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The Internal Revenue Code contains two different methods by which taxpayers can bring their substantive tax controversies to litigation: (1) deficiency procedures and (2) refund procedures.
Deficiency procedures relate exclusively to income, estate, gift and certain excise taxes. They arise from an examination of the taxpayer's return, followed by the opportunity for a review in the IRS Appeals Division and, finally, from the issuance of a Statutory Notice of Deficiency — which offers the taxpayer the right to litigate the matter in the U.S. Tax Court prior to assessment and payment.
Refund procedures, in contrast, may involve any kind of federal tax and may originate from the actions of either the taxpayer or the government. As the term "refund" suggests, refund claims and suits arise only after the taxpayer has paid the amount under dispute and has sought and been denied a timely written claim for refund filed with the IRS. Because a strict "full payment rule" is applicable to income tax cases, only the taxpayer who has paid or can pay the disputed tax can realistically proceed by refund suit. Unlike deficiency cases, a suit for refund is filed with one of the U.S. District Courts or the United States Court of Federal Claims.
In tax disputes which can be pursued by either the deficiency or the refund procedure, an important consideration in addition to the ability to pay in advance is the likelihood of the court selected to rule favorably to the taxpayer on the issue presented. This involves detailed research into the courts’ past decisions on the issue or similar issues, and also the expertise of the chosen court in dealing with federal tax issues. The U.S. Tax Court deals exclusively with federal tax issues and has considerable expertise in that subject matter. The U.S. District Court, on the other hand, has broad jurisdiction over civil and criminal cases and is far less likely to possess the level of expertise of the Tax Court, which can be good or bad, depending on the merit and complexity of the taxpayer’s case. The U.S. Court of Federal Claims, which has concurrent jurisdiction with the District Courts of suits involving the federal government, is less specialized than the Tax Court but generally more familiar with federal tax issues than the District Court. The "track record" of the various courts as well as the rules governing the prior decisions they must follow will be most important if cases similar to the taxpayer’s have actually been decided and can be relied upon to make arguments for similar treatment.
Opposing counsel will also differ between Tax Court and District Court and the Court of Federal Claims. Opposing counsel in Tax Court will be an attorney from the IRS Office of Chief Counsel. Those attorneys specialize in tax cases. Opposing counsel in the other federal courts will be an attorney from the U.S. Department of Justice. Those attorneys generally specialize in tax litigation rather than substantive tax law and may have to coordinate the preparation of their cases with the IRS Office of Chief Counsel.
Philadelphia tax attorney Joseph R. Viola is a member of the bars of the United States District Courts for the Eastern District of Pennsylvania and the District of Jew Jersey, the United States Court of Federal Claims, the U.S. Courts of Appeals for the Federal and Third Circuits, and the Supreme Court of the United States. If you have a federal tax matter in which refund litigation is the only remaining option, contact Joseph R. Viola to schedule a case evaluation.