tax litigation case can occur through a settlement or by a formal decision from the judge after a trial. The vast majority of cases are settled before reaching a trial verdict, with the dispute resolved on mutually agreed-upon terms.

If a case proceeds through trial, the judge will issue a written opinion detailing the findings of fact and the legal reasoning for the ruling. The court’s opinion does not typically include the final tax calculation. Instead, the court withholds entering a final decision to allow the parties to calculate the precise tax deficiency or overpayment based on the judge’s holdings, a process governed by Tax Court Rule 155.

Under Rule 155, both the taxpayer and the IRS must submit computations showing the correct amount of tax owed. If the parties agree, they file a joint computation, and the court enters a decision for that amount. If they disagree, each party submits their own computation, and the court may hold a hearing to resolve the differences before entering its decision.

Once the court enters its final decision, the taxpayer must pay the determined liability, including any accrued interest. If the taxpayer disagrees with the Tax Court’s decision in a regular case, they have the right to appeal by filing a notice within 90 days. The appeal is made to the U.S. Court of Appeals for the circuit where the taxpayer resided when the petition was filed. Decisions in cases designated as “small tax cases” (disputes of $50,000 or less per year) are final and cannot be appealed by either party.