Taxpayers using the judicial system to delay tax collections could pay a stiff price if they file cases simply as a delaying tactic, the Internal Revenue Service (IRS) says.
Since the beginning of 2004, the IRS reports that the U.S. Tax Court imposed penalties totaling more than $117,000 against taxpayers filing frivolous cases in order to delay tax collections. Since 2001 the total amount of such penalties exceeds $378,000. The Second, Ninth and Tenth Circuit Appeals courts have upheld six earlier Tax Court decisions with penalties totaling an additional $15,600.
The U.S. Tax Court was created to give individuals and companies a place to solve tax disputes. Growing out of an idea in the Senate in 1924, the Tax Court now hears about 20,000 cases annually. The size of the cases brought before the Tax Court varies from those involving a few thousand dollars to those involving millions of dollars.
Unique among the federal courts, the Tax Court is a truly national court, despite being based in Wasington D.C. The judges travel to and hear cases in 70 cities throughout the country. Another unique characteristic of the Tax Court is that the judges serving on the Court serve 15-year terms although they can be reappointed every 15 years by the president and after congressional review. Of the judges currently sitting on the Tax Court, six were appointed by President George W. Bush, five by President Clinton, three by President George H.W. Bush and four by President Reagan, including Joel Gerber, Chief Judge until June 1, 2006.
“The decisions of most other courts that have tax issues are only good for the people of one state or part of one state,” Chief Judge Joel Gerber told the International Tax Review. “Since we are a national court, we are charges with having uniform interpretation of the tax law for the entire country.”
The IRS Restructuring and Reform Act of 1998 set forth taxpayer rights related to ax liens or levies, including the right to seek judicial review. Those who misuse their right to a court review solely in an effort to stall their tax payments, however, may face sanctions of up to $25,000. Although 18 cases have been deemed frivolous and been fined a thousand dollars or more since March 2004, only one, Kolker v. Commissioner has been sanctioned for the full $25,000 amount.
The Tax Court stated that Kolker had “repeatedly wasted the Federal tax system’s resources and his conduct deserves an appropriate and severe sanction,” noting that the taxpayer had filed multiple actions and appeals.
The Tax Court is not the only court where tax cases are heard although it is the most popular.
“The fact that we are a specialized court and our judges are well qualified in tax law is effective,” Gerber tells the International Tax Review. “People come to our court when they need meaningful interpretation of complex tax laws. If you did not want a judge to understand your case, you might not bring it to the US Tax Court.”
The Supreme Court rarely hears tax cases or cases appealed from the Tax Court, but this year they are dealing with one, Banks v. Commissioner. The case was argued before the Supreme Court on November 1, 2004 and decided on January 24, 2005. The case was actually two separate cases filed by two individual taxpayers who are challenging the IRS opinion that they are liable for tax on the contingency fees the paid their lawyers in bringing suits against their employers after being fired. Both employment cases were settled, however, the neither included attorney’s fees paid under contingent-fee agreements as gross income on their federal income tax returns. The Supreme Court held that when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee. The complete decision can be read online at the Supreme Court’s web site.
Few Tax Court cases are appealed to the Supreme Court just as few of the 20,000 case brought annually before the TAX Court are judged to be frivolous. The specialized knowledge of Tax Court judges means that even those who lose cases before the Tax Court are generally satisfied. Illustrating that point is the case of a California teacher who lost a case in which she represented herself, but later wrote to Gerber, who presided over the case, telling him she thought the system worked well and that she had received a fair hearing according to the International Tax Review.
“Taxpayers have rights they should use when appropriate,” says Kevin M. Brown, commissioner of the IRS Small Business/Self-Employed Division. “But anyone who abuses those rights should understand they can incur significant penalties.”
The Truth about Frivolous Tax Arguments, an IRS publication, presents 16 frivolous assertions, a summary of relevant law and cases involving false claims as well as a section devoted to Collection Due Process cases.