Making Sense Of Tax Court Deadlines In A COVID-19 World

The United States Tax Court, like many courts around the country, is closed. Trial sessions are cancelled, and the court typically doesn’t have in-person status hearings or oral arguments on motions even when the world isn’t shut down due to a pandemic. Tax Court petitions, which have to be filed in paper and delivered either in-person or by mail, are not being delivered to the Tax Court. Instead, according to the Tax Court website, mail sent by standard delivery is being held at the post office while the court remains closed. Judges are still working, however, and the court’s order last week in Smith v. Commissioner, dismissing the case for lack of jurisdiction, is an important reminder that even during a pandemic, deadlines must be met.

What Went Wrong?

The taxpayers in Smith received a Notice of Deficiency on November 18, 2019. A Notice of Deficiency is the notice the IRS sends to taxpayers at the end of an examination, detailing how much more in tax and, in some cases, penalties, the IRS thinks the taxpayer should have to pay for a given tax year. A Notice of Deficiency is often called a “Ticket to Tax Court” because not every taxpayer has a right to be there. Think of the Tax Court as the Superbowl or a Broadway play. You can’t get in without a ticket. Why? Because if the court doesn’t have jurisdiction over the case, then the court has no authority at all to decide the case. Congress limited the Tax Court’s jurisdiction to certain kinds of cases, including:

• Taxpayer files a petition within 90 days of the date of the Notice of Deficiency (or 150 days if the taxpayer was living outside of the country when the Notice of Deficiency was mailed);
• Taxpayer files a petition within 30 days of the date of a Notice of Determination; or
• Taxpayer files a petition within 90 days of the date of a Final Partnership Administrative Adjustment.

Why is the Tax Court’s jurisdiction so limited? Shouldn’t everyone be able to go to Tax Court to resolve disputes with the IRS? No. Congress limited the Tax Court’s jurisdiction very intentionally, and only taxpayers whose disputes with the IRS are about a specific tax issue that has risen to a very specific point in the IRS examination process may go to Tax Court. The right to litigate a dispute in Tax Court should never be taken for granted, because it is the only place where a taxpayer can get an impartial judge to decide their federal tax dispute before having to pay the disputed amount in full.

The Smiths received a Notice of Deficiency for the 2017 tax year, meaning the IRS determined that the Smiths owed more tax than they reported as due on their 2017 return. They had 90 days, or until February 16, 2020, to file a Tax Court petition. The Smiths called the IRS number on the Notice of Deficiency on February 15, they wrote a petition and faxed it to the IRS at the number on the Notice of Deficiency on February 17, and mailed the petition to the IRS on February 18. The IRS put the petition in the mail and sent it to the Tax Court on February 20, but it didn’t arrive until February 21, five days too late. It isn’t enough to file a Tax Court petition on time (even though here, the Smiths didn’t file the petition on time), it must be sent to the Tax Court on time. The court explained:

[W]hile the Court is sympathetic to petitioners’ situation and understands the unintentional character of the inadvertence here, as well as the challenges of the circumstances faced and the good faith efforts made, governing law recognizes no applicable exceptions that would allow petitioners to proceed in this judicial forum.

In other words, it doesn’t matter that the Smiths made an honest mistake, or that they tried hard to file a tax court petition on time but sent it to the wrong place. The Court can’t hear the case, because Tax Court jurisdiction only extends to timely-filed petitions that are sent to the Tax Court.

For the Smiths to resolve their IRS dispute now, they must pay the entire amount of tax in dispute first, then file a claim for refund with the IRS, and after the IRS either denies the claim or six months passes, file a lawsuit in Federal District Court or the Court of Claims. Not only do they have to pay the disputed amount in full first to get to court, but it is typically far more expensive to litigate in District Court or the Court of Claims than litigating in Tax Court.

COVID-19’s Impact on the IRS and Tax Court

On March 25, 2020, the IRS announced its People First Initiative, promising to postpone most (but not all) enforced tax collection efforts. Then, on April 9, 2020, the IRS issued guidance (Notice 2020-23) that extended most tax return filing deadlines to July 15, and, importantly, extended the time for filing petitions with the Tax Court. Notice 2020-32 provides that certain actions, including filing petitions with the Tax Court, that are due to be performed between April 1, 2020 through July 15, 2020 are extended through July 15, 2020. This means that any taxpayer who received a Notice of Deficiency, Notice of Determination, or Final Notice of Partnership Adjustment has an extension through July 15, 2020 to file a Tax Court petition. The IRS published Frequently Asked Questions and Answers addressing the extended deadlines.

