Tax Court, district court, or the Court of Federal Claims: where should you fight the IRS?

Most taxpayers fight a proposed IRS adjustment in the U.S. Tax Court, because it is the only one of the three courts that lets you dispute the tax before paying it; you file within 90 days of a notice of deficiency. The other two routes, a refund suit in your federal district court or in the U.S. Court of Federal Claims, require you to pay the tax, file a refund claim with the IRS, and then sue. A district court is the only one of the three where you can ask for a jury.

Which forum fits depends on whether you can pay, how strong the facts are, how the law reads in each court, and the deadlines that are still open. The choice sits at the start of every matter in Kathryn Meyer's tax litigation practice.

How the three courts compare

Jurisdiction for the two refund courts comes from 28 U.S.C. 1346(a)(1), which gives district courts jurisdiction, alongside the Court of Federal Claims, over any civil action against the United States to recover a tax "alleged to have been erroneously or illegally assessed or collected." IRS Publication 5 adds that a nonresident alien generally can sue only in the Court of Federal Claims, because a district court suit must be filed where the plaintiff resides.

How each route works, step by step

Tax Court

1. The IRS mails a notice of deficiency under IRC 6212.
2. You petition the court within 90 days (150 if the notice is addressed outside the United States).
3. While the case is pending, the IRS generally may not assess or levy the disputed tax (IRC 6213(a)).
4. The case is usually discussed with IRS Appeals or IRS counsel, and most cases settle; the rest are tried before a judge.

The petition itself is covered in how to file a petition in the U.S. Tax Court.

Refund suit

1. You pay the tax that was assessed.
2. You file a refund claim with the IRS within the time IRC 6511 allows; no suit may be filed until a claim has been filed (IRC 7422(a)).
3. You wait for the IRS: suit may not begin until 6 months after the claim unless the IRS denies it first.
4. You file in district court or the Court of Federal Claims no later than 2 years after the IRS mails a notice of disallowance. Publication 5 notes that Appeals' consideration of a disallowed claim does not extend that 2 years, although it can be extended by written agreement.

The claim deadlines that come before any suit are explained in how long you have to claim a tax refund.

For taxpayers in and around Washington, the Tax Court's own courtroom is close at hand, as described in what to expect at the U.S. Tax Court in Washington, DC.

A Northern Virginia resident who pays and sues files in the Alexandria Division of the Eastern District of Virginia; the local steps, fees and jury rules are in filing a tax refund suit in federal court in Alexandria.

Can you switch from one route to the other?

Only in limited ways, and the statutes run in one direction. Once you file a timely Tax Court petition after a notice of deficiency, IRC 6512(a) generally bars any refund suit for the same tax and year; the Tax Court decides the whole year, including any overpayment. Going the other way, if the IRS mails a notice of deficiency for the same tax before the hearing of your refund suit, IRC 7422(e) stays the refund suit during the time to petition the Tax Court and for 60 days after; if you then petition, the refund court loses jurisdiction to the extent the Tax Court takes it.

A taxpayer who misses the 90 days is not out of options, but the only remaining court route is usually to pay and sue for a refund; the choices are laid out in what to do if you missed the 90-day Tax Court deadline. Some unpaid assessments can also be revisited administratively, as described in whether you can reopen an IRS audit after it closes.

What changes the answer

• Whether you can pay. The Supreme Court held in Flora v. United States that "full payment of the assessment" is required before a refund suit; if paying is not possible, the Tax Court is usually the only practical forum.
• Penalties that start with a partial payment. For the trust fund recovery penalty, IRC 6672(c) refers to paying "the minimum amount required to commence a proceeding in court," which is less than the full penalty; see the trust fund recovery penalty.
• Who decides the facts. A jury is available only in district court, at either party's request under 28 U.S.C. 2402; Tax Court and Court of Federal Claims cases are decided by a judge.
• Which court of appeals' law applies. Tax Court and district court appeals go to the regional circuit, while Court of Federal Claims appeals go to the Federal Circuit, so the law on a disputed point can differ by forum.
• The amount. Disputes of $50,000 or less a year can use the Tax Court's small case procedure; the trade-offs are in small tax case or regular case.
• Interest and cash flow. Interest runs on unpaid tax during a Tax Court case unless you pay or deposit it; in a refund suit, your money is already with the government while the case runs.
• Deadlines already missed. If the 90 days have passed, the Tax Court is generally closed for that notice; if the refund claim period under IRC 6511 has passed, the refund courts are closed.

