This article is the third in a series analyzing the proposed Taxpayer Assistance and Service Act (the “TAS Act”), bipartisan legislation introduced by Senators Crapo and Wyden to improve service and administration at the Internal Revenue Service (“IRS”). Our introduction to the series is here, our discussion of Title I is here, and our discussion of Title II is here.
This article examines the provisions of Title III of the TAS Act, titled “Judicial Review.” Title III expands the jurisdiction and powers of the United States Tax Court. Its provisions address longstanding limitations on Tax Court authority and jurisdictional gaps that have prevented taxpayers from obtaining complete judicial review of IRS determinations. Although the most far-reaching changes to the Tax Court in Title III address the recovery of refunds, other provisions – allowing pre-trial subpoenas, providing potential relief from final judgments, changes to the innocent spouse and collection due process hearing rules, and allowing deficiency procedures for certain otherwise automatically assessable penalties, for instance – will substantially change practitioners’ day-to-day work in Tax Court.
Pre-Hearing Subpoenas (Section 301).
Currently, the Tax Court does not have the express authority to issue third-party subpoenas for document production before a hearing date. As a result, parties often do not receive documents and information that might encourage settlement until close to trial, resulting in unnecessary attorney fees for taxpayers, inefficient use of time by all counsel, and a drain on Tax Court resources. This provision helps resolve these issues by expressly empowering the Tax Court to authorize third-party subpoenas for the production of documents and testimony before a hearing date.
Relief from Final Judgments (Section 302).
When the Tax Court issues a final decision under Code section 7481, it cannot reopen the case. This provision would enable the Tax Court to provide relief from a final judgment or order in circumstances where justice so requires, consistent with Federal Rule of Civil Procedure 60, including for mistakes, newly discovered evidence, and fraud.
Special Trial Judge Authority (Section 303).
Under certain circumstances, this provision would enable parties in Tax Court to consent to the assignment of their case to a special trial judge. In addition, this provision would grant special trial judges contempt authority in limited circumstances.
Judge Disqualification Standards (Section 304).
This provision would subject Tax Court judges and special trial judges to the same statutory disqualification standards that apply to other federal judges.
Multi-Year Credit Ban Review (Section 305).
If the IRS determines that a taxpayer improperly claimed the Earned Income Tax Credit, Child Tax Credit, or American Opportunity Tax Credit, it has the authority to ban the taxpayer from claiming these credits for either 2 years or 10 years in the future, even if otherwise eligible in those future years. Moreover, there is no requirement that the IRS explain the ban to taxpayers in written notices, it is unclear whether the Tax Court has jurisdiction to review the bans, and if the Tax Court does have review authority the burden of proof is unclear. This provision would require the IRS to issue a notice of deficiency explaining any determination banning a taxpayer from claiming these credits for multiple years. In addition, it would grant the Tax Court jurisdiction to determine and redetermine the ban. Finally, the provision would give the IRS the burden of production for 2-year bans and the burden of proof for 10-year bans.
Innocent Spouse Relief (Section 306).
In innocent spouse cases, the Tax Court, unless evidence is “newly discovered” may not admit evidence unless the taxpayer previously presented the evidence to the IRS. This provision authorizes the Tax Court to consider all relevant evidence in innocent spouse cases, even if the taxpayer did not previously present the evidence to the IRS, with particular consideration for taxpayers who are victims of domestic violence or psychological abuse, two classes of taxpayers who may have previously been prevented from presenting evidence through no fault of their own or due to risks to their health and safety.
Filing Deadline Clarifications (Section 307).
The bill clarifies that the deadline for filing a Petition in Tax Court in deficiency, collection due process, and innocent spouse cases is not jurisdictional, but is instead a nonjurisdictional claims-processing rule subject to waiver, forfeiture, estoppel, and equitable tolling. This provision will end litigation throughout the country over this issue by overturning Tax Court precedent and, by statute, siding with a number of Courts of Appeals which have found the deadlines to be mere claims-processing rules. It is likely that litigation will continue on the issues not specifically identified in the statutory provision, with the Tax Court finding that Congress only made certain deadlines claim processing rules and that other deadlines are therefore jurisdictional.
Collection Due Process Jurisdiction (Section 308).
This provision would enable taxpayers to challenge IRS-determined tax liability in a collection due process hearing if they did not have a prior opportunity to dispute it in Tax Court. It attempts to eliminate situations where the IRS takes collection actions against taxpayers who did not have an opportunity to challenge their tax liability in court because current regulations interpret the law to bar taxpayers from disputing a tax liability if they had an opportunity to dispute the liability with IRS Appeals. This provision would impact these taxpayers by not requiring them to pay the full amount the IRS claims they owe and then seek a refund and potentially having to file refund litigation in Federal court.
Refunds in CDP Cases (Section 309).
The Tax Court has held that, when it reviews a taxpayer’s challenge to liability in an appeal of a CDP hearing determination, it lacks authority to order a refund or credit. This provision would authorize the Tax Court to order refunds or credits in all collection due process cases where it has jurisdiction to determine liability.
Tax Court Refund Jurisdiction (Section 310).
This provision expands Tax Court jurisdiction to hear refund cases requesting refunds of tax or interest in the amount of $2,000,000 or less that would otherwise be heard in Federal District Court or the Court of Federal Claims. The $2,000,000 cap on jurisdiction limits the Tax Court from overstepping the authority of the Joint Committee on Taxation from approving all refunds in excess of $2,000,000. The provision does not address whether the $2,000,000 cap is inclusive or exclusive of overpayment interest.
Deficiency Procedures for Assessable Penalties (Section 311).
This provision allows, but does not appear to require, the IRS to use deficiency procedures for civil penalties which are automatically, but not otherwise, assessable, providing taxpayers an opportunity to petition the Tax Court before assessment.
Partial Payment Refund Suits (Section 312).
Under current law, taxpayers must fully pay all assessed tax for a tax period before filing a refund suit. This provision creates an exception to this full-payment rule for taxpayers paying liabilities through installment agreements, periodic payment offers-in-compromise, or whose accounts are designated as currently not collectible.
Small Tax Case Threshold (Section 313).
This provision increases the threshold for using simplified “small tax case” procedures in Tax Court (S-Cases) from $50,000 to $100,000 and would index the threshold for inflation.
Conclusion
Title III of the TAS Act recognizes that current legal processes and procedures are too complex and cumbersome for taxpayers and provide the IRS with an undeserved advantage. By allowing pre-trial subpoenas, the TAS Act will encourage earlier settlements which will decrease costs and time for taxpayers. By adding provisions addressing cases and appeals pending throughout the country, the TAS Act provides certainty. By broadening the jurisdiction of the Tax Court – and confirming that filing deadlines are not jurisdictional – the TAS Act gives taxpayers more effective access to the Tax Court. And by granting the Tax Court refund jurisdiction, the TAS Act provides a prepayment forum in certain cases and a less complicated procedural mechanism for taxpayers to recover money owed to them by the IRS. In doing all of this, Title III of the TAS Act incorporates numerous proposals by the Office of the Taxpayer Advocate to help even the playing field with the IRS for taxpayers.
And the next post in this series will review Title IV, which will focus on the Office of the Taxpayer Advocate.