The IRS has several well-established processes available for challenging its decisions. While the IRS appeals process can usually handle most of these, another potential avenue is filing a petition with the U.S. Tax Court (Tax Court). The best option depends on the situation.
The goal of this article is to compare IRS appeals vs. Tax Court, including their differences and why a taxpayer might want to choose one over the other. If the IRS has made a decision you disagree with, McLaud Law P.C. can help you determine the best course of action and guide you through the next steps to ensure your rights are protected.
Key Takeaways
- IRS appeals are widely available – the IRS likely has an appeals process in place to handle the majority of taxpayer disputes.
- The Collection Appeals Program (CAP) and Collection Due Process (CDP) hearings are two of the most common appeals options – it’s important to understand the differences.
- Tax Court isn’t just for audits – Tax Court is commonly used to challenge IRS audit results, but it’s also a common setting for unpaid tax collection cases.
- Trial is rare – an overwhelming number of Tax Court cases settle before trial.
- Professional tax representation is critical – working with an experienced tax pro that can represent clients before the IRS and Tax Court offers the most comprehensive tax advice possible when fighting the IRS.
A General Overview of the IRS Tax Dispute Process
Many tax disagreements concern unpaid taxes, tax assessments, or collection actions. This may include an assessment from a tax audit, the IRS filing a substitute for return, tax levies to collect delinquent taxes, or the IRS assessing a Trust Fund Recovery Penalty.
Assuming the taxpayer disagrees with the IRS, the taxpayer will often have the option at this point to file an appeal in the form of a formal written protest or a small case request with the IRS office that sent the notice or letter in question. The exact procedure and deadline should be listed in the IRS letter or notice being appealed. There will likely be a special form the taxpayer needs to use depending on what they’re appealing and the amount of unpaid taxes in dispute.
Many of these appeals are decided by the IRS Independent Office of Appeals. If the taxpayer isn’t happy with the Independent Office of Appeals’ decision, they may have the right to sue the IRS in Tax Court by filing a petition.
In other cases, the taxpayer may not have the right to appeal, or they may not want to appeal. In either case, they may decide to go straight to Tax Court. However, in the vast majority of cases, taxpayers are usually better off using the IRS appeals process before going to Tax Court. Not only is the appeals process faster than Tax Court, but it’s also less expensive.
The IRS Appeals Process: The Primary Tax Resolution Tool for Taxpayers
Most IRS appeals are handled by the IRS Independent Office of Appeals (Office of Appeals). The Office of Appeals is part of the IRS, but it’s separate from its tax assessment and collection functions. This means the Office of Appeals is independent from the IRS department that the taxpayer is appealing to and isn’t supposed to be influenced by that department during the appeals process.
The Office of Appeals exists to offer a less-expensive option for resolving tax disputes without formal litigation, and it includes forms of alternative dispute resolution like mediation. Tax matters commonly sent before the Office of Appeals include:
- Audit challenges
- Rejected offers in compromise (OIC)
- Trust Fund Recovery Penalty (TFRP) assessments
There are several different types of appeals, with two of the most common being:
- Collection Due Process (CDP)
- Collection Appeals Program (CAP)
Due to its informal nature, using the IRS appeals process offers the benefits of being the fastest and least expensive way of challenging an IRS decision. This informality isn’t always a good thing for taxpayers, as it offers Office of Appeals officers more discretion and leeway in making their decisions, especially when deciding CAP and CDP appeals.
CDP vs. CAP: The Differences
One of the trickiest parts of appealing an IRS tax collection enforcement action is choosing between a CDP hearing and a CAP. Both offer the ability to challenge an IRS tax collection action, such as a lien or levy. However, there are a few distinctions between the two:
- Additional reviews: CAP decisions are final, but you can challenge the results of a CDP hearing.
- Deadlines: Typically, you have 30 days from the decision or proposed action to request a CDP hearing, but typically only a few days for a CAP appeal.
