A taxpayer engaged in a Federal tax dispute has the opportunity to select the forum that will decide the case among four separate courts. Although the choice may be subject to certain legal and practical restrictions, those courts are as follows:
1. The United States Tax Court. The majority of tax cases are litigated in the United States Tax Court as this allows taxpayers to commence a tax case before paying the tax liability asserted by the IRS. While the Tax Court is headquartered in Washington, D.C., its 19 judges hear cases in about 80 cities throughout the U.S.
A Tax Court case usually begins after the taxpayer has received a Notice of Deficiency from the IRS. The taxpayer must then file a petition in Tax Court within 90 days of the mailing date on the IRS notice. The Tax Court also has jurisdiction to hear non-deficiency cases in disputes involving opposition to IRS levies and liens, IRS denials of requests for innocent spouse relief, an offer in compromise, penalty abatement or other collection action.
These non-deficiency cases are commenced in the Tax Court by the taxpayer filing a petition after exhausting all IRS appeal rights pursuant to a request for a collection due process hearing. The Tax Court can also be utilized to dispute the IRS assertion of transferee liability, certain kinds of declaratory relief, the adjustment of partnership allocations and items, and the reclassification of workers as employees or independent contractors
Trial procedure in the Tax Court is much the same as trial procedure in the District Court in nonjury cases except the rules of evidence tend to be more lenient. Most Tax Court cases are settled by mutual agreement but if a trial is conducted, a decision will be rendered setting forth findings of fact and an opinion.
Decisions of the Tax Court, except for cases involving disputes under $50,000 conducted under the Court’s small tax case procedure, are appealable to the United States Courts of Appeals.
2. The United States Court of Federal Claims. The U.S. Court of Federal Claims is centered in Washington, D.C., but can hold trials in other courts around the country. Its jurisdiction is limited to hearing claims for money that arise from the U.S. Constitution, federal statutes, executive regulations, or federal contracts.
Included in this jurisdiction is the authority to hear claims by taxpayers for refunds of federal taxes paid, but the taxpayer bringing the claim must have first paid the deficiency to the IRS. Although many tax-refund suits are docketed in the Claims Court, it is considerably less specialized than the Tax Court, however, its judges may be presumed to have more expertise in the tax field than a District Court judge.
3. The United States District Courts. In contrast to the Tax Court and the Claims Court, which hear cases from all over the country, the District Court only hears cases arising within its district in its own state. Thus the District Court judge will be more familiar with local conditions that may bear on a tax case and may be in a better position to judge the credibility of local witnesses. The taxpayer bringing the claim must have first paid the deficiency determined by the IRS.
4. The United States Bankruptcy Court. Each of the federal judicial districts also has a Bankruptcy Court which operates under the supervision of the District Court. The bankruptcy courts are broadly empowered to hear any issue arising under the Bankruptcy Code, including federal tax issues arising in bankruptcy proceedings.
If a taxpayer otherwise qualifies for bankruptcy, there may be significant advantages to having the tax issue decided in Bankruptcy Court, as the Bankruptcy Court tends to be more debtor/taxpayer friendly. Bankruptcy Court appeals are taken to the District Court before they can be heard by the circuit courts.
For the Tax Court and District Court, appeals can be taken either by the taxpayer or the IRS to one of the eleven regionally-based U.S. Courts of Appeals. For the Court of Federal Claims, appeals are to the Court of Appeals for the Federal Circuit, a specialized appeals court, but one with national jurisdiction. This diversity allows forum shopping as a taxpayer can choose to bring a case before the court most likely to provide a favorable opinion based on the taxpayer’s knowledge of the precedents of the various courts.