Federal Court Litigation of Tax Matters
When it comes to litigating tax matters against the IRS, Taxpayers have various different forums available to them. In general, IRS tax matters are litigated in Federal Courts. The main Federal Courts include the Tax Court, District Court, and the Court of Federal Claims. Each system has its own sets of pros and cons, including whether or not a Taxpayer seeks to present the case to a jury of their peers or a bench trial; are they willing to pay the amount they owe first, and then seek a refund (Flora Rule); or would they rather litigate in Tax Court before payment is made (although some matters cannot be litigated in tax court). Let’s take a brief look at the three main options Taxpayers have to litigate a tax matter.
U.S. Tax Court
Tax court is one of the most common forms for taxpayers to litigate tax matters with the Internal Revenue Service. That is because the tax court utilizes a more informal process as opposed to the two other main options (District Court and Federal Court of Claims). Thus, many petitioners in tax court are ‘self-represented’ and appear without counsel. There are very strict timelines for taxpayers who are considering a tax court petition and typically have to be done within 90 or 150 days of receiving a NOD letter (or 30 days after an appeal is rejected, subject to the new Supreme Court ruling in Boechler). There is no jury in tax court and unfortunately, tax court does not allow the litigation of all types of IRS matters, such as FBAR.
United States District Court
District Court is the next most common option. In this type of scenario, taxpayers typically must first pay any outstanding tax liability to the IRS — then, the taxpayer can make a claim for a refund and when that is rejected they can pursue a District court claim. Unlike tax court, in District Court, taxpayers can request a jury trial. Especially in situations in which from a legal perspective they may not be in the best position, if they believe that they could convince the jury of their peers easier than a Tax Court Judge, for example, they may want to consider the District Court option. While typically payment must be made first under the Flora Rule, this may not apply in all scenarios such as FBAR and the recent case of Mendu. Depending on the specific precedent available in the District the taxpayer would bring a lawsuit can also impact the decision to go to District Court.
U.S. Court of Federal Claims
As an alternative to District Court, some taxpayers may prefer the Court of Federal Claims. With the Court of Federal Claims, taxpayers are limited to bringing lawsuits against the US government and thus lawsuits against Internal Revenue Service are not uncommon. Similar to District Court, taxpayers have to first make payment under the Flora Rule, but unlike District Court, there is no option to request a trial by jury and instead, it is a bench trial wherein the judge will make the final decision.
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