The voluntary nature of income tax returns in the United States means that taxpayers are responsible for reporting their income and paying the appropriate taxes.
Taxpayers do this largely as it is the right thing to do. This is premised on a perception that the tax system has some elements of being fair and uniform and that it applies to everyone and that if audited, the IRS will act reasonably. It is also premised on a hope that the court system will provide a fair remedy if there were some sort of problem.
This perception is largely the result of low IRS audit rates, as very few taxpayers ever undergo an IRS audit. They are not put into the tax system and do not experience the system. Consequently, many taxpayers are unaware of the burden, the unequal positions of the IRS vs. taxpayers, and the IRS’s combative guilty-until-proven-innocent stance.
This brings us to the Sanders v. Commissioner, 160 T.C. No. 16, case. The case involves a tax court petition that was filed 11 seconds late. This is in contrast to the tax court’s recent reversal on a late-filed petition in a collection due process hearing case.
Facts & Procedural History
This case likely comes out of an IRS audit. The taxpayer did not agree with the audit results and filed a petition with the U.S. Tax Court.
The petition was due on December 11, 2022, but was extended to December 12, 2022, as the 11th was a Sunday. The court record showed that the taxpayer had logged into the U.S. Tax Court’s new eFiling system to set up an account before the due date. Then, on the due date for the petition, the taxpayer logged into the system from multiple devices. According to the taxpayer he had to do this as he could not complete the filing of his tax court petition on his Android device and had to switch to a Windows device.
The result was that the petition was transmitted 9 seconds past the midnight deadline. The court’s computer filing system recorded the petition as filed 11 seconds late.
Forty-one days later, the IRS attorney, presumably Frederic J. Fernandez who is listed as the lead IRS attorney in the case, filed a motion to dismiss rather than an answer to the taxpayer’s petition. Mr. Fernandez asserted that the court lacked jurisdiction over the case due to the filing being filed 11 seconds late.
The Center for Taxpayer Rights filed an amicus brief for the self-represented taxpayer in this case urging the court to find the petition was timely filed in this case as the taxpayer had accessed the filing system timely.
Now, 204 days after the taxpayer’s 11-second foot fault, the U.S. Tax Court dismissed the case.
The Jurisdiction of the U.S. Tax Court
The U.S. Tax Court opinion, in this case, notes that it is a court of limited jurisdiction. This is true. Unlike U.S. District Courts that have general jurisdiction to hear just about any type of claim, the U.S. Tax Court is reliant on express grants of authority by Congress in the tax code.
The U.S. Tax Court does have a long history of liberally interpreting the rules when it comes to self-represented taxpayers. However, even when it does this, this is often just a recital in the court’s option as to one aspect of the case and the case may still end up being decided in the IRS’s favor.
The body of cases like this and the academic research that shows that the IRS prevails in most U.S. Tax Court cases (and even more so when the taxpayer is not represented by an attorney), has led some to compare the U.S. Tax Court to state administrative tax bodies, like the Texas State Office of Administrative Hearings (“SOAH”) that hears state tax disputes in Texas.
The Texas SOAH helps explain the concept as how it works is more transparent. SOAH is separate from the Texas Comptroller’s Office–which is equivalent to the IRS. The rules even say that if the Texas Comptroller (i.e., IRS equivalent) does not agree with the administrative law judge’s decision, they are free to reverse it–and the Comptroller does just that. The result is that the SOAH process is just a pause on the path to litigation in the state courts. It allows the state to hone its position. It has hallmarks of being a court process in that it is formal, has its own rules and a licensed attorney who is the judge. But it is clear that the Texas SOHA is just an administrative body and one with a clear record of not finding in favor of taxpayers.
Unlike the Texas SOAH described above, the U.S. Tax Court is treated as the actual court even though its function and rules are closer to that of an administrative body similar to the Texas SOAH. The U.S. Tax Court is considered the trial court, leaving only an appeal to the circuit court of appeals. The circuit court of appeals usually then applies an abuse of discretion standard, which is not easy to overcome. This precludes an appeal from the U.S. tax Court to the U.S. District Court with a de novo review and getting the tax issues before a jury.
The availability of a de novo proceeding and a jury can have a sobering effect on unreasonable positions. Juries generally do account for equity and apply a sense of fairness rather than an exacting reading of the law in handling cases. The absence of this type of review and a jury in treating the U.S. Tax Court like a trial court forecloses this in federal tax cases.