- Challenging the tax debt: You can only challenge the tax debt itself in a CDP hearing, and even then, only if you haven’t had the chance to do so before.
- Protection from Collection Action: A timely filed CDP appeal will block any collection action regarding the taxes at issue. While the IRS often will not pursue collection action while a CAP is pending, that is not guaranteed.
- Timing: CAP is typically much faster than a CDP hearing.
- Availability: You can generally only request a CDP hearing if you’ve received a notice saying you have that right, and CAP appeals are also only available in certain situations, such as the termination or rejection of an installment agreement.
However, these aren’t the only options. If you miss the deadline to request a CDP hearing, you have up to a year to request an equivalent hearing, and of course, in some situations, you may also have the right to petition the Tax Court.
Tax Court: Not Just for Audits
Many people think that the U.S. Tax Court is only for challenging audits, but that is not the case. The Tax Court has jurisdiction to hear a variety of tax matters, such as:
- Tax deficiencies
- Estate or gift taxes
- Joint and several liability disputes concerning jointly filed tax returns
- Collection actions
- Review whistleblower awards
- Interest abatement
- Worker classification
Even though the court has the ability to hear many different types of tax cases, most of the legal disputes will revolve around audits or tax collection.
Audit-Based Cases
If an audit results in the IRS concluding additional tax is owed, the IRS will normally send the taxpayer Letter 3219 (for correspondence audits) or Letter 531 (for in-person audits). Also called a Notice of Deficiency or a “90-Day Letter,” this gives the taxpayer 90 days (150 days if they’re outside the United States) to file a petition with the Tax Court if they disagree with the IRS’s audit findings.
If the taxpayer misses this 90-day deadline, their only other option to challenge the audit’s results is to request audit consideration.
Collection-Based Cases
If the taxpayer wants to challenge an IRS collection action, they’ll usually first request a CDP hearing. After the hearing, the Office of Appeals issues a determination letter. If the taxpayer disagrees with these findings, they can petition the Tax Court, usually within 30 days from the date of the determination letter.
It’s important to note that if an argument or piece of evidence isn’t first presented during the CDP appeals process, it often can’t be used in Tax Court. So it’s important for a taxpayer to present all potential arguments and facts during the IRS appeals process if they want to take full advantage of their Tax Court appeal rights. This is one reason why it’s important to have an experienced tax professional help when filing an appeal, and to get them involved at the very beginning.
Most Tax Court Cases Never Get to Trial
Despite what movies and television shows might portray, the vast majority of court cases never make it to trial. This is true in both criminal and civil courts. Instead, the parties agree to some sort of compromise or settlement.
Tax Court is no exception to this generalization. There are several reasons why most Tax Court cases settle before trial:
- Trials are unpredictable. Anything is possible, no matter how strong one side’s case is.
- Trials are expensive. Depending on the complexity of the case, the trial itself could easily double the cost of litigation.
- Both sides learn more about the case. Pre-trial preparation provides a deeper understanding of the case. This makes it easier to see the strengths of the other side and the weaknesses of one’s own position.
- Settling the case concludes the case. If the case goes to trial and the judge issues a decision, it’s potentially subject to appeal before the U.S. Court of Appeals (and even the U.S. Supreme Court).
- IRS appeals might still be an option. If a taxpayer skips the IRS appeals process and goes straight to Tax Court, the Office of Appeals might contact the taxpayer and ask them to try to resolve the dispute with the IRS appeals process before the Tax Court trial takes place.
