By David W. Klasing, Esq.
Many times, taxpayers who go through the audit process or some other investigation by the IRS are frustrated with the outcome and the tax bill, including additional penalties and interest with which they are left. Often, taxpayers are of the opinion that the IRS got the facts, the law, or both wrong when concluding their audit and choose to file an appeal of their audit assessment. Taxpayers can do so first by appealing to the IRS internally and, if this is not successful, by filing an appeal before the U.S. Tax Court.
Because taxpayers are often unsuccessful in front of the Tax Court, especially those who decide to try to represent themselves, it is common for tax professionals to receive questions about whether a decision by the Tax Court can be appealed to a higher court. The answer to this question is yes.
How do you appeal a U.S. Tax Court decision?
If you did not already have a lawyer assisting you with your original petition before the Tax Court, you should work right away after you receive notice of the Tax Court’s decision to retain a skilled tax litigation lawyer with appeals court experience. The lawyers will take a look at the specifics of your case and, based on their knowledge and experience, advise you on whether you have any real chance of success in appealing the matter. One important thing to note is that you cannot appeal decisions that were heard before the small tax case division, or “S” division. This is an expedited version of Tax Court that taxpayers can elect to use if their matter involves $50,000 or less. This is why it is vital to consult with an experienced tax litigation attorney before you file a petition with the S division and automatically concede many of your rights, including the right to an appeal.
If you decide to appeal a Tax Court decision, the appeal is to be filed in the U.S. Circuit Court covering the state you resided in at the time you filed your Tax Court petition. For example, because the 9th Circuit covers California, California citizens would file a Tax Court appeal there. You have 90 days from the date that the Tax Court enters its decision to file a notice of appeal with the appeals court, or the appeal is deemed waived. Unfortunately, you will have to pay either the taxes assessed or a deposit a surety bond while this appeal is pending, and it is usually cheaper to pay the taxes. If the Circuit Court rules in your favor, you can be reimbursed for however much you paid the agency more than what you are actually deemed to owe ultimately.
To be successful in appealing a Tax Court petition, the following is required:
1. To be appealable under Internal Revenue Code Section 7482(a)(2), the order must include a statement or certification that:
- A controlling question of law is present,
- Substantial grounds for difference of opinion are present, and
- An immediate appeal from the order may materially advance the ultimate termination of the litigation.
2. Failure to meet any one of the requirements in paragraph (1) is grounds for denial of certification. (See Gen. Signal Corp. v. Commissioner, 104 T.C. 248 (1995), aff’d, 142 F.3d 546 (2d Cir. 1998); Kovens v. Commissioner, supra.)
The appeal must contain:
- A statement of facts.
- A statement of the controlling question of law.
- A statement of the reasons why a substantial basis exists for a difference of opinion on the question.
- A statement of the reasons why an immediate appeal may materially advance the termination of the litigation.
The reality of Tax Court losses and potential for appeal
- Why most taxpayers lose in Tax Court: Many taxpayers who represent themselves in Tax Court do not fully grasp procedural rules or legal subtleties, making it more challenging to prove the IRS wrong. By contrast, those who retain experienced counsel enjoy much better odds of success. Even so, a final Tax Court decision is not always the endpoint: An appeal to the U.S. Court of Appeals can be pursued if you believe the Tax Court erred factually or legally, provided you did not elect the small tax case (“S”) procedure.
- Small tax case (“S”) division: Electing “S” status is appealing when a matter involves $50,000 or less and you want more straightforward procedures, but you lose the right to appeal if you choose that route. If your matter was handled under “S” status, you typically cannot proceed to a U.S. Circuit Court to reverse the decision, no matter how flawed you believe the result.
- Common reasons to appeal: Taxpayers may assert that the Tax Court misapplied statutes, overlooked controlling precedent, or relied on erroneous fact-finding. Because appellate judges rarely overturn factual determinations unless they are “clearly erroneous,” appeals based on legal arguments tend to fare better. Your attorney can help you assess whether an issue merits further review or if the law is solidly in the IRS’s favor.
Representing yourself before the appellate division of the IRS can put you at a significant disadvantage, much like appearing without a lawyer in a court of law. Without a thorough understanding of tax laws and procedures, you risk overlooking valuable defenses and concession opportunities. It’s crucial to enlist expert representation to safeguard your interests. Statistics show that more than 90% of taxpayer/IRS disputes with potential for litigation are resolved during the appeals stage, highlighting the importance of working with a tax professional who is well-versed in appeals office practices. The IRS handles more than 100,000 appeals annually, but you only deal with one. Lacking a solid grasp of IRS procedures could compromise your position from the outset.
Like taxpayers, the IRS has strong incentives to avoid the time, cost, and uncertainty of litigation. Government losses in court establish precedents that reduce future revenue. This higher perceived risk often prompts appeals officers to seek an agreeable settlement rather than risk an adverse judgment in court.
Additional key considerations and conflicts
- Deadlines, payment, and bonds: Under IRC §7483, you must file a notice of appeal within 90 days from the day the Tax Court enters its final decision. Missing this deadline forfeits your rights. The IRS can continue collecting unless you pay the deficiency or post a bond (up to twice the amount due). Many find posting a surety bond expensive, so they pay the tax and then seek a refund if the appeal succeeds.
- Original tax preparer issues: If your initial representation (or lack thereof) allowed the time to protest or administratively appeal to pass, you might have rushed into Tax Court as the last option. If a non-attorney preparer filed or completed your Tax Court petition, that could verge on unauthorized practice of law. Moreover, if you plan to argue you “relied on professional advice” to reduce or eliminate penalties, the preparer might be reluctant to accept blame. Hiring new counsel—unconnected to your original returns—can eliminate such a conflict of interest and strengthen your penalty defense.
- Potential for conflict of interest: When you claim reliance on a professional’s advice to show “reasonable cause,” that professional might be unwilling to admit error due to personal or reputational risks—such as potential preparer tax penalties. Engaging independent tax appeals counsel ensures your representation is free from such conflicts, allowing you to use the reliance defense without the original preparer’s reticence undermining it.
- Impact of IRS settlement practices: With a 98% IRS settlement rate, questionable or weaker cases are frequently settled before or during a Tax Court trial. As a result, the matters that proceed to a final, losing verdict often have less favorable facts for the taxpayer. For an appeal to be worthwhile, there typically needs to be a substantial question of law or a strong procedural argument for reversal. Still, an appeal might encourage the IRS to revisit settlement possibilities if it fears an adverse precedent in the appellate court.
Even though the Tax Court is commonly thought of as the forum of last resort for appealing tax bills and other IRS issues, there is a way to appeal a Tax Court ruling. However, the chances of success of these appeals with the Circuit Courts are often relatively low, as the IRS has a 98% settlement rate and ordinarily settles losing cases long before going to Tax Court in the first place. You should consult with an experienced tax attorney or CPA before making any decisions about whether or not to go through with this process.
ABOUT THE AUTHOR:
David W. Klasing, Esq., is the founder and managing attorney of the Tax Law Offices of David W. Klasing PC, a boutique California tax firm comprised of nationally recognized tax attorneys and CPAs.
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Tags: Income Taxes, IRS, tax court, Taxes
