2025 Houston Law Guide | Federal and Texas State Law Guidance

Tag: history

  • Who Handles Tax Disputes in the Federal System?

    When a tax dispute arises, it can feel overwhelming to figure out who exactly is involved. Federal tax controversies are not handled by a single office or court — several government entities share responsibility. Each plays a distinct role in making, interpreting, enforcing, and litigating tax law.

    Congress

    Congress writes the Internal Revenue Code. It enacts the statutes that set out what income is taxable, which deductions and credits are available, and the rates at which tax is imposed. Every tax rule starts with legislation.

    Treasury Department

    The Treasury Department issues regulations that interpret and implement the Code. These regulations provide detailed guidance on how statutory provisions apply in practice. Regulations carry significant legal weight and are often central in disputes.

    Internal Revenue Service (IRS)

    The IRS is the administrative agency charged with enforcing the Code. It issues tax forms, processes returns, conducts audits, collects taxes, and attempts to resolve disputes at the administrative level. The IRS is the primary point of contact for taxpayers and the central player in most controversies.

    Joint Committee on Taxation

    This congressional committee has a specific oversight role: it must approve refunds exceeding $2 million before they can be issued. While not directly involved in day-to-day disputes, the committee provides an additional layer of accountability for very large refund claims.

    Department of Justice (DOJ)

    When tax cases move to federal court (other than the U.S. Tax Court), the DOJ represents the government. DOJ attorneys handle both civil and criminal tax litigation in U.S. District Courts and the U.S. Court of Federal Claims.

    The Courts

    Several courts provide judicial resolution of tax controversies, each with distinct rules:

    • U.S. Tax Court. A specialized national court where taxpayers may challenge a deficiency without first paying the tax. IRS Chief Counsel attorneys represent the Commissioner here.
    • U.S. District Courts. General federal trial courts. Taxpayers must pay first and sue for a refund. These courts allow jury trials.
    • U.S. Court of Federal Claims. Located in Washington, D.C. Like district courts, refund suits require payment first, but no jury trials are available.
    • U.S. Courts of Appeals. Review decisions of the Tax Court, district courts, and the Court of Federal Claims.
    • U.S. Supreme Court. The final arbiter of tax law, though it hears relatively few tax cases.

    Why This Matters

    Understanding which entity is responsible at each stage of a tax controversy helps taxpayers and their advisors make informed decisions. A dispute may begin with an IRS audit, move to Appeals, and then proceed into litigation in Tax Court or a refund forum. At higher levels, appellate courts and even the Supreme Court may weigh in. Knowing the role of each player ensures taxpayers preserve their rights and navigate the process strategically.

  • What Is a Federal Tax Controversy?

    Federal tax controversies arise when a dispute develops between a taxpayer and the federal government over the proper application or enforcement of the Internal Revenue Code. These disputes may involve individuals, small businesses, large corporations, or tax-exempt organizations. They can be resolved administratively within the Internal Revenue Service (IRS) or judicially in one of several federal courts. Unlike routine tax compliance, which focuses on timely and accurate filing of returns, controversies begin when the IRS challenges a taxpayer’s position or the taxpayer challenges an IRS determination.

    Key Government Participants

    Although the IRS is the most visible participant, several government entities play important roles in the process. Congress enacts the statutes that govern federal tax obligations. The Treasury Department issues regulations and sub-regulatory guidance interpreting those statutes. The IRS enforces the law by issuing forms, examining returns, assessing liabilities, and collecting taxes. The Department of Justice Tax Division litigates federal civil tax cases in the district courts and the Court of Federal Claims, as well as all federal criminal tax cases. The Joint Committee on Taxation must approve any refund exceeding $2,000,000. Despite this broad institutional framework, the IRS serves as the primary front-line agency in tax controversies, handling the bulk of examinations, administrative appeals, and collections.

    The Stages of a Tax Controversy

    A tax controversy typically follows a predictable sequence. It begins with return selection, where the IRS identifies a return for review, often through automated scoring systems, referrals, or compliance campaigns. The next stage is examination, where the IRS reviews the return and may propose adjustments. If the taxpayer disagrees, the matter can proceed to the IRS Independent Office of Appeals, which is designed to provide a forum for resolution short of litigation. If no agreement is reached, the taxpayer can seek judicial review. The U.S. Tax Court provides a pre-payment forum, allowing the taxpayer to challenge the deficiency without first paying it. Alternatively, taxpayers may pay the disputed tax and pursue a refund suit in either a U.S. District Court or the U.S. Court of Federal Claims. Even after liability is resolved, disputes may continue over collection actions such as liens, levies, or installment agreements.

    Administrative vs. Judicial Resolution

    The distinction between administrative and judicial resolution is critical. Administrative proceedings are generally more efficient and less costly, but they take place within the IRS, which acts as both examiner and adjudicator. Judicial proceedings provide independence and formal procedural protections, but often require greater expense and, in refund cases, pre-payment of the tax in dispute. This dual system is designed to balance administrative efficiency with the taxpayer’s right to due process.

    Why Tax Controversies Matter

    The stakes in tax controversies can be substantial. Financial exposure often includes not only the underlying tax but also penalties and interest. In some cases, precedent set in a single case affects the treatment of many similarly situated taxpayers. Equally important are the rights at issue: the right to be informed, the right to quality service, the right to pay no more than the correct amount of tax, and the right to appeal an IRS determination in an independent forum. Tax controversies also shed light on broader systemic issues, including the “tax gap” — the difference between taxes legally owed and taxes actually collected. By some estimates, this gap reaches hundreds of billions of dollars annually. Effective resolution of controversies therefore serves not only the interests of individual taxpayers but also the integrity of the federal tax system as a whole.