| IRS Appeals | Tax Court | |
|---|---|---|
| Expense | Relatively low cost. | More expensive due to filing fees and a more complex litigation process. |
| Time To Resolve Tax Matter | A few months. | A few months to a few years, but 12 to 24 months is common. |
| Formality and Rules of Evidence | Informal conferences or hearings with loose evidentiary rules. | Official court documents and filings required, such as briefs and motions. Case decided by a judge after a trial. Special Tax Court rules govern how the pre-trial, trial, and post-trial phases will work. The Federal Rules of Evidence determine the admissibility of evidence. |
| Outcome | The parties settle the appeal, or the appeals officer makes a final decision. | Judicial opinion or settlement. |
| Professional Representation Recommended? | It depends on the complexity of the tax matter, but it’s recommended if a further appeal to the Tax Court is a possibility. | Yes. |
| Who Can Represent Taxpayers? | Any attorney, enrolled agent, enrolled actuary, or CPA in good standing with the IRS with a written power of attorney from the taxpayer. | A tax attorney who’s been admitted to practice before the Tax Court or a U.S. Tax Court Practitioner (usually a CPA or enrolled agent who has passed a special written exam). |
IRS Appeals or Tax Court: McLaud Law Can Help
Deciding which approach to take isn’t always easy. That said, if you think you might want to sue the IRS in Tax Court, you should be prepared to file an IRS appeal first, given its lower cost and speed. If this doesn’t produce the results you were hoping for, you can then invest the added time, money, and effort of litigating in Tax Court. However, in some cases, it makes more sense to petition the Tax Court directly – an experienced professional can help you navigate a path forward.
So, who should you hire to help you during the appeals and Tax Court process? It’s probably best to hire someone who can handle your case in both phases. Remember, many tax pros who can represent taxpayers on appeal aren’t allowed to represent them in Tax Court.
Having to switch representation between the appeals and Tax Court phases can result in increased costs and delays. This switch can also cause issues in Tax Court because if an argument or fact isn’t first brought up on appeal, you might not be allowed to present it in Tax Court.
Hiring someone from day one to help with your tax matter offers continuity in representation and a unified strategy that takes into account both the appeals process and the possibility of Tax Court. This is why you should contact McLaud Law P.C. if you receive a CDP determination letter, Notice of Deficiency, or a levy notice. Your time to respond is limited, and our firm can represent you no matter where your tax challenge takes you.
IRS Appeal vs. Tax Court FAQs
Is the Tax Court only for IRS audits?
No, the U.S. Tax Court can hear other cases, such as those concerning unpaid tax collections and innocent spouse relief.
Can I go to Tax Court for unpaid taxes?
Yes, the U.S. Tax Court will often hear cases dealing with disagreements over back taxes.
What IRS notices give me Tax Court rights?
Common IRS notices that mention U.S. Tax Court appeals rights include CP 3219-A (following a tax audit), an IRS letter following the completion of a CDP hearing, or an IRS final determination letter denying your requested innocent spouse relief. However, you don’t necessarily need to receive a letter to have the right to petition the Tax Court –it depends on the case.
What’s the difference between CDP and CAP appeals?
The CAP works for a wider range of unpaid tax collection disputes and is generally quicker to complete than the CDP appeals process. However, if you disagree with the appeals decision, you can’t challenge it in court unless you filed a CDP appeal.
Does filing an appeal stop IRS collection?
Yes, filing an appeal will usually offer a temporary pause in the IRS collection enforcement activities until the appeals process finishes.
Do most Tax Court cases go to trial?
No, most cases filed in the Tax Court settle without going to trial.
This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.
Sources
– https://www.irs.gov/appeals/what-to-expect-from-the-independent-office-of-appeals
– https://www.irs.gov/newsroom/heres-what-to-expect-after-requesting-an-appeal-of-a-tax-matter
– https://www.irs.gov/about-irs/appeals-at-a-glance
– https://www.irs.gov/pub/irs-pdf/p1660.pdf
– https://www.irs.gov/pub/irs-pdf/p5.pdf
– https://www.ustaxcourt.gov/court-information/
– https://www.irs.gov/pub/irs-pdf/f12203.pdf
– https://www.irs.gov/pub/irs-pdf/f12153.pdf
– https://www.taxpayeradvocate.irs.gov/notices/90-day-notice-of-deficiency/