Jurisdictional vs. Procedural Rule
Chances are that many taxpayers would not support the U.S. Tax Court’s position in this case. While the policy of deadlines is important, there doesn’t seem to be any harm to the government for a petition that was filed 11 seconds late. This is particularly true when there is evidence that the taxpayer was trying to meet the deadline and the consequence might mean that the taxpayer loses their opportunity to have their day in court.
While the U.S. Tax Court is a court of limited jurisdiction, it is not without power to create its own rules. The U.S. Tax Court is free to write its own rules–which it has done–and can interpret those rules as it sees fit. It could easily interpret its rules to say that evidence of compliance before the deadline, as with facts like this case, is sufficient if the petition is filed the next day, etc. If the fear is that the court is worried about other taxpayers making similar claims, it could require proof attached to the petition as to efforts made prior to the deadline to meet the deadline.
The IRS Office of Chief Counsel also played a role in this outcome. The IRS attorneys who work for the IRS Office of Chief Counsel have wide discretion in what claims and issues to raise and pursue. The IRS Office of Chief Counsel has the ability to decide what issues to pursue in light of the IRS’s overall objectives and the reality that the IRS cannot pursue every small infraction. Even with jurisdictional questions, the U.S. Tax Court can, but often does not act unless a party presents the issue to the court. The IRS attorney, in this case, chose to raise this issue by filing a motion to dismiss. One can’t help but second guess that decision given these facts and circustances and the impmact on voluntary compliance.
The Impact on Voluntarily Compliance
The impact of the court’s opinion, and even that the IRS attorney raised the issue to start with, might do more harm than good.
However, when the IRS adopts positions that conflict with commonly accepted notions of fair play and hinder individuals from presenting their tax cases, it may inadvertently undermine the foundation of voluntary compliance. This is concerning because voluntary compliance is the core principle that supports the IRS’s tax administration system.
The IRS has historically maintained that it actively promotes voluntary compliance among taxpayers. This allows it to process millions of tax returns each year–as taxpayers do the heavy lifting in computing and reporting their taxes. In essence, the IRS’s intention to encourage compliance by closely scrutinizing tax returns and publicizing its enforcement actions can backfire if its positions and actions are perceived as unfair or inhibiting taxpayers’ ability to present their side of the story. Such instances call into question the integrity of the voluntary compliance framework, potentially eroding the trust and cooperation between taxpayers and the IRS.
How many taxpayers see cases and outcomes like this and just decide to cheat on their taxes? How many see this and decide to put the burden on the IRS to file and deal with their taxes, with the knowledge that the IRS might never get to it or might not have the information to fully assess the tax? How many taxpayers learn about this case and simply opt to not pay their tax balances with the IRS? Even if the answer is as small as “two taxpayers”more than one,” the IRS may have lost out by pursuing the motion to dismiss in this case.
The Taxpayer’s Other Remedies
Despite the dramatic outcome in this case, the outcome may not be as dire as it seems. The taxpayer whose petition to the U.S. Tax Court may still have other remedies.
Given the U.S. Tax Court’s decision, absent an appeal to the circuit court of appeals, the taxpayer may still be able to get the case before the U.S. District Court. Since the U.S. Tax Court did not reach the merits of the case, so this supplemental litigation would still be available. To do so, the taxpayer would likely have to pay the tax up-front and sue for a refund in the U.S. District Court. Tax litigation in the U.S. district court is usually reserved for higher net worth taxpayers. This district court litigation presupposes that the taxpayer can afford to pre-pay the tax and afford to hire a tax attorney, as the U.S. District Courts generally require taxpayers to have an attorney.
The taxpayer may also be able to wait for the IRS’s collection actions and dispute the liability by filing a collection due process hearing. If the IRS collection due process hearing does not resolve the matter administratively, the taxpayer may be able to get the case back in front of the U.S. Tax Court. The IRS attorney would likely argue that the taxpayer was not entitled to this relief as they had a prior opportunity to contest the taxes. It isn’t entirely clear how the tax court would rule on this type of issue.
The taxpayer may also be able to submit an audit reconsideration request if additional records or new information has been found in support of their position. This can allow the case to get back to the IRS Office of Appeals for consideration if the IRS Exam function does not agree with the new information.
The voluntary nature of income tax returns in the U.S. relies on taxpayers’ belief in a fair and uniform tax system. However, incidents like this case, where a petition was dismissed for being 11 seconds late, raise concerns about fairness and the ability to present one’s case. Such instances can undermine voluntary compliance and erode trust in the tax system. It is important for the IRS to consider the impact of its actions on compliance and ensure a balanced approach that maintains fairness and taxpayer trust, as taxpayers do learn of cases like this.