04 March 2021

Reflections On Tax Court

Often, I can't write about the details of what litigation is like because of my obligations to preserve confidentiality as an attorney. But I am not so restrained when I am representing myself.

In my case, I was in U.S. tax court because of a dispute over my 2017 personal tax return. The merits were straightforward.

I was the trustee of a trust. Like a good trustee, I reported the trust's income (which was exceptionally high that year because a lot of assets were sold to make a distribution to beneficiaries, who were people other than me) on Form 1041, sent K-1s to the appropriate people, and all of the taxes due on the trust's income was paid right on time.

The brokerage firm that handled the trust had switched their records over to show that I was the trustee for the first time that year. Unfortunately, somebody in the back office entered my Social Security number, rather than the tax ID number for the trust on the system that generated 1099s for the trust. This probably happened because before I was the trustee, it was a revocable trust for which the Social Security number of the trustee and the tax ID number for the trust were the same. Most likely the "use the trustee's Social Security number" setting in the software wasn't changed because the person doing it didn't realize that its tax classification had changed, which was understandable because the official name of the trust still has the words "revocable trust" in it even though it isn't actually a revocable trust anymore.

As a result, the IRS got 1099s indicating that I had earned the money that was actually earned (and reported to it with tax paid on it) by the trust. The IRS audited me to ask why I didn't report all the income that had been 1099'd to me. I contacted the brokerage about the problem, and they promptly and without much fuss, filed corrections to the previous 1099s with the correct tax ID number after I sent them a W-9 to confirm the trust's tax ID number.

It took a while to figure out that this is what happened based upon the original audit notice that I received from the IRS, but eventually I figured it out and wrote to them explaining what had happened and asking that the case be resolved in the audit stage.

For some reason, my written responses to the IRS audit weren't enough to prevent the IRS for continuing to pursue the matter.  The IRS declared that I owed about $10,000 of taxes that people associated with the trust, of which I was trustee, had already paid. So, I filed a timely protest of the IRS decision by filing a case in Tax Court.

One of the coolest things about Tax Court is that since tax court cases are between you and the United States government, and because the United States government owns the U.S. Postal Service, your tax court filings are considered to be filed on the date that they are postmarked, rather than the date that they are received.

This is a good thing, because despite postmarking my tax court filing by the deadline, it took several weeks for my properly addressed filing to get to the proper office in Washington D.C. because apparently the postal service had trouble finding it or something. And, keep in mind, this was even before Trump backed postal board members appointed Louis DeJoy, who intentionally undermined the post office's operations and effectiveness (in part, because he has a large financial stake in a USPS competitor and, in part, as part of an attempt to interfere with mail in voting in the 2020 election) was appointed. This was apparently allegedly due to changes in how the Tax Court processed its incoming mail due to COVID although I'm skeptical of this claim. This is properly addressed mail to a government agency that gets thousands of letters addressed to it every business day, and presumably the same guy at a particular D.C. local post office for the relevant zip code is in charge of delivering all of these letters to the same place. The full story of that little delay may never be known, but due to the wonders of tax court, I'll never need to know.

By comparison, in another federal court case, not involving Tax Court that I had to litigate for a client, where a timely delivered FedEx filed document didn't arrive at the time guaranteed by FedEx due to a snow storm that grounded the FedEx plane (that could not be filed in time electronically because of delays in processing our application to be recognized on that court's e-filing system), it took an evidentiary hearing in a trial court at which our plea for mercy was rejected, followed by an appeal at which we were prevailed, to have our courier's fault delayed document delivery salvaged so that we could continue our case in which we eventually prevailed. Lawyers appreciate details like that.

There is a deadline to attempt to settle tax court cases (which doesn't have any real penalties associated with it other than causing the case to be set for trial if the case hasn't settled by that date) which came and went because I couldn't reach anybody at the IRS. But eventually, my settlement communication in writing to the relevant government lawyers got through and was reviewed (the delay was due to lack of staffing and deceased office efficiency as a result of COVID).

The way the IRS litigates tax disputes is really unique to the agency's institutional culture and not something I've ever seen in any other context, even though all government lawyers, in theory, are supposed to act similarly.

If the IRS thinks you are wrong, they will pull out all stops to litigate with you all of the way up to the U.S. Supreme Court, even if the amount in dispute is $23. But the moment that you convince the IRS that you are right, even if millions of dollars are at stake and there isn't anything close to a 100% chance that you would prevail in litigation, the IRS will immediately drop its case and concede that you are right, with no whining or attempts to gain concessions from you that you would be willing to make in order to have the case go away in any other kind of litigation.

There have probably been half a dozen or a dozen times that I have written a short one to four page letter to the IRS, sometimes with one or two pages of documentation to back it up, and the IRS has, without further adieu, immediately given up on collecting hundreds of thousands or even millions of dollars of taxes.

