Legal Definitions - United States Tax Court

The United States Tax Court is a specialized federal court established by Congress to resolve disputes between taxpayers and the Internal Revenue Service (IRS). Its unique feature is that taxpayers can challenge an IRS decision regarding a tax deficiency (meaning the IRS believes you owe more tax) in the Tax Court before actually paying the additional tax. This allows individuals and businesses to dispute the IRS's assessment without first having to pay the amount in question.

The court has the authority to review a wide range of tax-related matters, including:

• Deciding if a taxpayer owes additional taxes.
• Resolving disputes about who is responsible for a tax debt, especially when assets have been transferred.
• Determining if a worker should be classified as an employee or an independent contractor for tax purposes.
• Reviewing IRS actions related to collecting taxes.
• Considering requests from spouses for relief from tax debts on joint returns.
• Evaluating awards for whistleblowers who provide information about tax fraud.

Examples of the United States Tax Court in Action:

• Challenging a Disallowed Business Expense:

  Imagine a small business owner, Ms. Chen, receives a notice from the IRS stating that certain travel expenses she claimed for her business were disallowed, resulting in an additional $15,000 tax deficiency. Ms. Chen firmly believes these expenses were legitimate and directly related to her business operations. Instead of paying the $15,000 and then filing a lawsuit in a district court for a refund, Ms. Chen can file a petition with the United States Tax Court. The Tax Court will then hear arguments and review evidence from both Ms. Chen and the IRS to determine whether the expenses were properly deductible, all before Ms. Chen has to pay the disputed amount.

• Seeking Innocent Spouse Relief:

  Consider David and Emily, who filed a joint tax return. Unbeknownst to David, Emily significantly underreported her income from a side business. Years later, after their divorce, the IRS audits the old return and demands a large sum of money from both David and Emily. David, who had no knowledge of Emily's underreporting, believes he should not be held responsible for the entire tax debt. David can petition the United States Tax Court to request "innocent spouse relief." The court would then examine the circumstances to determine if David qualifies for relief from the joint tax liability, potentially excusing him from paying the portion of the tax debt attributable to Emily's unreported income.

• Disputing Worker Classification:

  A tech startup, "Innovate Solutions," hires several software developers as independent contractors, issuing them 1099 forms. After an audit, the IRS determines that these developers should have been classified as employees, leading to significant back taxes for payroll taxes, benefits, and other employer-related contributions. Innovate Solutions disagrees with this assessment, believing their contractual arrangements clearly define the developers as independent contractors. The company can take its case to the United States Tax Court to dispute the IRS's reclassification of its workers. The Tax Court would then apply legal tests to the facts of the relationship between Innovate Solutions and its developers to determine the correct worker classification for tax purposes.