How To Fight The IRS
The IRS Examiner has just left. You're wondering what to do about the very expensive "adjustments" she wants to make to your tax return. Now what?
Ways to Deal with the IRS
You have several alternatives to just giving up. You can attempt to negotiate with the Examiner. Or you can try to make a better deal with the IRS Appeals Office. Or you can take the IRS to court.
In fact, you can take all of these steps, or any combination of them, if you want. But not every step is right for every case.
Negotiating with the Examiners
This is the least expensive and quickest route. The Examiner's job is to get the facts straight. If there are important facts she has overlooked, by all means show her. Most Examiners will listen (some won't).
A lot here depends on the nature of the issue. Examiners don't have any authority to consider "litigating hazards." This means they can't take into account the relative strengths of legal arguments. If the IRS has a legal position on an issue, the Examiners are supposed to assert it, even if they personally think it's a loser.
If this is your situation--a good faith dispute over a factual or legal argument--then you should try IRS Appeals.
Going to IRS Appeals
The IRS Appeals Office has one job: to compromise tax cases. They assess the relative strengths and weaknesses of the taxpayer's arguments, and try to make a deal.
To get here you'll need to prepare a document called a Protest in all but the simplest cases. Since the Protest is your chance to make your best case in writing, you should get experienced help.
Usually the Appeals Officer will try to negotiate a compromise settlement with you. Sometimes people are pleasantly surprised at how reasonable Appeals can be. Appeals is independent of Examination, and if the Appeals Officer thinks the Government's case is weak he can settle it for whatever he thinks it's worth, regardless of what the people in Examination think.
Unfortunately, Appeals Officers often claim that the Government's case is worth a lot more than you and your advisers think it is. If you reach impasse with them, it's time to consider going to court.
You have three courts to choose from. Selection of the right court is a critically important decision. The choice is entirely up to you--the Government has to go along with your pick.
Picking the Right Court
You have your choice of the Tax Court, the federal District Court or the Court of Federal Claims. There are advantages and disadvantages to each.
The Tax Court has one huge advantage over the other two--you do not have to pay the tax until the case is over. If cash isn't a critical factor, then you might make your choice on some other factors:
Case law--pick the court where you find the most favorable prior decisions. The Tax Court, District Court and Federal Claims Court are independent of each other and often disagree.
Jury trial--only available in District Court
Place of trial--District Court is local, Tax Court sits for this area in Detroit (or Chicago or Cleveland), and Federal Claims usually sits in Washington DC.
While every case is different, the Tax Court is often faster and less costly than the other two. The Tax Court judges are federal tax specialists, while the District Court judges see everything. The Federal Claims judges get more tax cases than District Court, but fewer than Tax Court.
Finally, there's your choice of opponent. Tax Court cases are handled by the IRS's own lawyers. District Court and Federal Claims cases are handed off to the Justice Department. The Justice Department lawyers often bring a fresh perspective to a case. Getting them involved sometimes breaks an impasse with the IRS.
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J. A. Cragwall, Jr., is a partner specializing in business litigation with Warner Norcross & Judd LLP. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit, and Muskegon. Jay may be reached in the Grand Rapids office at 616.752.2123. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.