Insights Into Handling IRS Disputes

Overview

Last month, U.S. Tax Court Judge Elizabeth Paris spent at day at Washburn Law School at my invitation.  I have known Judge Paris for over 20 years, and it was a delight to see her again and spend the day with her.  She had five events during the day, including an open session for the students and a continuing education event for lawyers and other tax professionals.  During these two sessions, Judge Paris provided great insight into client representation in tax matters, and handling a tax case through the process all the way through to the Tax Court.

Today, I would like to share the insights of Judge Paris based on my notes of her discussions.  I believe that those of you who represent clients in tax matters will find this very helpful.  Even if you don’t represent clients in tax matters, I trust that you will find this information useful.

Tax Law

Judge Paris made the point that many areas of the tax law are neither black or white, but many different shades of grey.  The complexity of the Code and regulations fosters this, and the outcome of cases that end up before the Tax Court are often heavily fact-dependent.  In addition, the IRS not infrequently takes a position on an issue that is questionable or is contrary to existing caselaw.  That is a frustrating aspect of tax practice.  No taxpayer wants to have correspondence from the IRS, and a goal of many practitioners is to ensure that a position taken on a return will not generate any interest from the IRS.  But, when a taxpayer does get a Notice from the IRS that asserts a deficiency, Judge Paris pointed out that procedure is very important. 

Audits and Responding to An IRS Notice

Most IRS audits are not in-person.  Instead, they are commonly done via correspondence.  Often, the initial contact will involve the IRS seeking additional information from the taxpayer to clarify something on the return.  Alternatively, if the taxpayer agrees with the additional tax asserted, the option exists to sign the form and mail it back.  If the amount in issue is small, it may be best to pay the additional amount and get the matter closed instead of risking opening up other areas on the return for inspection.  On the other hand, if the taxpayer doesn’t respond to the IRS correspondence, the next item received might be an Examination Report.  This is commonly known as a “30-day” letter.  The taxpayer has 30 days to respond with a “protest” letter that explains the taxpayer’s position.  The IRS may agree and close the matter, but usually it rejects the taxpayer’s explanation and transfers the matter to the IRS Office of Appeals. 

Unfortunately, it is not uncommon for the reasons given for the IRS rejection to not match-up with the reasons the taxpayer provided.  That’s where things, hopefully, can get straightened out at Appeals.  When I was in full-time practice, my experience with the IRS Appeals Office (out of Omaha at that time) was good.  You actually got to sit down with a person well-versed in tax law that had lots of experience in handling complicated tax matters – even agricultural tax matters.  Unfortunately, the IRS has put in place a new procedure that eliminates the possibility of a face-to-face meeting with an IRS Appeals Officer.  There is no longer a right to an in-person appeal.  Instead, what the taxpayer (and their representative) is left with is dealing with an “appeals tax specialist.”  From conversations that I have had with practitioners, what I hear is that these persons lack the training and experience of the persons I dealt with years ago in Omaha. 

If the matter is not resolved at Appeals (or the taxpayer doesn’t respond to the 30-day letter) the IRS will issue a Notice of Deficiency.  This is also known as a “statutory notice of deficiency” or SNOD.  It may also be referred to as a “90-day letter.”   It’s a legal notice informing the taxpayer that receives it that the IRS has determined there to be a deficiency associated with the tax return.  The IRS must issue the SNOD before it can assess additional income, estate, gift or certain excise taxes unless the taxpayer agrees to the additional assessment.  I.R.C. §§6212; 6213.  The SNOD is a legal determination, and it is presumed to be correct.  It will show how the deficiency was computed and will inform the taxpayer of the right to petition the Tax Court to dispute what the IRS is proposing as an adjustment to the tax liability in the SNOD.  The taxpayer has 90 days to respond, and that response is filing a petition in the U.S. Tax Court or paying the additional tax asserted and filing a refund suit in the federal district court.

U.S. Tax Court

As Judge Paris pointed out, a case before the Tax Court could be tried under simplified procedures if the taxpayer chooses to not be represented by counsel and the amount in controversy is less than $50,000.  For these cases, the Tax Court will issue an “S” opinion which cannot be appealed to the applicable U.S. Circuit Court of Appeals and cannot be cited as precedence by other taxpayers.  In other cases (those not qualifying for “S” status), the Tax Court will issue either a Memorandum opinion or a “Full” opinion if the case involves an issue that the court has not squarely addressed before. 

Judge Paris noted that while the Tax Court building itself is in Washington, D.C., and that is where the law clerks are located, the judges (19 of them) travel around the country to federal courthouses to conduct trials.  She discussed where cases can be heard and the application of state law to many of the Tax Court’s decisions.  She also pointed out that the Tax Court’s procedural and evidentiary rules are streamlined.  There is no jury.  The case is tried directly to the judges.  The taxpayer can call witnesses, and often many issues are stipulated to with the IRS before they are presented to the court. 

When the Tax Court issues an opinion, that opinion (unless it is an “S” opinion) can be appealed to the Circuit Court of Appeals where the case arose from.  One of the questions that Judge Paris received involved the IRS practice of issuing an “Action on Decision” indicating that it will not follow the Tax Court’s decision (in those cases where the Tax Court has ruled against the IRS) in subsequent cases.  This is known as a “non-acquiescence.”  For those of us that deal with ag tax cases, this is the technique that the IRS utilized in the Morehouse CRP litigation where it won in the Tax Court and then lost in the Eighth Circuit Court of Appeals.  The IRS “non-acquiesced” to the Eighth Circuit’s opinion.  IRS can also issue a “non-acquiescence” to a Tax Court opinion and continue to litigate the matter to a different Circuit in hopes of a different result.  While Judge Paris acknowledged the frustration to taxpayers and tax practitioners of an administrative agency such as the IRS taking such a position, she noted that it is within the IRS’ province to do so. 

Judge Paris also noted that an alternative to going the Tax Court route is for the taxpayer to pay the asserted deficiency and file a refund suit in the federal district court.  But, she noted that many cases may not merit that approach because of the amount involved. 

Conclusion

The “jurist in residence” day at Washburn Law School for Judge Paris was a great day for the students and the faculty.  It’s not every day that we get to “rub shoulders” with a sitting U.S. Tax Court Judge.  Judge Paris also made presentations in two different classes during her day at the law school, giving the students direct access to her.  It helps put a practical application to the concepts that the students are learning in class and will make them better lawyers once they finish law school.  After all, that’s what it’s all about.