IRS Appeals & U.S. Tax Court

Rule

IRS Independent Appeals ("IRS Appeals") is separate from Examination and Collection and gives taxpayers an informal administrative forum to resolve disputes without going to court. Appeals considers settlement offers that fairly reflect the relative merits of the parties' positions and the litigation hazards — but will NOT settle based on "nuisance value." Appeals cannot be used for positions based only on moral, religious, political, constitutional, or conscience grounds.

Three Options to Challenge an IRS Determination

1. IRS Appeals — administrative, no payment required
2. U.S. Tax Court — no payment required before filing (only court where you can contest a deficiency WITHOUT first paying)
3. U.S. District Court / U.S. Court of Federal Claims — MUST pay the tax first, then sue for a refund

Interest and penalties continue to accrue during Appeals unless the dispute is resolved "no-change."

Post-Examination Appeal Path

1. 30-day letter — sent after the closing conference; includes the RAR, a consent/waiver form, and Pub 5. Taxpayer has 30 days to accept or request an Appeals conference.
2. If no agreement in Appeals (or no response to the 30-day letter), IRS issues a 90-day letter (Notice of Deficiency) — the statutory notice that IRS intends to assess. Sent by certified/registered mail. Taxpayer has 90 days (or 150 days if outside the U.S.) to petition the U.S. Tax Court.
3. If the taxpayer misses the 90-day deadline, the tax is assessed and the Tax Court door closes — the taxpayer must then pay and sue for refund in District Court or the Court of Federal Claims.
4. If the taxpayer timely petitions the Tax Court, the case is usually sent back to IRS Appeals first to attempt settlement (>90% of Tax Court cases settle without trial).

Representation in Appeals

Only Circular 230 practitioners (attorneys, CPAs, EAs) may represent a taxpayer in an Appeals hearing. An unenrolled preparer (even with AFSP) may attend as a witness but may NOT represent. Exceptions apply under limited-practice rules (e.g., a parent for their child, a fiduciary for an estate). With a valid Form 2848, the taxpayer need not attend.

Small Case Request (IRS Appeals) — NOT the same as Tax Court S-case

If the disputed amount (tax + penalties) per tax period is ≤ $25,000, the taxpayer may use Form 12203 (Request for Appeals Review) or a brief written statement instead of a full formal protest. Employee retirement plans (Form 5500), exempt organizations, S corporations, and partnerships do NOT qualify for the small-case request. Do NOT confuse this with the Tax Court's small-tax-case procedure.

Formal Protest Requirements

A formal protest (for amounts > $25,000) must include:

• Taxpayer's name, address, and daytime phone
• Statement that the taxpayer wants to appeal the examiner's findings
• Tax periods/years involved
• List of changes with which the taxpayer disagrees
• Reasons for disagreement (facts and law)
• Any facts new since the exam
• Signature under penalties of perjury (or, if prepared by a practitioner, the practitioner's declaration)

U.S. Tax Court

• Independent federal court; the ONLY court where a taxpayer can contest a deficiency WITHOUT first paying
• Jurisdiction requires a Notice of Deficiency (90-day letter) — taxpayer cannot go to Tax Court for a refund-only claim
• Jurisdiction includes: income/estate/gift tax deficiencies; interest abatement denials; transferee liability; partnership adjustments; administrative fees; worker classification; certain collection actions; innocent spouse relief; seriously delinquent tax debt certifications (passport); whistleblower awards
• Taxpayer may appear pro se or be represented by someone admitted to practice before the Tax Court
• EAs and CPAs must pass a separate Tax Court exam to be admitted; attorneys need NOT take the exam
• "Practice before the IRS" does NOT include practice before the Tax Court
• Issues Regular decisions (first ruling on an issue) and Memo decisions (revisits a previously decided issue)

Small Tax Case (S-case) Procedure

Faster, less formal; the decision is final and NOT appealable by either party. S-case decisions are not precedent and usually not published. All three (taxpayer, IRS, Tax Court) must agree to use it. Dollar limits:

Do NOT confuse the Tax Court S-case with the IRS Appeals small-case request (Form 12203, $25,000 limit).

Anti-Delay Tactics (IRC §6673)

The Tax Court may impose a penalty of up to $25,000 if the taxpayer: unreasonably fails to use the IRS internal appeals system; files a Tax Court petition primarily to cause delay; or takes a frivolous position. Frivolous positions include: the income tax is unconstitutional/invalid; the 16th Amendment was not properly ratified; paying tax is "voluntary"; "sovereign citizen" claims; wages are not income. IRS publishes names of taxpayers penalized under §6673.

Other Courts

EAs and CPAs have unlimited IRS representation rights but CANNOT represent taxpayers in District Court, bankruptcy court, Courts of Appeals, or the Supreme Court — only attorneys can.

