Insights

Strategies for Dealing with the IRS: Going to Court

This video is the final in a four-part series on Jones Day's approach to dealing with the IRS. In it, partner Chuck Hodges discusses stage four - going to court. He describes the three courts available to taxpayers when they are unable to settle with the IRS - the U.S. Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims. 

Read the full transcript below:

Chuck Hodges:

The Jones Day approach for resolving a tax case involves four stages. I like to refer to them as the four acts of a play. Act one is dealing with the IRS examination. If you go unagreed, then you move on to act two, which is dealing with the IRS Office of Appeals, who tries to settle cases without litigation. There's also act three, which we talked about, which is the alternative dispute resolution techniques that are out there. But if all of those fail, act four is going to court. And if I can emphasize one thing, over 90% of all tax cases that are docketed in court still settle.

Chuck Hodges:

When the IRS officially send you a notice of deficiency, and they say, "This is your final notice as to the adjustments that we're making to your tax return," I have to go to court. And so which court do I go to? What are the differences? What are my options? And your options are really threefold. One, you get to go to the US Tax Court. The important parts there is that prepayment of tax is not required. That's why they handle such a large percentage of most tax cases.

Chuck Hodges:

The judges are traditionally tax experts since they only hear tax cases. Jury trials are not available, but the tax court rules governing discovery are extremely narrow, unlike other types of litigation. Option two is filing in the US District Court. The differences is is that unlike with the tax court, prepayment of your liability is required. The judges are generalists. They handle very few tax cases. Jury trials are available so you can actually prepay the tax, and then in your claim for refund, you can ask for a jury. The Federal rules of civil procedure apply. So you are going to go through a lot more detailed discovery. The last one, similar to District Court, is the Court of Federal Claims. Their prepayment of your liability is also required, but juries are not available. And there, the rules of the US Court of Federal Claims apply.

Chuck Hodges:

One thing that's important to distinguish between the three, the US Tax Court is a court of national jurisdiction, as is the Court of Federal Claims. Whereas the US District Court is, of course, a court only of that particular district or that area of the country.

Chuck Hodges:

What I'd like to talk about now is where most tax cases are docketed, and that's the US Tax Court in Washington DC. The way that a tax court case occurs is that they, again, the IRS issues their final notice of deficiency, which gives the taxpayer 90 days, without extension, 90 days to file a petition in US Tax Court, challenging the adjustments in that notice. Once that happens, after you file your petition, then the IRS, which is called the respondent in the tax court, the respondent will then answer your petition and pointing out any facts that the IRS may agree to.

Chuck Hodges:

Then the parties have to start an informal discovery process, and this is quite unique to the US Tax Court, but it is very helpful. You get together with the IRS lawyer, you exchange documents, you exchange information, and it's called a Branerton meeting. And so, once that's over, then you go the formal route of actually doing requests for admissions, interrogatories and document requests.

Chuck Hodges:

But one of the biggest differences between tax court and other courts is that depositions are not always granted. And in fact, it is rarely granted. And instead, if the other side does not agree, you have to follow with the tax court and request to take the deposition. Why? Why would you have to go through all that? Remember, the IRS has already conducted a multi-year audit of the taxpayer.

Chuck Hodges:

The other reason is, is that the tax court tries to be a court proceeding that is less expensive for taxpayers. Then what happens is after you meet with the IRS, at some point in the very near future, the tax court is going to issue you a notice that says that you are now on a docket to have your case tried in your local jurisdiction within a short period of time. So again, you can actually file your petition in well within less than a year. Will you be docketed in tax court for trial?

Chuck Hodges:

And because of that, that really gets the two parties, the IRS lawyers, so the chief counsel's office, as well as the taxpayer, really gets them to think hard, what are the issues we believe we can resolve and what really needs to go to trial? In those situations, the tax court and the judges are pretty adamant that if this is something such as valuation or any type of issues that our beauty's in the eye of the beholder, they really, really want the parties to come together to try to resolve them with each other versus going through the whole process of a trial. And in fact, now the tax court is even moving to where you can mediate your case before a trial in the tax court.

Chuck Hodges:

So again, why I think that this is all important is that in most instances, taxpayers don't want to go to court. But I want taxpayers to realize sometimes that may be your best option for settling your case.

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