Boston Tax Attorney on Equitable Jurisprudence in Tax Law
The IRS will send a Notice of Deficiency when its Revenue Agents have made an adjustment to a taxpayer's income tax for one or more years, or when a timely administrative appeal from a revenue agent's adjustments has resulted in the issuance of the Notice. The Notice is, in any case, the "ticket to the Tax Court." The taxpayer is not required to pay the tax deficiency scheduled by the IRS in it's Notice before going to tax court.
However, going to Tax Court is not always the best way to resolve the issues raised by the IRS's tax adjustments. There are often considerations of what may or may not be equitable to the taxpayer in the tax adjustments made by IRS.
The Tax Court, an administrative court in which the IRS is sued, is not equipped to handle equitable claims. It is not a court of equitable jurisdiction under the United States Constitution. Unfairness to the taxpayer is not its business. It applies the tax code on evidence of compliance with proofs and standards which Congress has laid down, and nothing more.
A federal district court, on the other hand, is a court of both law and equity. United States District Courts, as Article III courts, are the forum in which "the Sovereign," that is, the United States, waives immunity from being sued for wrongdoing. The price for having the benefit of suing the United States for wrongdoing in an income, estate or gift tax case is that before doing so, the adjustment made by the IRS in its Notice of Deficiency [with very limited exception], must be paid in full. During a trial on the evidence of the taxpayer in a federal district court, the trial court will look to whether the IRS adjustments are consistent with the law [the Internal Revenue Code], and with equity and good conscience on the part of the IRS. This is not a difference of subtleties. It is a major difference of kind.
Now, if the taxpayer has petitioned the Tax Court from a Notice of Deficiency, he may have an administrative hearing in the Office of Regional Appeals of the IRS prior to trial if he did not first take an administrative appeal to that office from the revenue agent's proposed adjustments. If the taxpayer does have a hearing at the IRS regional appeals office, that office may review what are called "hazards of litigation" to the IRS in terms of letting the case go to trial, and offer some sort of settlement which may or may not be acceptable to the taxpayer. Whatever the outcome of this adventure - settlement in Appeals or trial in Tax Court — the taxpayer has had his remedy. No refund suit option remains open to him.
During the collection phase of an IRS tax case [post-assessment], equitable remedies against enforced collection are possible for the truly destitute, or in cases of extreme hardship for other reasons, but, generally, all assets and income are up for grabs by IRS enforced levies and by way of sale at auction. Whether there once was a tax refund suit remedy is of cold comfort to those who were, in any case, without means to pay the entire tax at issue and sue in federal district court when they had the choice. This is a fact of life, and something about which lawyers have no good answer apart from "this is the system." And it is.
Thus, in situations in which IRS is pursuing an assessment of tax after the time period for filing in the Tax Court has run — an assessment is simply the entry of an account receivable on the books of the IRS for a tax which it has determined to be due — the taxpayer's only remaining legal remedy is to pay the income, estate or gift tax, file a claim for refund for taxes paid and thereafter bring suit against the government for a refund of that tax as having been, on some appropriate grounds, improperly assessed or collected. Employment tax cases, including those involving "trust fund" and persons responsible for withheld but unpaid taxes, are treated differently in tax law. Full payment of the assessment is not required to initiate a claim for refund and, if rejected, a federal tax refund suit.
For additional information please contact attorney Theodore L. Craft.