Burden of Proof (IRC §7491)

Generally on the taxpayer, but it shifts to IRS if the taxpayer: (a) complies with IRS substantiation requirements; (b) keeps adequate records; (c) cooperates with reasonable IRS information requests; and (d) presents credible evidence on the issue. The shift applies to individuals and to entities with ≤$7 million net worth and ≤500 employees (for the tax matter). It applies only in civil court proceedings, not criminal. IRS always bears the burden on any income item it reconstructs using statistics from unrelated taxpayers.

Litigation Costs (IRC §7430)

A taxpayer may recover reasonable administrative and litigation costs if: the costs arose in an administrative or court proceeding against the U.S.; the taxpayer is the prevailing party; the taxpayer exhausted IRS administrative remedies; the costs are reasonable and relate to assessment, collection, or refund of tax/interest/penalties; and the taxpayer did not unreasonably protract the proceeding. IRS is NOT treated as the prevailing party if its position was not substantially justified. Net-worth limits apply: individuals ≤ $2 million; estates ≤ $2 million (at death); exempt orgs/cooperatives ≤ 500 employees; other taxpayers ≤ $7 million net worth and ≤ 500 employees.

Authority

• IRC §6213 — 90-day/150-day Tax Court petition window
• IRC §6673 — Tax Court anti-delay/frivolous-position penalty (up to $25,000)
• IRC §7491 — burden of proof shift to IRS
• IRC §7430 — recovery of litigation/administrative costs
• IRC §6511 — refund claim statute (3 years from filing / 2 years from payment)
• Treasury Reg. §601.106(d)(2) — Appeals settlement standard
• Form 12203 (small-case Appeals request)
• Publication 5 (Your Appeal Rights), Pub 4227, Pub 4167

Edge Cases

• 150-day window for taxpayers outside the U.S.: The Tax Court petition deadline is 90 days generally, but 150 days if the taxpayer is outside the U.S. when the Notice of Deficiency is mailed.
• Refund-only claims CANNOT go to Tax Court: A taxpayer who overpaid and wants a refund must pay, file an administrative refund claim, and then (after 6 months or denial) sue in District Court or the Court of Federal Claims. The Tax Court has no jurisdiction over refund-only suits.
• Tax Court admission: EAs/CPAs must pass a separate Tax Court exam; attorneys are admitted without it. "Practice before the IRS" ≠ practice before the Tax Court.
• S-case finality: An S-case decision cannot be appealed by either party — including the IRS. Weigh this against the speed/informality benefit.
• Software reliance does NOT avoid §6662: The Tax Court has held that relying on tax software to justify errors on a self-prepared return does NOT excuse the accuracy-related penalty (Anyika v. Commissioner).
• Burden shift entity limits: For corps/trusts/partnerships, the §7491 shift applies only if net worth ≤ $7 million AND ≤ 500 employees at the time the request for examination review was filed.
• Interest does NOT stop in Appeals: Appeals does not abate interest; it continues to accrue until the liability is paid or the taxpayer wins a no-change.

Common Traps

• 90 vs. 150 days: 90 days to petition Tax Court (150 if outside the U.S.). Candidates often miss the 150-day rule for expats.
• Pay-first courts: District Court and Court of Federal Claims require payment first, then a refund suit. Only the Tax Court allows contesting a deficiency without paying. Picking "pay first, then Tax Court" is always wrong.
• EAs/CPAs cannot represent in federal courts: EAs and CPAs can represent at all IRS levels (including Appeals) but NOT in District Court, Court of Federal Claims, bankruptcy, Circuit Courts, or the Supreme Court. Only attorneys can.
• AFSP holders cannot represent in Appeals: AFSP limited practice is examination-level only (tax examiners/customer service). In Appeals, only enrolled practitioners (or limited-practice exceptions like a fiduciary) may represent.
• Two "small case" procedures: IRS Appeals small-case request = Form 12203, ≤ $25,000. Tax Court S-case = ≤ $50,000. Mixing them up is a classic trap.
• §6673 penalty is $25,000: The Tax Court anti-delay/frivolous-position penalty is up to $25,000 (not $5,000 or $50,000). Distinct from the §6702 $5,000 frivolous-return penalty.
• Appeals cannot be used for constitutional/moral arguments: Appeals requires a tax-law basis. A "the income tax is unconstitutional" position fails in Appeals and invites §6673 in Tax Court.
• No Notice of Deficiency → no Tax Court: A taxpayer needs a 90-day letter to access the Tax Court. Without it, the path is pay → refund claim → District Court/Claims Court.

Connected Rules

• irs-examinations — 30-day letter, RAR, audit dispositions that lead to Appeals
• irs-collections — CDP/CAP appeals of collection actions; Tax Court review of CDP
• poa-disclosure-privacy — Form 2848 for Appeals/Tax Court representation
• penalties-refund-professional-responsibility — §6662 accuracy penalty; §6702 frivolous return; refund claims
• practitioner-misconduct — sanctions for frivolous positions; OPR referrals for §6702

Scenarios Worked

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