Eventually, this is what happened in my case. Once someone in the tax court litigation department reviewed my filings closely, they immediately gave up on all of the $10,000 amount that they were seeking except $25 of taxes and $4 of interest that I owed because of a small arithmetic error in my original 2017 tax return.  The arithmetic error didn't even directly affect the amount of income taxes I owed based upon my taxable income, but it did slightly tweak the amount of a refundable tax credit that I was entitled to as part of a complicated formula.

How did this happen? 

They literally just called me out of the blue in the middle of the day one day that didn't have any significance relative to my tax court case, and said something to the effect of "we looked at what you filed and it looks to us like you are correct except for this small arithmetic error and would you be willing to settle your tax court case by paying $29 of additional taxes without any penalties." I said  something to the effect of "yes, I agree that my arithmetic was wrong and I will pay the additional $29 as long as the rest of the claim for additional taxes is withdrawn."

As it happens, actually going from that oral agreement to getting the actual paperwork signed took a while.

First, the software system that turns the adjustments to my 2017 tax return that we agreed upon was down when I got the call (the federal employee I was talking to in Utah, by the way, is working about two days a week in the office and the rest of the time from home) into forms that can be approved, so that took a few days until that was fixed. Otherwise it would have taken forever to do by hand and would have been much more likely to contain an error. My one little addition error tweaked about seven page of tax forms.

Then, the IRS emailed me the forms to print out and sign, but they were encrypted and the passwords that I wrote down and then confirmed in a couple of subsequent phone calls just would not work for some reason. After a few tries, the problem was fixed and the files were opened, but a small but critical typo (the IRS attorney's registration number in tax court was mangled, or something like that), was discovered, and so that was fixed. The IRS sent the corrected forms to me via email and we had more password encrypted filed opening problems. Eventually, with my permission and because the forms in question didn't even have my Social Security number on them, the IRS sent me a non-password protected version which I printed out.

The process of getting the forms agreeing to the tax court settlement in writing once the forms were delivered to me via email was classic red tape with a modern overlay. 

We needed to print of the forms, single sided, and sign them with blue ink, in triplicate. And, then, once we did that, we needed to scan and email them to the IRS so it could start processing them, and then we had to send the physical paper to them via certified mail to the IRS, flagged for the person handling our case on the envelope. 

This is apparently because Tax Court needs three wet blue ink signed copies of every stipulation on dead tree paper to accept a settlement of a case. 

Now, that's done, and when the Tax Court rubber stamps our stipulation if a few days or weeks, I'll send the IRS a check for $29 and this tax dispute will be over and done with.

If we had gone to a hearing in Tax Court, due to COVID, it would have been virtual, and one had been scheduled for June, with some complicated pre-trial procedures so that all of our documentation (and all of the documentation that the IRS would present) would be in everyone's hands before the virtual hearing was held, along with pre-trial briefing and a list of witnesses and what they would be testifying about. 

Normally, the Tax Court holds in person hearings, but you, as a taxpayer can choose what location you want the hearing to be held at of many available court houses, so the hearing in my case would have been held before a Tax Court judge riding circuit so to speak (there is one national Tax Court in the United States with its headquarters in the District of Columbia), rather than having to travel to its main courthouse in the District of Columbia.

Also, while I didn't end up going to a hearing in this case, in Tax Court, unlike almost every other judicial forum, it is commonplace for the IRS and the taxpayer to stipulate to all or almost all of the facts in the case (and to the authenticity and admissibility of almost all documents in the case), leaving at most one or two disputed factual issues to be resolved in the Tax Court hearing with evidence. This is what usually happens even in very complicated cases involving hundreds of millions of dollars of disputed tax liabilities involving multiple different issues.

Rather insisting that the taxpayer meets the standards of the rules of evidence to prove the factual basis of the taxpayer's case as government lawyers in any other case would, and without piercingly questioning the credibility of witnesses, the IRS routinely accepts that the documents submitted to the tax court by taxpayers and testimony of the witnesses who are slated to testify in tax court, are truthful and that witnesses will testify in the manner anticipated by the taxpayer, unless there is very good reason to think otherwise and that truthfulness or authenticity is the core issue on the merits in the case, which is rare.

Mostly, Tax Court hearings are more like oral arguments on dueling motions for summary judgment, with only very brief and narrow instances of taking evidence to resolve disputed questions of fact. And, when there are evidentiary disputes, they tend to focus on whether the testimony and documents offered into evidence without objection are sufficient to prove the case, rather than on the authenticity or veracity of what is in the documents and the veracity of what the witnesses stated in their testimony. 

The system could be better. Hard copy signatures in blue ink on physical paper in triplicate is so 19th century in a 21st century world, especially when the IRS has a scanned copy in hand a week or two before it has the paper copies. The document password system for the IRS (and its IT systems in general) could use some improvements. And, it would have been better if there had been some way to get someone at the IRS to hear out my explanation and consider it on the merits sooner in the process. But, in the end, the job got done and it was a happy ending that took time, but very little money for me (since as I lawyer who does tax law, I didn't need to hire any professionals to help me).

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