The U.S. District Courts
District courts are general trial courts which handle both civil and criminal cases in the federal court system. There are 94 district courts, and more than 670 district court judges in the U.S. and its territories. If a taxpayer wants to litigate in this forum, a complaint must be filed in the judicial district in which the taxpayer resides or in the case of a corporation, where its principal place of business is located. The taxpayer and the government are both entitled to request a jury trial in District Court.
Note that there are some tax disputes that must be heard by the District Court, including tax return preparer and tax shelter injunction suits.
In order to file a tax case in a U.S. District Court, the taxpayer must pay the disputed amount and then request a refund from the IRS. After receiving a denial of the taxpayer’s request and exhausting IRS administrative remedies, the taxpayer can then file a suit for refund in their U.S. District Court, where the taxpayer receives the right to a trial by jury, something unavailable in tax or claims court. There is no minimum amount for tax disputes in the U.S. District Court, but the costs and complexity of a federal District Court case often limit this option to only large cases.
Filing a Petition
Prior to filing a petition in the U.S. Court of Federal Claims or District Court, the taxpayer must:
- Pay the full amount of the proposed tax deficiency
- File an Amended Tax Return (Form 1120X or Form 1140X), making a claim for a refund of the amount paid
- Wait 6 months to see if the IRS grants the refund request
- File a formal complaint with the U.S. District Court if IRS does not grant the refund
After paying the deficiency, but before filing their refund claim, a taxpayer may appeal for a review by the IRS Appeals Office. There are advantages and disadvantages to filing an appeal first or filing directly with the Court. For example, if the limitations period has expired when the case is filed with the Court, the Department of Justice may not raise any additional claims that would raise the amount owed by the taxpayer (although claims may be raised to offset the taxpayer’s refund). If the limitations period has not expired, opposing counsel may raise new issues at trial and claim a larger tax deficiency. The taxpayer’s Tax Attorney should discuss these and other strategic procedural decisions with the client at the conclusion of the audit.
Tax Litigation Considerations in the U.S. District Courts
Keep the following in mind before filing the petition in the District Court:
- The proposed tax deficiency must be paid in full before filing.
- Jury trials are permitted in U.S. District Court.
- There are no jury trials in U.S. Tax Court;
- Federal District courts are often backlogged and it may take some time for the case to be tried.
- U.S. Department of Justice attorneys are highly skilled in courtroom practice and evidentiary issues while U.S. Tax Court cases are handled by what are called District Counsel attorneys who often do not have substantial trial experience since most Tax Court cases are settled before trial.
- District Court judges as a general rule are less knowledgeable about tax law, but are more familiar with local issues that may be relevant to the case.
- A case tried in District Court is more likely to receive local publicity.
- District Courts have greater backlogs than Tax Court or the U.S. Court of Federal Claims.
- The Federal Rules of Civil Procedure are vast, complex and more strictly enforced in the District Courts whereas U.S. Tax Court rules of discovery are less complicated and discovery is limited.
- As opposed to Tax Court, which utilizes informal and more limited discovery procedures, in the District Court there is a broad use of discovery and
- U.S. Department of Justice attorneys make extensive use of subpoenas, depositions, and requests for admissions.