A few years back, National Taxpayer Advocate Nina Olson released her annual report to Congress listing the 10 tax issues most litigated in the federal courts. Of the 923 cases involving those issues, taxpayers prevailed in whole, or in part, in 132, or roughly 14 percent. Taxpayers who were represented by counsel did somewhat better—they won 20 percent, or 54 of 265 cases; pro se taxpayers prevailed in 12 percent, or 78 of 658 cases. So, why is it so hard for taxpayers to beat the IRS in court? Here are, in my opinion, the five most influential reasons, in no particular order:
1. The IRS only litigates "winning" cases. Rarely, if ever, will the IRS try a case in court in which it does not believe that it has an overwhelming chance of winning. The reason for this has to rest on the fact that court decisions are public, and widely disseminated; a loss serves to undermine compliance/deterrence policies, and encourages taxpayers to further challenge the IRS.
2. The attorneys who represent the IRS have a superior knowledge of Tax Court procedures, and use that knowledge to their tactical advantage. Even seasoned civil litigators aren’t normally familiar with the unique procedures of the U.S. Tax Court, where 98% of all disputes against the IRS are tried. The stipulation process, reliance on post-trial briefs, limited discovery rules, and specialized role of expert witnesses are just a few examples of procedures that are peculiar to Tax Court practice.
3. The IRS has superior resources, and does not make litigating decisions based on economics. If the IRS maintains a position that it believes will have a significant impact on future taxpayer compliance, it can and will spend as much money as it needs in order to secure witness testimony and "expert" opinions, and to subpoena necessary - even duplicative - documentary evidence. Moreover, it can assign numerous agents, technical advisors and attorneys to litigate a position it feels is important, without incurring an additional expense - more worker bees is just a reallocation of a fixed labor cost.
4. Taxpayers frequently advance weak or irrelevant arguments in Court, including equitable positions. The Tax Court is a legislatively-created court with no powers to do what is "right" or what is "fair". It has to apply the tax laws as written by Congress. Taxpayers almost always fail to realize that sympathetic - even unfair - situations do not necessarily result in rulings in their favor.
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