Tax Controversies and Disputes
Tax controversies with the IRS and other taxing authorities typically progress through the following four stages: audit, appeals, litigation, and collections. These disputes can involve individuals, companies, partnerships, estates, and trusts and cover a variety of tax matters.
For example, our Florida and Palm Beach County tax planning law firm has resolved the following tax issues on behalf of our clients:
- The deductibility of interest payments
- The effect of debt on the tax allocations of a partnership
- The personal liability of business owners and officers for unpaid employment taxes
- The recognition of gain from S-corporation distributions
- The failure to collect and remit sales tax
- The termination of one spouse’s liability for the tax debts of the other through innocent spouse relief
- The abatement of various tax penalties including federal tax penalties for the failure to file tax returns and failure to pay taxes
The Tax Dispute Process
The most efficient way to handle a tax controversy is to address it in a thoughtful and organized manner early in the process. As the matter progresses from one stage to the next, there are fewer options available to the taxpayer and the process becomes more time consuming and expensive.
Stage One: The Audit Notice
In most federal tax cases, the process begins with the taxpayer receiving an audit notice. The notice almost always requires the taxpayer to provide documents and information to the IRS within 30 days.
The IRS agent handling the audit may also request an in-person meeting with the taxpayer. Understanding exactly what the IRS agent is requesting, having the correct documentation prepared and organized, and being ready to answer questions about the issues that the IRS agent might raise makes it easy for the IRS agent to understand the taxpayer’s position and helps to narrow the issues.
A taxpayer who knows of a serious issue with the return being audited or who the IRS agent wants to meet with in person should consider engaging tax counsel shortly after receiving the audit notice.
Stage Two: Appeals
If the IRS agent proposes changes at the end of the audit, the IRS sends the taxpayer a 30-day letter, which states the amount and reasons for the proposed deficiency. The taxpayer then has 30 days to file a protest with the Independent Office of Appeals. If the taxpayer disagrees with the proposed changes, timely filing this protest is almost always in the taxpayer’s best interest for two reasons.
- Most appeals officers are smart, reasonable people who understand the tax laws, and they have the authority to consider the risk of litigation in making a settlement.
- Filing a timely protest is part of exhausting the taxpayer’s administrative remedies, which is one of the requirements for an award of attorneys’ fees.
A taxpayer with a well-reasoned position and the documentation to support it can often settle the case at this stage and avoid the expense of a trial.
Stage Three: Litigation
If the dispute is not settled at the Independent Office of Appeals, the IRS sends the taxpayer a Notice of Deficiency, commonly called a 90-day letter. The taxpayer then has 90 days to file a petition with the U.S. Tax Court. At the conclusion of this 90-day period, if no petition is filed, the IRS assesses the tax and begins the collection process.
The right to file a petition with the U.S. Tax Court is an important right because the U.S. Tax Court has the statutory authority to adjudicate a federal tax dispute before the taxpayer pays the contested tax. The only other court that can hear a federal tax case before the tax is paid is the bankruptcy court and filing for bankruptcy is often not an acceptable alternative.
For many taxpayers who do not have the ability to pay the disputed tax upfront, filing a petition with the U.S. Tax Court is the only practical way to have your case heard without having to pay the tax to do so.
This 90-day deadline is perhaps the most critical in tax litigation. If a taxpayer files a petition in the U.S. Tax Court, the case will be assigned to an attorney in the Chief Counsel’s Office of the IRS, and the taxpayer will have an opportunity to settle with the IRS before trial.
Stage Four: Collections
If the taxpayer sits on the Notice of Deficiency and fails to timely file a petition with the U.S. Tax Court, the IRS will assess the tax and send the taxpayer’s file to collections.
- The taxpayer can still pay the disputed tax and file a lawsuit against the IRS for a refund in the United States district courts or the United States Court of Federal Claims.
- The taxpayer may also consider filing bankruptcy for the sole purpose of having the bankruptcy court adjudicate the tax dispute.
While paying the tax upfront or filing for bankruptcy is not ideal in most situations, sometimes the taxpayer may purposefully choose to do so because one of the other available forums has a more favorable view of the disputed tax issue than the U.S. Tax Court.
Options for Missed Deadlines
If the taxpayer misses the 90-day deadline for filing with the U.S. Tax Court and doesn’t want to adjudicate the claim in one of the other available forums, then the taxpayer has one last administrative remedy available to it without paying the assessed tax:
- The taxpayer can file an offer in compromise based on doubt as to liability.
- If the offer in compromise is initially denied, the taxpayer has an administrative appeal within the IRS.
However, the IRS’s decision to accept or reject an offer in compromise based on doubt as to liability is not appealable in court, and thus, the taxpayer is relying solely on the reasonableness of the IRS personnel involved in evaluating the offer in compromise.
Tax Dispute? Work with a Florida and Palm Beach County Tax Planning Law Firm
For more information on how to navigate your tax controversy or dispute contact Comiter, Singer, Baseman & Braun, a Florida and Palm Beach County tax planning law firm either online or by calling us at 561-626-2101 or toll free at 800-226-1484. We work with clients throughout the state of Florida, including those in Palm Beach Gardens and Boca Raton.