2025 Houston Law Guide | Federal and Texas State Law Guidance

Tag: politics

  • The Structure of the IRS: Who Handles Your Case?

    The Internal Revenue Service is the federal government’s administrative agency charged with enforcing the Internal Revenue Code. Its structure has a direct impact on how tax controversies are handled, since different divisions of the IRS serve different categories of taxpayers. Understanding which division is responsible for a case helps predict how issues will be developed, what kinds of examiners or attorneys will be involved, and what strategies may be most effective.

    Leadership and National Headquarters

    The IRS is an agency of the Department of the Treasury and is headed by the Commissioner of Internal Revenue, who is appointed by the President and confirmed by the Senate under I.R.C. § 7802. The Commissioner’s office in Washington, D.C. sets national policy, oversees the operating divisions, and develops major enforcement and service initiatives. The Office of Chief Counsel is also housed at headquarters, with attorneys responsible for drafting regulations, issuing rulings, and advising IRS personnel nationwide. Field attorneys from the Chief Counsel’s office represent the Commissioner in the U.S. Tax Court and certain bankruptcy proceedings.

    The Four Operating Divisions

    Since the IRS Restructuring and Reform Act of 1998, the agency has been organized around four operating divisions, each with end-to-end responsibility for a distinct group of taxpayers.

    Wage and Investment Division (W&I). This division serves the majority of individual taxpayers — roughly 120 million filers whose income consists primarily of wages and investment returns. W&I oversees return processing, customer service, and correspondence audits. Its subunits handle pre-filing assistance, return integrity and compliance checks, and administration of refundable credits.

    Small Business/Self-Employed Division (SB/SE). This division manages compliance for approximately 21 million self-employed individuals and about nine million small businesses with assets under $10 million. SB/SE is also responsible for estate and gift tax matters, employment tax issues, and most collection activity. Within SB/SE, specialized units handle field audits, compliance services, and enforcement of delinquent accounts.

    Large Business and International Division (LB&I). LB&I oversees corporations, partnerships, and other entities with assets over $10 million, many of which conduct cross-border operations. Its structure emphasizes “practice areas” focused on common issues such as transfer pricing, treaty compliance, and pass-through entity taxation. LB&I examiners handle some of the most complex audits, often involving international transactions, accounting method disputes, or specialized industries.

    Tax-Exempt and Government Entities Division (TE/GE). TE/GE addresses pension and retirement plans, public charities and private foundations, political organizations, and governmental bodies such as state and local governments. This division reviews applications for exempt status, issues determination letters, and conducts examinations to ensure ongoing compliance with statutory requirements.

    Supporting Units and Specialized Offices

    In addition to the operating divisions, the IRS has nationwide functional offices that play critical roles in tax controversies. The Criminal Investigation Division investigates potential criminal violations of the tax laws and related financial crimes. The Independent Office of Appeals provides an administrative forum for dispute resolution separate from examination, with authority to settle cases based on hazards of litigation. The Taxpayer Advocate Service acts as an ombudsman, assisting taxpayers whose cases have been stalled or whose rights may be impaired. Other units manage communications with Congress, develop compliance statistics, and support technology and research.

    Oversight and Reform Efforts

    Congress established the IRS Oversight Board under I.R.C. § 7802 to provide outside expertise in governance and accountability. Although the Board has been inactive since 2015 due to lack of confirmed members, its creation reflects ongoing concerns about IRS management and taxpayer service. The agency’s current structure was itself a product of the IRS Reform Act of 1998, which shifted the organization away from a geographic model and toward divisions based on taxpayer type. This reorganization was designed to improve service, reduce duplication, and create accountability within distinct taxpayer populations.

  • The Tax Controversy Pipeline: From Audit to Litigation

    A federal tax controversy follows a recognizable path, beginning with the selection of a tax return for examination and potentially ending with judicial review in federal court. Each stage offers opportunities to resolve disputes, but each also carries procedural requirements that affect taxpayer rights and strategy.

