What are Some Potential Drawbacks of the Tax Appeal Process?
In deciding whether to file a tax appeal written protest, a taxpayer should consider all the pros and cons of the tax appeal process. In a previous article, we described the benefits of filing a tax appeal. Here, we will discuss some of the potential drawbacks of the tax appeal process.
Potential Downsides to Participating in Appeals
In some cases, it may be more advantageous for the taxpayer to refrain from filing an appeal. Not every case will be appropriate for an appeal from a local IRS office to the Appeals Office. An Appeals Office hearing is available to taxpayers if a protest is filed within the thirty-day period after receiving the 30-Day Letter. An appeals process is also available to taxpayers who miss the thirty-day period but file a petition to the Tax Court within ninety days of receiving a notice of deficiency. As a taxpayer, you must generally decide whether to file a protest in Appeals, or bypass the Appeals Office and proceed straight to litigation in Tax Court. The following factors may actually weight in favor of skipping the appeals process and proceeding directly to tax litigation.
- By filing a protest in Appeals, the taxpayer opens the door for new issues and grounds to be raised by the Appeals officer. IRS Appeals Officers are generally more sophisticated and knowledgeable than local IRS revenue officers. As such, they have the ability to improve on a basis for adjustment recommended by a revenue officer or raise a new issue that may have a material effect on the tax due. In a pre-ninety-day case, the Appeals Officer has the ability to find additional grounds for tax and adjustments because the statute of limitations for assessments remains open. By filing a petition in Tax Court, the taxpayer can prevent his or her tax situation from being under scrutiny by this sophisticated group of Appeals Officers. Under Tax Court rules, if a new issue is raised after the local IRS office has sent a notice of deficiency to the taxpayer, the Commissioner has the burden of proof on any new issue or proposed increase in deficiency (1). In contrast, if the notice of deficiency was sent by the Appeals Office, the taxpayer has the burden of proof when seeking a redetermination of deficiency. This shift in burden of proof tends to decrease the possibility that the Appeals office will attempt to seek an adjustment to the tax due and owing. Therefore, when contemplating filing an appeal, the taxpayer should consider whether a new issue creating a substantial deficiency might be raised by the Appeals Officer. If so, then it might be better for the taxpayer to proceed to Tax Court and sue for a refund rather than pursue an appeals process.
- Appeals Officers do not have the authority to settle fraud penalty cases if a criminal prosecution has been recommended, except with the concurrence of Counsel. If the taxpayer instead files suit in Tax Court and the case is docketed, the prospect of a settlement in a fraud penalty case is improved.
- Proceeding to tax litigation may actually provide a psychological advantage in pursuing negotiations with the Appeals Office. By filing a petition in tax court, the taxpayer shows the Appeals Office that he or she has confidence in the strength of his or her case. This can be an advantage in future negotiations with the Appeals Office. However, the potential psychological benefit seems to be greater in smaller cases rather than large cases. Also, docketed cases must be given a priority in Appeals, so the processing and settlement of those cases may be faster.
- Filing a protest generally delays the disposition of the case. When a case goes to tax litigation instead of appeals, the case is resolved more quickly. In smaller cases, filing a Tax Court petition can significantly speed up the Appeals Office hearing. Thus, if you are interested in a speedy resolution to your case, filing a Tax Court petition may help you speed the process along.
- Settlement in a docketed case has more finality than in a nondocketed case. A settlement reached in the context of the Tax Court is entered through stipulation, but it essentially is regarded as a decision of the Tax Court (2). In contrast, a settlement reached in a nondocketed case is recorded on Form 870-AD, which explicitly states that the agreement is nonbinding if there is any evidence of concealment or misrepresentation of a material fact, fraud, or malfeasance.
Additional Considerations of Appeals or Litigation
If the decision is made to proceed with tax litigation instead of Appeals, you will be facing the choice of judicial forum for the tax litigation. Your choices include: Tax Court, Federal District Court, or Court of Federal Claims. Even if a claim is filed, a taxpayer may still decide to pursue an administrative appeal with the Appeals Office. Each forum has different procedures and precedents such that litigation in one forum might be preferable over the others. Most cases end up being litigated in Tax Court, but there are some valid reasons for choosing to litigate in the District Court or the Court of Federal Claims as well. An experienced tax attorney can help you decide the best forum in which to litigate.
How a Taxpayer Can Help with Appeals
Deciding to engage in the Appeals process involves weighing various pros and cons. This article lists some of the disadvantages that can come to the taxpayer by participating in Appeals. If you think that your tax situation might make you a candidate for an Appeals process, you should consult with a knowledgeable tax attorney.
San Diego Tax Lawyer, William D Hartsock, Esq. has been successfully helping clients with appeals since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.
Tax Law References:
- Tax Ct. R. Prac. & Proc. 142(a).
- Fluor v. United States, 79-1 USTC ¶ 9393 (CD Cal. 1979).