For example: one dispute, three paths

For example, imagine a small business owner whose audit ends with a notice of deficiency for $70,000 in tax and penalties for one year. She cannot pay $70,000 now, so she petitions the Tax Court within 90 days; collection of that amount is barred while the case is pending, and she later settles part of the case with IRS Appeals. Now change one fact: she has the cash, and her case turns on whether a jury would believe her account of a business arrangement. She could instead let the 90 days pass, pay the assessed tax, file a refund claim, wait 6 months (or until the IRS denies it), and sue in the district court where she lives, asking for a jury. If her case instead turned on a legal question on which the Federal Circuit's precedent favored her, the Court of Federal Claims might be worth considering. Each choice has costs that should be weighed before the 90 days run. This is a hypothetical, not a real case.

Common mistakes when choosing a forum

• Letting the 90 days lapse by accident. Missing the Tax Court deadline turns a free choice into a pay-first route.
• Filing a refund suit without a claim. IRC 7422(a) requires a refund claim to be filed with the IRS first.
• Suing too early or too late. A refund suit cannot begin until 6 months after the claim unless it is denied sooner, and the 2-year limit after a disallowance notice is not extended by Appeals' review.
• Paying only part of the tax. Flora requires full payment of the assessment before suit, outside special rules such as the one in IRC 6672(c).
• Assuming a petition and a refund suit can run side by side. IRC 6512(a) generally bars a refund suit for a year in a timely Tax Court case.
• Ignoring where an appeal would go. The court of appeals that will review the case can matter as much as the trial court.

What to do this week

1. Find out which notice you have and its date: a notice of deficiency starts the 90 days.
2. Decide realistically whether paying the full assessment is possible.
3. List the key disputed facts and legal questions, and whether a jury or a particular court of appeals matters to them.
4. If you have paid, check that a refund claim is on file and note its date and any disallowance letter.
5. Calendar every deadline: 90 days for a petition, 6 months and 2 years for a refund suit.

Frequently asked questions

Who represents the government in each court?

In the Tax Court, the Commissioner of Internal Revenue is the respondent, represented by attorneys from the IRS Office of Chief Counsel. In refund suits, the United States is the defendant.

Is the Tax Court part of the IRS?

No. IRS Publication 5 describes the Tax Court, the district courts and the Court of Federal Claims as independent judicial bodies with no connection to the IRS.

Can you recover legal fees in any of these courts?

A prevailing party may recover reasonable costs under IRC 7430 if its conditions are met, in any of the three courts; see whether you can recover your legal fees if you beat the IRS.

Who has to prove what?

In general the taxpayer carries the burden of proving the IRS wrong, with exceptions; see who has to prove what in a Tax Court case.

Does settlement work the same way in each court?

Settlement is possible in all three. Publication 5 says a Tax Court petitioner who did not go to Appeals before filing will normally have a chance to settle with Appeals before trial; see whether a Tax Court case can settle before trial.

Can the Tax Court penalize a weak case?

Yes. Publication 5 warns that if a case is brought mainly for delay, or a position is frivolous or groundless, the court can impose a penalty of up to $25,000 (IRC 6673).

What happens after a Tax Court decision?

A regular case decision can be appealed within 90 days; see whether you can appeal a Tax Court decision, and to which court.

Choosing the forum before the clock runs

The forum decision is usually made in the 90 days after a notice of deficiency, and it shapes cost, proof and appeal for the rest of the case. Kathryn Meyer spent more than two decades in the IRS Office of Chief Counsel, which litigates tax cases for the government, and now represents taxpayers. If you are weighing where to bring a dispute, contact the firm or call (571) 560-8674.

Sources

• 26 U.S.C. 6213, petition to Tax Court
• 26 U.S.C. 6512, Limitations in case of petition to Tax Court
• 26 U.S.C. 6511, Limitations on credit or refund
• 26 U.S.C. 6532, Periods of limitation on suits
• 26 U.S.C. 7422, Civil actions for refund
• 26 U.S.C. 7482, Courts of review
• 28 U.S.C. 1346, United States as defendant
• 28 U.S.C. 1402, venue in suits against the United States
• 28 U.S.C. 2402, Jury trial in actions against United States
• 28 U.S.C. 173, Times and places of holding court (Court of Federal Claims)
• 26 U.S.C. 6672, Failure to collect and pay over tax
• 26 U.S.C. 6673, Sanctions and costs awarded by courts
• 28 U.S.C. 1291, Final decisions of district courts
• 28 U.S.C. 1295, Jurisdiction of the Federal Circuit
• Flora v. United States, 362 U.S. 145 (1960)
• IRS Publication 5, Your Appeal Rights and How to Prepare a Protest
• U.S. Court of Federal Claims