    Return Selection

    The IRS examines only a small percentage of filed returns, but its selection process is increasingly sophisticated. Many returns are chosen through the Discriminant Inventory Function (DIF) system, which assigns scores based on statistical likelihood of error. Others are identified through compliance campaigns, whistleblower tips, or third-party information reporting. Certain transactions, such as those involving large losses, international activity, or complex structures, are more likely to attract IRS attention.

    Examination

    Once a return is selected, the IRS initiates an examination, commonly referred to as an audit. Examinations may be conducted by correspondence, in an IRS office, or in the field. During this process, the IRS requests documents, interviews taxpayers, and evaluates whether the reported items comply with the law. If the IRS proposes changes, it issues a Revenue Agent’s Report. The taxpayer may agree and resolve the case, or disagree and move forward in the process.

    Administrative Appeals

    If the taxpayer contests the proposed adjustments, the matter may proceed to the Independent Office of Appeals. Appeals is separate from IRS Examination and is empowered to settle cases based on the “hazards of litigation.” This means Appeals weighs the strengths and weaknesses of each side’s position and may compromise accordingly. For many taxpayers, Appeals represents the best opportunity to resolve a case without the time and expense of litigation.

    Judicial Forums

    When administrative resolution fails, taxpayers may turn to the courts. Three forums are available, each with distinct advantages:

    • U.S. Tax Court. This is the primary pre-payment forum, allowing taxpayers to challenge a deficiency before paying it. Proceedings are specialized, with judges experienced in tax law.
    • U.S. District Courts. Taxpayers may pay the disputed tax and sue for a refund in the federal district court for their jurisdiction. District court cases allow for jury trials, which may be strategically important in certain disputes.
    • U.S. Court of Federal Claims. Like the district courts, this forum hears refund suits, but it sits in Washington, D.C. and has nationwide jurisdiction.

    The choice of forum depends on multiple factors, including the taxpayer’s ability to pay, the type of issue, procedural preferences, and perceived judicial outlook.

    Collection Proceedings

    Even after liability is determined, disputes may continue at the collection stage. The IRS has broad authority to assess liens, levy assets, and garnish wages. Taxpayers can contest these actions through Collection Due Process hearings or administrative appeals. In some cases, litigation arises over the appropriateness of collection measures or the availability of installment agreements and offers in compromise.

    Strategic Considerations

    At every stage of the pipeline, taxpayers and their advisors must weigh cost, risk, and procedural posture. Early resolution may be preferable to avoid litigation, but in some cases judicial review is the only way to secure an independent evaluation. Understanding the stages of a tax controversy helps practitioners guide clients effectively through what is often a lengthy and complex process.

  • 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.

  • I Received a Notice of Deficiency — What Are My Options?

    A Notice of Deficiency, often called a “90-day letter,” is one of the most important documents the IRS can issue. It signals that the IRS has formally determined you owe additional tax and intends to assess it. The notice triggers strict deadlines and limited choices for how to respond.

    Petition the U.S. Tax Court

    The primary option is to file a petition with the U.S. Tax Court within 90 days of the notice’s date. The Tax Court is unique because it allows taxpayers to challenge the IRS’s determination before paying the disputed tax. This provides a valuable opportunity to have an independent judge review the IRS’s position. If the deadline is missed, the right to Tax Court review is lost.

    Pay First and Seek a Refund

    Taxpayers may also choose to pay the disputed amount in full and then file a formal claim for refund with the IRS. If the claim is denied or not acted upon within six months, the taxpayer can pursue a refund suit in federal court. Two forums are available: a U.S. District Court, where jury trials are possible, or the U.S. Court of Federal Claims, which hears refund suits without juries. This path requires upfront payment but preserves judicial review.

    Take No Action

    If no action is taken, the IRS will assess the deficiency after the 90-day period expires and begin collection through liens, levies, or wage garnishment. Inaction effectively concedes the IRS’s determination and removes the opportunity for independent review.

    Why Timely Action Matters

    The Notice of Deficiency is more than just another IRS letter — it is a formal legal notice that starts the countdown to significant rights and consequences. Taxpayers must decide promptly whether to contest the IRS in Tax Court, pay and seek a refund, or allow the assessment to proceed. Understanding these options ensures that important rights are not lost by default.