Navigating tax disputes can be a daunting task for taxpayers, especially when it comes to the technical litigation rules that they may not be familiar with. The U.S. Tax Court‘s small tax case procedures provide a way to simplify the process.
Taxpayers need to be aware that the amount of money involved in the dispute cannot exceed a certain dollar amount to qualify for small case status under Section 7463, and this amount varies depending on the type of tax and the type of proceeding involved.
It’s essential to carefully review the applicable statutory language to determine if a case qualifies as a small tax case. The court addressed these rules in Schwartz v. Commissioner, 128 T.C. 2 (2007) in the context of a collection case that is before the U.S. Tax Court.
Facts & Procedural History
The taxpayer represented themselves without the assistance of a tax attorney. They filed a petition in the U.S. Tax Court to contest the IRS’s determination to proceed with collections for unpaid income tax for the years 1997-2003.
The taxpayers elected to have the case conducted under the U.S. Tax Court’s small tax case procedures. Although the unpaid tax for any single year did not exceed $50,000, the total tax for all years exceeded $150,000.
The IRS and the taxpayer agreed that the small tax case procedures should be used. The U.S. Tax Court did not accept the party’s agreement without first considering the issue itself as the court concluded that this was a jurisdictional issue.
The Small Tax Case Election
Section 7463 provides a way for disputes in small tax cases to be decided in proceedings that are less formal than regular tax court proceedings. This is referred to as the “small tax case” election or “S case” election. There are pros and cons to this election.
On the one hand, this election relaxes some of the usual procedural and evidentiary rules and the court can consider any evidence that it deems to have probative value. On the other hand, the court’s decisions made in small tax cases cannot be appealed.
In order for a case to qualify as a small tax case under Section 7463, the amount of money involved in the dispute cannot exceed a certain dollar amount, which is generally set at $50,000.
It’s important to note that the specific language used to express this dollar amount varies depending on the type of tax being disputed (such as income, estate, or gift) and the type of proceeding involved (such as deficiency cases, spousal relief cases, or collection proceedings). Therefore, it’s essential to carefully review the applicable statutory language to determine if a case qualifies as a small tax case under Section 7463.
The $50,000 Limit
The $50,000 limit is set out in Section 7463(a) and (f). These two subsections grant the U.S. Tax Court the ability to hear a tax matter using the small tax case procedures for:
(1) deficiency cases if the unpaid tax is less than “$50,000 for any one taxable year” and
(2) tax redetermination cases if the total unpaid tax is less than $50,000.
Deficiency cases are tax cases where taxpayers challenge the tax liability (usually because the taxpayer believes that the IRS assessed the wrong amount of tax) and redetermination cases, like the Schwartz case, are tax cases where taxpayers challenge the IRS’s decision to proceed with collections (usually because the IRS hasn’t complied with the required collection procedures).
Combined Years for Collections Cases
The U.S. Tax Court noted that this was a redetermination case. It also noted that the language in Section 7463 saying that “the total unpaid tax is less than $50,000” is not the same as the language for deficiency cases, which is “less than “$50,000 for any one taxable year.”
The court noted that the language Congress chose to use in Section 7463 makes redetermination cases cumulative. As such, the court concluded that it was not able to hear this case using the small tax case procedures because the case was a redetermination case (not a deficiency case) and the total tax for all of the tax years involved exceeded the $50,000 limit (although the tax for any one tax year did not exceed this amount).
The court points out that neither the IRS nor the taxpayer argued that “a literal application of section 7463(f)(2) produces an absurd result, and it is certainly not unreasonable for Congress to have articulated different dollar thresholds for different types of cases.”
The U.S. Tax Court’s small tax case procedures provide taxpayers with a way to avoid some of the technical litigation rules that they may not be familiar with. However, in order to qualify for small case status under Section 7463, the amount of money involved in the dispute cannot exceed a certain dollar amount, which varies depending on the type of tax and the type of proceeding involved. Taxpayers should carefully review the applicable statutory language to determine if their case qualifies as a small tax case. Additionally, taxpayers who petition the U.S. Tax Court for a collection case should be aware that the combined years must be under $50,000 in order to qualify for an S election, which is different than the threshold for deficiency cases.