Powell Tax Law Blog
Your Day in Court: The Why and How of Filing a Claim in Federal Court
They say you can’t fight City Hall, but taxpayers can certainly fight the federal government.
In fact, when it comes to filing a claim in federal court, Americans have three avenues: The U.S. Tax Court, U.S. Court of Federal Claims, and U.S. District Courts.
“There may come a time when your quest for justice may require filing a federal lawsuit. Wrongful tax audits, improper trust fund assessments, and wrongful levies, seizures, or liens may need court intervention to protect your rights as a taxpayer,” explained experienced tax attorney Steve Powell. “It's important for taxpayers facing such issues to consult with a qualified tax attorney who can provide guidance on the appropriate course of action, whether it involves the Tax Court, Court of Federal Claims, or a District Court. These legal processes can be complex, and the choice of court can significantly impact the outcome of a case.”
The IRS acknowledges that taxpayers have the right to appeal their decision in an independent forum.
“Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court,” says the IRS Taxpayer Bill of Rights.
Understanding the Different Federal Court Options for Taxpayers
Legal action should only come after you have exhausted all your administrative options as a taxpayer.
“Three different federal trial courts decide tax cases: U.S. Tax Courts, U.S. Federal District Courts, and U.S. Courts of Federal Claims,” says the University of San Francisco Law School. “In order to be heard by a Federal District Court or a U.S. Court of Federal Claims, a taxpayer must first pay the disputed tax and then sue for a refund. In contrast, a taxpayer can be heard in U.S. Tax Court without paying the amount in dispute prior to litigating. For this reason, most tax cases are litigated in Tax Court.”
Let’s look at each and what they can offer taxpayers:
U.S. Tax Court: Deals Exclusively in Federal Tax Issues
You may be able to file a petition with the U.S. Tax Court to review the changes proposed by the IRS. The U.S. Tax Court is generally a “prepayment” forum, which means you can petition the U.S. Tax Court before making full payment, but its jurisdiction is limited.
You generally cannot petition the U.S. Tax Court unless you have received a notice or determination letter that informs you that you have the right to do so. However, you may also petition the Tax Court if you have not received a notice or determination involving:
- A determination of tax-exempt status under IRC 7428 if the IRS has not made a determination after 270 days.
- The abatement of interest if the IRS has not mailed a final determination within 180 days of a claim for abatement under IRC 6404.
- An innocent spouse relief request if the IRS has not issued a final determination letter after six months since filing Form 8857, Request for Innocent Spouse Relief.
U.S. Tax Court Highlights:
- The U.S. Tax Court is a specialized court with 19 judges with expertise in tax law that deals exclusively with federal tax issues.
- The U.S. Tax Court is physically located in Washington, D.C. but the judges travel to various designated cities around the country to hear tax cases.
- Taxpayers can file a petition with the Tax Court within 90 days of receiving a Notice of Deficiency (also known as a 90-day letter) from the IRS. This letter informs the taxpayer of the IRS's proposed adjustments to their tax return. (Note: 150 days if the notice is addressed to a person outside of the United States).
- Taxpayers do not have to pay the disputed tax before filing with the Tax Court, which is different from other federal courts.
- The Tax Court has jurisdiction over a wide range of tax disputes, including income tax, estate tax, and gift tax matters.
- All Tax Court cases are “bench trials”, meaning there is no jury with the judge alone weighing facts and deciding the case.
- The Tax Court issues three types of opinions:
Regular Opinions (also called Reported Opinions): Involve important legal issues.
o Memorandum Opinions: Involves well-established legal issues based on the interpretations of facts.
o Summary Opinions: The small cases division hears disputes of $50,000 or less with decisions that are not appealable and are not precedent.
“If you timely petition the Tax Court, and you did not previously appeal your case within the IRS, you will normally have an opportunity to attempt settlement with Appeals while you are waiting for your trial,” says the IRS. “The Tax Court will still follow its normal procedures to schedule your case for trial, but you may not need to appear at trial if you settle your case before the trial date.”
A word of caution: If you want to file a claim in U.S. Tax Court just to delay paying, the court can impose a penalty against you of up to $25,000 in its decision if it is determined your case was intended primarily to cause delay, or that your position was frivolous or groundless.
U.S. Court of Federal Claims: Dispute Tax Must be Paid First
The US Court of Federal Claims (created in 1982 but traces its roots back to 1855) handles a variety of claims against the United States government, including tax-related claims.
