Tax Litigation (Controversy and Dispute Resolution)
Interaction with the IRS can be intimidating. Never is this more so than when a taxpayer is facing the IRS in an adversarial manner. The rules, procedures, and terminology can seem foreign and the stakes are always high. There are four major components of tax controversy that a business or individual taxpayer may face. In all four of these situations, the assistance of experienced tax counsel can be invaluable. Additionally, the costs imposed on a taxpayer tend to increase as the taxpayer moves through the various stages. It is, therefore, imperative that a taxpayer engage counsel and resolve the issues as quickly as possible.
IRS audits need to be taken seriously. Approaching an audit correctly can prevent a small problem from becoming a much bigger one. Audits typically begin when the taxpayer receives correspondence from the IRS requesting the taxpayer to explain or substantiate items in a tax return. When a business or individual receives notification from the IRS that it intends to examine prior returns, it is crucial that the taxpayer begin preparing immediately by reviewing records, assessing the strength of positions taken on the subject return, and determining whether there are any other areas of concern that may cause the audit to expand in scope.
Representation by an attorney during the course of an audit can make the difference between a quick resolution of the audit and expansion of the scope of the audit. It is especially crucial in determining what information does, and does not, have to be provided to the examining agent, how to respond to the examining agent’s inquiries, and how to take advantage of taxpayer protections built into the Internal Revenue Code, such as the statute of limitations and evidentiary privileges.
Additionally, in certain circumstances, when the traditional information gathering techniques are not successful, the IRS will seek to collect documents and information through a summons, under which the IRS can invoke the power of the federal courts to compel disclosure of the requested information. However, in doing so, the IRS must follow specific procedural rules; failure to do so can lead to summons being quashed and the audit being ground to a halt. Attorney representation during the course of the audit is imperative to ensure that the examining agent is following all of the applicable procedural requirements and ensuring that the taxpayer avails itself fully of remedies available for failure to follow procedural requirements.
In the event the audit results in unresolved issues, the examining agent will typically issue a report colloquially referred to as a 30-day letter. Upon receipt of that letter, the taxpayer has the opportunity to file a protest and invoke the jurisdiction of the IRS Appeals Office. The Appeals Office serves as an independent examiner of issues that arise from an audit. Resolving a case at the appeals level is the last chance to avoid the stress and expense of court.
Representation at the appeals level is crucial. The appeals officer is independent and does not work in tandem with IRS attorneys or revenue agents. The taxpayer’s representative can, and should, engage in candid, technical, one-on-one conversation with the appeals officer in an effort to resolve the outstanding issues.
Furthermore, appeals officers are trained to settle cases based on the hazards the IRS may face in litigation; the more potential hazards that can be brought to the appeals officer’s attention, the greater the chance of a favorable settlement. Attorney representation is needed to identify each of the IRS’s litigation hazards and present them to the appeals officer in the most effective manner possible.
As with the audit level, resolving a case at the appeals level is highly desirable. It saves the taxpayer much in the way of money and worry. Attorney representation is a hugely beneficial component to obtaining a favorable result at the appeals level.
To the extent issues cannot be resolved at the appeals level, the next level of review is in court. Generally, taxpayers facing a deficiency determination have two options: (1) pay the tax and sue for a refund or (2) seek prepayment review in the Tax Court. Determining which course to follow requires an examination of the unique circumstances of each case. For instance, paying and seeking a refund stops the accrual of interest, thereby lowering the potential overall liability. Furthermore, refund litigation and trials occur in the United States District Courts and allow the taxpayer to present the case to a jury, whereas all matters in the Tax Court are resolved by a judge.
Regardless of the path chosen, numerous procedural and substantive hurdles must be crossed before judicial relief is obtained; drafting pleadings, conducting discovery, examining witnesses, and making and overcoming evidentiary objections are part of nearly every refund or deficiency case. Additionally, litigation may present further opportunities for an advantageous settlement. The complexities of litigation and a trial in the Tax Court make it extremely difficult for a taxpayer to undergo this effort alone.
The collection of tax is a crucial function of the government, and it spares nothing in its efforts to collect tax. Moreover, Congress has given the IRS tremendous authority to collect tax, including significant lien powers and the right to levy and sell a taxpayer’s property to satisfy a debt. The enforcement of these powers can be crippling to a business’s ongoing operations. Fortunately, and necessarily, the Internal Revenue Code and tax regulations balance the government’s collection efforts with statutory taxpayer protections and payment alternatives.
For instance, relief from IRS liens (through discharge, release, subordination, etc.) is available under certain circumstances. This relief can be crucial, for instance, where the tax debtor is seeking to sell property or inventory, but the price is being driven down or the sale is otherwise being hampered by the presence of the IRS lien.
Taxpayers facing collection actions can also seek to settle their tax liabilities through installment payment plans or offers in compromise. An offer in compromise requires the taxpayer to submit information regarding his or her income, assets, and liabilities to allow the IRS to determine how much can reasonably be expected to be paid during the collections period. In situations where a taxpayer simply cannot afford to pay the liability in a reasonable amount of time, offers in compromise can be an effective way to settle a tax liability for less than its total amount. Offers in compromise also have the effect of suspending collection action and allowing the taxpayer to regroup while it negotiates with the IRS.
Additionally, a tax debtor, upon receipt of notice that the IRS has filed a tax lien or intends to levy property, has the right to seek Appeals Office review of the propriety of the collection action by filing what is known as Collection Due Process appeal. In that context, the appeals office will review the proposed collection action to ensure that procedural requirements were followed and allow the taxpayer to propose a collection alternative, such as an installment agreement or offer in compromise.
If the taxpayer is dissatisfied with the Appeals Office’s determination, it can petition the Tax Court for review. Note that the ability to challenge the substantive underlying liability is greatly circumscribed in the CDP context; generally, only if the taxpayer did not receive a notice of deficiency (and therefore have the right to seek Tax Court review) will review of the substantive liability during a CDP hearing be proper.
The attorneys at Fuerst Ittleman David & Joseph have extensive experience with all stages of tax controversy and dispute resolution, from the beginning of an audit to crafting a beneficial offer in compromise, to litigating in Tax Court and District Court, and arguing appeals thereafter. From our experience, the earlier a taxpayer engages the assistance of counsel, the better the outcome.
For more information, please contact us at firstname.lastname@example.org or call us directly at 305-350-5690.