Section of Taxation Publications
  VOL. 55
NO. 1
FALL 2001
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
 What to Consider in Choosing Among Forums for Resolving the Ordinary Tax Dispute
Paul E. Treusch

Paul E. Treusch is a Professor of Law at Southwestern University School of Law, a member of the Illinois, D.C., and Massachusetts Bars, and of the Bars of the U.S. Supreme Court and a member of a number of Federal Courts of Appeal. He is former Internal Revenue Service Assistant Chief Counsel (Litigation), and his professional career has combined with a long stay in the Service and in teaching, several years in private tax practice. Work on this manuscript was completed by the author in July of 2001.

The taxpayer may choose between a number of forums in which to pursue the judicial resolution of a dispute over a proposed increase in civil federal income tax liability. However, the Internal Revenue Service makes certain preliminary administrative steps available to the taxpayer, and in some cases these administrative measures are mandatory. The first of these preliminary administrative steps occurs during audit by the examining officer. During the audit the taxpayer is afforded an informal conference and an opportunity to reach agreement. If the taxpayer remains unprepared to accept the adjusted tax, the taxpayer has the opportunity to have an independent review and conference by the Service's Appeals Division, in hopes that the independent review will lead to a settlement.

At the close of each level's administrative proceedings, the taxpayer is invited to accede to the proposed increased tax through either voluntary payment or collection process, and thereby to forego pursuing a judicial resolution. If the taxpayer decides not to contest assessment and collection, the taxpayer will waive the statutory bar on assessment and collection, triggered upon mailing of the deficiency notice, by executing a routine form. By executing this waiver form the taxpayer forfeits the valuable option of electing to pursue judicial resolution in the U.S. Tax Court. This Tax Court option may only be restored if a further deficiency may be and is sent before the statute of limitations has run on the tax year or years in question. At the audit stage this waiver is a Form 870; at the appellate stage it is a Form 870AD. These two waiver forms differ in one important respect. Unlike the Form 870 presented at the audit stage, the Form 870AD requires the taxpayer to stipulate that the taxpayer will not later file or prosecute a refund claim. In certain cases by executing this waiver the taxpayer may also be forfeiting the option of judicial resolution by refund claim and refund suit in the U.S. District Court or in the U.S. Court of Federal Claims.

Where the taxpayer is unwilling to accept the proposed tax increase and wants to expedite the election of forums for a judicial resolution, the taxpayer may request the immediate issuance of a deficiency letter. The taxpayer may request a deficiency letter in the Appeals Division, or earlier during the audit when the taxpayer has elected to by-pass further administrative review in the Appeals Division. Once the deficiency letter has been issued by either office, the taxpayer's choice of forums is triggered under the statute.

Over-loaded court dockets, delays, and costs associated with judicial resolution have increasingly led taxpayers to resort to non-judicial resolution of tax conflicts. Non-judicial resolution is even more appealing because of the availability of Service settlement capabilities. In fact, the judicial forums are so unpalatable that the Service's
settlement capabilities have instituted efforts to anticipate conflicts. Thus, the Service has recently instituted a test procedure for attempting to anticipate potential problems even
before a return has been filed. Even earlier, the Service openly encouraged mediation, voluntary binding arbitration, and alternative dispute resolution. The Tax Court rules also encourage alternative dispute resolution.

The administrative consideration of a disputed additional tax ends when the taxpayer takes one of two different actions. First, the taxpayer may agree to accept the proposed adjusted tax by making full voluntarily payment, or executing a waiver on assessment and collection by signing a Form 870 or a Form 870AD. In the alternative, the taxpayer may elect to pursue a judicial resolution. The taxpayer may elect judicial resolution by refusing to sign a waiver form or by failing to respond to an earlier 30-day demand letter. In either case, taxpayer action invites issuance of a deficiency letter, or so-called "90-day letter."

Upon mailing of the deficiency letter the taxpayer has the statutory choice of two options. First, the taxpayer may carry the dispute to the Tax Court, which may entitle the taxpayer to a judicial resolution even before the taxpayer pays the asserted tax deficiency. This choice is made by the taxpayer's electing to file a petition in the Tax Court within the required time, which is generally 90 days (unless the taxpayer is out of the country). In the alternative, the taxpayer may elect to pay the asserted deficiency in full and file a timely refund claim, and if not forthcoming, a later refund suit in either the U.S. District Court or the U.S. Court of Federal Claims.

Since it is the mailing, and not the receipt of the deficiency letter that triggers the taxpayer's "before payment" Tax Court option, it is prudent for the taxpayer to save the envelope as evidence of date of issuance. The taxpayer's opportunity to seek judicial resolution in the Tax Court before payment of an asserted deficiency is unique among tax systems. Most tax systems traditionally insist on full payment of any disputed tax, and allow recovery only by way of refund. This exceptional opportunity is afforded under the U.S. Federal tax system perhaps by reason of the system's "self assessment" character. The system is one of self assessment because the taxpayer is charged with reporting taxable income for the year, and then computing and paying the resulting tax. This self assessment is in sharp contrast to a revenue officer's customary computation and immediate assessment and collection of additional tax. If the revenue officer's assessment is unacceptable, the taxpayer can only recover by a claim of refund. This custom of immediate computation and collection is dictated by governmental unwillingness and inability to postpone collection of taxes, which generally constitute the principal source of government revenue.

The unique opportunity to challenge in the Tax Court before payment may stem from the administrative nature of the Tax Court's predecessor, the Board of Tax Appeals. The Board operated at first within the Service itself, and the Board's judicial status was first accorded by Congress only begrudgingly. Whatever its historical origins, the successor Tax Court has operated now as a full-fledged, highly respected judicial tribunal for many decades.



Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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