“Throughout its history, although it has undergone notable changes in name, size, scope of jurisdiction, and procedures, its purpose has remained the same: in this court, the federal government stands as the defendant and may be sued by citizens seeking monetary redress. For this reason, the court has been referred to as the “keeper of the nation’s conscience” and “the People’s Court,” says the U.S. Court of Federal Claims history brochure.
Unlike the Tax Court, taxpayers must pay the disputed tax before filing in the Court of Federal Claims.
Here are the U.S. Court of Federal Claims highlights:
- Taxpayers can file a suit in the Court of Federal Claims if they believe they have been wronged by the government in a tax matter, such as wrongful tax refunds, improper trust fund assessments, or wrongful levies, seizures, or liens.
- Generally, taxpayers must first file a refund claim with the IRS before bringing a lawsuit in the Court of Federal Claims. If the IRS denies the refund claim or takes no action within six months, the taxpayer can proceed with the lawsuit.
- The court consists of 16 judges nominated by the President and confirmed by the Senate for a term of fifteen years.
- Many cases before the court involve tax refund suits, an area in which the court exercises concurrent jurisdiction with the United States district courts. The cases generally involve complex factual and statutory construction issues in tax law.
“In recent years, the court’s docket has been increasingly characterized by complex, high dollar demands, and high profile cases in such areas as, for example, the savings and loan crisis of the 1980s, the World War II internment of Japanese Americans, and the federal repository of civilian spent nuclear fuel,” says the court’s history. “Nevertheless, despite the nature of the claim, the notability of the claimant, or the amount in dispute, the Court of Federal Claims acts as a clearing house where the government must settle up with those it has legally wronged.”
U.S. District Courts: Wide Range of Civil and Criminal Cases Including Tax Disputes
U.S. District Courts handle a wide range of civil and criminal cases, including tax disputes.
Taxpayers can file a lawsuit in a U.S. District Court if they wish to bring a tax-related claim that does not fall within the jurisdiction of the Tax Court or the Court of Federal Claims.
Highlights of the U.S. District Courts:
- Common tax-related claims in District Courts may include wrongful tax audits, allegations of civil rights violations in the context of tax enforcement, and other tax-related issues.
- Taxpayers must typically exhaust administrative remedies with the IRS before filing a tax-related lawsuit in a District Court.
- Like the U.S. Court of Federal Claims, taxpayers must fully pay their tax liability to be heard before the court.
- U.S. District Courts are the only tax trial courts in which a taxpayer may request a jury.
Tax Situations that Prompt Federal Legal Action
Taxpayers may consider bringing federal legal action in various situations, including:
- Wrongful Tax Audits: If a taxpayer believes they were unfairly targeted or subjected to an improper audit by the IRS, they may seek legal recourse.
- Improper Trust Fund Assessments: When the IRS assesses a trust fund recovery penalty against individuals responsible for withholding and paying payroll taxes, they can challenge these assessments in court if they believe they were wrongly assessed.
- Wrongful Levies, Seizures, or Liens: If the IRS wrongfully seized property, levies bank accounts, or places liens on assets, taxpayers can file claims to recover their property or seek damages.
- Other Tax-Related Disputes: Taxpayers may also bring federal legal action for various other tax disputes, such as disputes over the classification of income, deductions, or credits.
It’s important to seek professional legal advice, especially as some actions can only be heard before certain courts such as:
- U.S. District Courts
o IRC Section 7402(b) - Summons enforcement actions filed by the government.
o IRC Section 7403(a) - Action to enforce or discharge liens.
o IRC Section 7426 - Wrongful levy actions.
o IRC Section 7407(a) - Tax return preparer injunction suits.
- U.S. Tax Court
o RC Section 6330(d)(1) - Collection due process determination appeal.
o IRC Section 6404 - Review of IRS interest abatement rejection.
o IRC Section 7430(f)(2) - Review of determination to award reasonable administrative costs.
Reminder: The IRS says that You can take your case to your U.S. District Court or the U.S. Court of Federal Claims, but generally only after you have fully paid the amount and timely filed a claim for refund with the IRS. If you are a nonresident alien, you may seek relief in the U.S. Court of Federal Claims, but you generally cannot take your case to a U.S. District Court because you are not a resident of any United States judicial district.
Contact Powell Tax Law today to examine all your legal options in a dispute with the IRS.