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In January 2016, the IRS denied Nancy Rubel’s request that she be excused from paying tax liabilities that she and her former husband had reported on their joint returns for 2005 through 2008, deciding that she did not meet the legal standards for that type of relief. The IRS told Rubel that she had until April 19, 2016 to appeal that decision to the U.S. Tax Court. Rubel filed her appeal on that exact date.
Then things took a bad turn. At the IRS’s request, the Tax Court threw out Rubel’s case on the ground that she had filed a week late – the IRS had miscalculated the deadline by using the wrong starting date to compute the 90-day period in which she could sue. The U.S. Court of Appeals for the Third Circuit upheld the dismissal of Rubel’s case, although it urged the IRS to “exercise care when drafting correspondence to a taxpayer to ensure it is accurate.”
It hardly seems fair that Rubel was denied her day in court because of the IRS’s mistake. For most types of lawsuits, there are legal doctrines – lawyers call them equitable estoppel and equitable tolling – that help prevent this type of injustice. Those doctrines provide relief when someone misses a filing deadline due to her opponent’s mistake or misconduct or due to extreme circumstances outside her control.
Unfortunately, courts have repeatedly held that those doctrines do not apply to key filing deadlines in the Tax Court. A taxpayer who misses a deadline – even by a day – is out of luck, no matter what the reason. Although the courts acknowledge that this harsh approach can be unfair, they contend that Congress wrote the Tax Court filing rules in a way that leaves no room for equitable estoppel and equitable tolling. That’s open to debate – some lawyers argue that the courts are misinterpreting the rules.
The best way to resolve the matter would be for Congress to write fairer and clearer rules. National Taxpayer Advocate Nina E. Olson, who heads an independent IRS division that protects taxpayers’ rights, recently urged Congress to adopt two simple reforms that would help taxpayers get their day in court.
First, Olson proposed that taxpayers be allowed to rely on the filing deadline computed by the IRS, even when the IRS makes a mistake. Congress has already adopted that rule for the deficiency notices that the IRS often issues after audits. Olson proposed that the rule be extended to other IRS notices, including the type of notice that Nancy Rubel received.
Second, Olson proposed that Congress spell out that equitable estoppel and equitable tolling apply to Tax Court filing deadlines. Of course, taxpayers would have to demonstrate compelling reasons to be allowed to file late.
Adopting Olson’s proposals would be a big improvement, but another reform is also needed. Congress has specified that taxpayers can challenge certain types of penalties in court only after they have paid the full amount the IRS thinks they owe – if they win in court, their payment is refunded with interest. This full-payment rule poses a problem when the IRS imposes a penalty so large that the taxpayer cannot pay all of it.
The problem is vividly illustrated by a recent case in which a tax shelter promoter was barred from challenging a $60 million penalty in court because he was unable to pay the full amount. Although the shelter promoter might not have been the most sympathetic claimant, he should have been allowed to present his case. Congress should relax the full-payment rule to ensure that taxpayers can challenge penalties in court.
Each year, the federal courts hear cases filed by tens of thousands of taxpayers who have a dispute with the IRS. Most of these cases go through the Tax Court, which offers a less formal approach that is convenient for taxpayers without lawyers. Sometimes, the court rules in favor of the taxpayer. Many other times, after hearing the taxpayer out, the court rules in favor of the IRS. Either way, our system works better when taxpayers get their day in court.
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