How Does Tax Court Work?

What is tax court and How does it work?

How Tax Court Works
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A former attorney for the IRS Scott Estill discusses U.S. Tax Court, how a case gets to tax court, what happens during the court process, what are your rights as you go to Tax Court, and your right to appeal. Mr. Estill currently practices law in the Denver area, with a practice centered on tax law.

When does an IRS dispute get taken to Tax Court? Who makes the determination and when is it made? 

When you are called for an audit, you have two choices: you can agree with the IRS or disagree. If you agree, the case is over. If you disagree, the IRS sends you a "notice of deficiency" (also called a 90-day Letter), stating the adjustments that the Service wants to make to your tax return. You have 90 days to file a petition with the Tax Court. If you don't file within 90 days, you have agreed with the IRS.

In essence, you the taxpayer are suing the IRS in court.

Who is the Tax Court? Is it a judge or a panel of judges or a jury?

The tax "court" is really 19 judges who go out to all 50 states. Tax Court cases do not get tried before a jury.

How does evidence work in Tax Court? What is the burden of proof on the taxpayer to provide evidence?

The taxpayer must come forward with credible evidence. For example, if the IRS says I didn't incur the auto expenses I put on my tax return, I must present a mileage log or other sufficient evidence to prove that I did incur these expenses. Records are critical in these cases. If you have records to support your position, the IRS must accept them or prove them false or wrong.

Who can you take to Tax Court with you? Can you take an attorney or CPA?

You can bring anyone you like, but you should bring someone who is familiar with Tax Court processes, to help you successfully defend your case. An attorney who has expertise with the Tax Court is better than someone who is just a general attorney. According to Investopedia, the person who represents you must be an attorney who has been "admitted to the bar of the Tax Court."

You can also bring witnesses, as in other court cases. But a string of character witnesses won't be as helpful as employees or others who can verify your business expenses or support your case.

I heard there are different types of Tax Court cases. What's that about?

The Tax Court has a special kind of case called a Small Case, which runs like the "People's Court," for cases under $50,000. In Small Case Tax Court, the process is more informal and neither side can appeal. Most of the time, if you want to represent yourself, make the case a Small Court case.

You can file your case as a Small Court case by designating when you file your petition on the Tax Court website. Only you as the taxpayer can make this designation; the IRS has no say in this designation.

What happens after the court date? When does the judge make a decision?

Everything in tax court looks the same as with other types of court. The only difference is that at end of the trial in Tax Court, you don't get a decision. It may take a year or two for you to find out the decision. In a Small Case, the time might be shorter, since there are less complex issues.

What if you lose in Tax Court? Is there a higher court you can appeal to?

In a Small Case, there is no appeal. In a regular Tax Court case, you can go to the US Court of Appeals in your district; you have 90 days to file this appeal.

If the Tax Court rules against you, do they impose fines and penalties? 

Let's say the IRS said your business expenses should not be allowed and you owe $20,000, and they want you to pay a 20% penalty. The judge can rule on both issues separately. He or she can say that you owe the $20,000 but no penalty or decide you must pay both the amount and the penalty. It all depends on the specific circumstances of the case. The judge can also increase the penalty if you filed a frivolous case, for wasting the court's time.

Can I deduct expenses for taking my business tax case to Tax Court?
Yes, you can deduct your legal and other expenses for this case, if the case is only related to your business. If your business case is combined with your personal taxes, you will have to allocate fees between personal and business, since you can't deduct personal expenses.

Do you have a chance of winning in Tax Court? Does the IRS win every time?

Given the fact that the IRS has already reviewed your case in audit, most Tax Court cases are settled in favor of the IRS. Unless the IRS auditor is just not listening or being a complete jerk, the IRS should have heard your best case at audit.

But, the vast majority (90%) of cases are settled out of court, by agreement between the taxpayer (and his/her attorney) and the IRS. This is why it's important to get a good Tax Court attorney to help you. A settlement is better for everyone, for a variety of reasons, including the cost of bringing a case to court. In a settlement, you can control the outcome, and the IRS may agree to settle for less than they originally asked for.

One last point: If the IRS blatantly disregards your records and evidence, you can file a motion to have IRS reimburse you for attorney fees because they weren't substantially justified.

Tax audits and Tax Court sessions are an emotional issue for everyone - taxpayers, attorneys, and the IRS. They are nerve-wracking and expensive, and the attorneys are the only ones who win. Having good records and presenting them at audit can in many cases keep you out of Tax Court.