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IRS Administrative Appeal vs. Going to Tax Court: Which is Right for Me?

IRS Administrative Appeal vs. Going to Tax Court: Which is Right for Me?

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IRS Administrative Appeal vs. Going to Tax Court:

Which is Right for Me?

The Internal Revenue Service (IRS) regularly audits individual and business tax returns to verify income, deductions, credits, carryforwards, etc. and ensure compliance with federal tax laws. The different types of audits conducted by the IRS constitute the main source of tax disputes.

Typically, tax disputes occur where the IRS and taxpayer disagree on a specific tax position or decision. If you have a tax dispute with the IRS, the Office of Appeals allows you to resolve the issue without going to court.

However, depending on the nature and circumstances of your tax dispute, you may choose to bypass the IRS administrative process and go straight to court. Normally, the court process involves filing a petition with the Tax Court, where you are the petitioner and the Commissioner of Internal Revenue is the respondent. Through its local office, the IRS must file an answer within 60 days of a taxpayer filing a petition.

While your dispute resolution method of choice will depend on the nature and circumstances of your case, it is advisable to consider the benefits and limitations of the respective processes.

The Pros and Cons of the IRS Appeals Process

Filing a tax appeal with the IRS has several advantages, including:

  • It’s less expensive. The administrative process eliminates potentially expensive litigation costs.
  • It is informal. Although the IRS has forms for everything – and the appeals process is no exception – the taxpayer can informally negotiate their case with the IRS.
  • It’s often faster than the court process, as the IRS usually evaluates its officers on how quickly they settle cases.
  • It allows a taxpayer to defer tax payments by entering into an installment agreement over a number of years.
  • The process protects the privacy of the taxpayer. Unlike the court process, the administrative process usually takes place in a private forum, safeguarding the taxpayer’s private details, including personal and business information.

However, the tax appeals process also has some disadvantages, including:

  • The likelihood of bias in favor of the IRS by the Appeals Officer in charge of the process as a tax appeal is an in-house IRS function.
  • By allowing the tax issue to remain open for scrutiny, an IRS appeal increases the chances of new issues with the potential for additional tax liability arising.
  • Unlike the court process, the usually informal administrative process may lack the necessary finality or closure for the taxpayer.

The Pros and Cons of a Tax Court Petition

Filing a petition with the Tax Court also has certain advantages, including:

  • Allowing a taxpayer to block further scrutiny of their tax situation hence reducing the chances of new issues arising.
  • For smaller cases (less than or equal to $50,000), filing a tax court petition is likely to speed up dispute resolution as it forces the IRS Appeals Office to resolve the issue quickly.
  • An independent judge handles the court process, meaning he/she is comparatively more objective than the administrative officer handling an appeal.
  • While a petition is pending, the taxpayer may simultaneously try to resolve the dispute by working with an appeals offer, who is automatically assigned to the case.

However, resolving a tax dispute through the court process has its disadvantages, including:

  • It is comparatively more expensive than the IRS administrative process.
  • It does not safeguard the taxpayers’ privacy because it is held in a public setting.
  • It can take a long time to resolve a tax dispute. Besides strict procedures that can slow the settlement process, there is no fixed time for a Tax Court judge to issue a ruling. Although difficult to predict, a small case may take close to a year to resolve or be heard by a judge, while larger cases may take longer.

Bottom Line

Whether you choose the administrative process or the Tax Court route for resolving your tax dispute, each has its benefits and limitations. However, a skilled and experienced tax attorney can help you decide which route best suits your tax situation.

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Read our Post about Offers in Compromise here.