While the Smiths mailed their Tax Court petition before COVID-19 shut down courts, their case is a cautionary tale to others who are currently holding “tickets” to Tax Court. A Tax court case officially begins when the taxpayer files a petition. Typically, if the IRS issues a Notice of Deficiency and a timely Tax Court petition is filed, a series of events unfold:

1. The IRS is alerted that a petition was filed,
2. The IRS does not assess the tax in dispute against the taxpayer, because the IRS is prohibited by law from assessing tax that is the subject of a timely filed tax court petition,
3. The taxpayer receives notice that the court has “Docketed” the case and can access the case information online,
4. The IRS must answer the petition, or, if they believe a petition was filed too late or that the taxpayer did not have a valid “ticket” to tax court, file a motion to dismiss the petition,
5. The taxpayer and the IRS litigate in Tax Court,
6. If the Tax Court has jurisdiction, the Tax Court must decide, or “determine” whether the taxpayer actually owes additional tax,
7. If the taxpayer wins entirely, no additional tax is due,
8. If the taxpayer wins on some issues but loses on others, some additional tax is due, plus interest, and
9. If the IRS wins, all of the tax that the IRS initially determined to be due in the Notice of Deficiency is due, plus interest.

If the IRS sends a Notice of Deficiency and the IRS does not receive notification that a timely Tax Court petition has been filed, another series of events unfolds:

1. The IRS will assess the disputed tax and additions to tax – including penalties and interest – sometime after the 90 day restriction on assessment expires,
2. The IRS will send a notice of assessment and demand for payment to the taxpayer,
3. If payment is not received within ten days, the IRS may start taking enforced collection action, including sending notices of intent to file a tax lien or levy assets,
4. If the taxpayer wants to dispute the amount due, the entire amount the IRS assessed must be paid in full first, then file a claim for refund with the IRS, and wait six months before filing a lawsuit in either Federal District Court or the Court of Federal Claims,
5. If the taxpayer does not have the ability to pay the tax in full, the taxpayer may propose “collection alternatives” based on ability to pay.

Notice 2020-32 not only extended the amount of time for taxpayers to act, it also extended the amount of time for the government to act. In general, the IRS has three years from the date a tax return is filed to assess tax, and ten years from the date tax is assessed to collect it. (Many exceptions to these general rules apply). The Notice provides that the time normally allowed for the IRS to assess tax, issue a notice and demand for payment, collect tax, bring a suit for refund, or allow a claim for refund is also extended through July 15, 2020.

Even though the IRS seemingly has additional time to assess tax, neither the People First Initiative nor Notice 2020-32 provide guidance regarding whether the IRS has suspended all assessments during this time period. In a non-COVID-19 world, when 90 days pass after a Notice of Deficiency is issued and a Tax Court case has not been opened, the taxpayer can expect an imminent tax assessment. Unlike the Smiths, whose lateness filing a petition was not excused, taxpayers whose petitions are due between April 1, 2020 and July 15, 2020 have been given of time to file a Tax Court petition. What is not clear, however, is whether they will be facing a massive administrative headache when the Tax Court and the IRS reopen. The IRS may have assessed tax that is the subject of timely filed petitions with the Tax Court, and if so, that tax should be abated. Taxpayers who find themselves in this position need to keep diligent records and keep an eye on the mailbox for IRS mail indicating an assessment was made.

With the extended deadlines and mail being held at the post office instead of being processed at the Tax Court, it is inevitable that mistakes will be made. Some mail may be returned as undeliverable, and neither the taxpayer nor the Tax Court will have proof that the petition was timely filed. Whenever a Tax Court petition is filed, whether during a pandemic or not, taxpayers who file Tax Court petitions must use a designated, approved delivery service and get delivery confirmation. Being able to prove the petition was mailed on time is half the battle. Just ask the Smiths.