Chapter seven: Tax Court, District Court and the Court of Federal Claims compared, plus installment agreements, hardship status and offers in compromise.
Fewer than 1% of IRS disputes ever go to trial. Understanding your judicial options still changes the entire dynamic of a negotiation, because knowledge of your rights is leverage even when you never use them.
Chapter seven of my book, The IRS Survival Guide, covers the three courts available to you and the payment arrangements that protect you when you cannot pay in full.
Watch my full video on this topic below, or watch on YouTube.
Once your administrative options are exhausted, there are three places to take a tax dispute.
United States Tax Court is the most taxpayer friendly, and the reason is simple: you do not have to pay the disputed tax before you file. If the IRS says you owe half a million dollars, you can contest that without paying a penny of it. Tax Court judges specialize exclusively in tax law. You get there by waiting for a notice of deficiency, also called a 90-day letter, which triggers your right to file.
United States District Court requires full payment of the tax first. You then file a lawsuit asking for a refund. You do have the option of a jury trial, which can be an advantage in the right case, and you can file in the district court closest to you.
United States Court of Federal Claims also requires full payment upfront, then a suit for a refund. It sits in Washington, D.C.
Choosing between District Court and Federal Claims depends on where you live and on your issue, since some courts have better precedent for particular legal questions. In practice most tax cases end up in Tax Court, mainly because you do not have to pay first.
Installment agreement. You pay in monthly installments. Penalties and interest keep accruing, though penalties are reduced slightly, and collection actions stop. The IRS generally allows around seven years, sometimes less depending on how much of the ten-year collection statute is left.
Partial pay installment agreement. If you cannot clear the balance before the ten-year collection statute expires, the IRS may accept lower monthly payments. You disclose your assets, debts, monthly income and household expenses, and anything still outstanding when the statute expires gets written off.
Currently not collectible status. If you genuinely cannot pay because of hardship, the IRS can suspend collection temporarily. The debt remains and keeps accruing penalties and interest, and the IRS will revisit your situation periodically, but it stops liens, levies and garnishments while it lasts.
Offer in compromise. Paying a lump sum for less than you owe. This is not the negotiation people imagine from the advertising. The qualifications are strict, you disclose everything you own and owe, and it is a formulaic process. Approval rates are low, particularly without professional help. I analyze it for everyone who comes to me with tax debt and find very few people genuinely qualify.
Sometimes, under strict conditions. For income taxes to be dischargeable, the return generally must have been due at least three years ago, filed at least two years ago, and the tax assessed at least 240 days ago. That is not the full list.
Bankruptcy is usually a last resort and its interaction with tax law is complex. If you are considering it, talk to both a tax attorney and a bankruptcy attorney.
Go to TheIRSSurvivalGuide.com to get your free PDF copy of my book today.
