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What are the Most Litigated Issues and What’s Happening in Collection?

Posted on Jan. 25, 2022

This year the National Taxpayer Advocate took a new approach to calculating the most litigated issues in her annual report.  You can read about her approach starting on page 183 of the report.   Instead of just looking at the tried cases, which she does capture, she also looks at the cases in which taxpayers filed a Tax Court petition.  It’s all in how you define litigation.  Is it best measured by the relatively small number of cases that get tried and receive an opinion, i.e., looking at the end of the case where about 1% of the filed cases end up, or by looking at the filed cases in which taxpayers started litigation but for a variety of reasons did not follow it to a conclusion by trial and opinion?  Since she gives you both sets of data, it’s hard to complain no matter which set of information you prefer.

Here are the charts, with the first one based on opinions issued and the second one on petitions filed:

Figure: Screen-Shot-2022-01-25-at-12.18.25-AM.png
Figure: Screen-Shot-2022-01-25-at-12.18.36-AM.png

Some things come out the same in either measure as the report states:

[Gross income disputes] was the number one issue among those litigated in the Tax Court with 66 substantive opinions issued. It was also the largest category of cases petitioned to the Tax Court. In FY 2021, taxpayers petitioned the Tax Court in 13,558 cases where gross income was an issue during the examination.

In the same vein, trade or business disputes came in second under both methods:

50 opinions where this category of issues was litigated in the Tax Court. Taxpayers petitioned the Tax Court in 2,255 instances where trade or business expenses were an issue during the examination in FY 2021.20 This category is high on our list as the second most prevalent category of opinions issued at the Tax Court and the second most petitioned issue in the Tax Court.

Collection due process notices and hearing requests continue to fall. Some of the falloff in the most recent period is no doubt attributable to the pandemic, but the trend was set before Covid arrived. Here is a graph displaying the trend:

Figure: Screen-Shot-2022-01-25-at-12.19.18-AM.png

The report gives more details and explanations for those interested. It also included a chart on the number of family status cases petitioned to the Tax Court. The number of Earned Income Tax Credit (EITC) cases seems low when you read about the number of EITC audits.

Figure: Screen-Shot-2022-01-25-at-12.19.50-AM.png

This section of the report also contains an analysis of the number of non-Tax Court cases litigated during the past year.  Even more than the CDP filing chart above, a chart showing the number of lien cases referred to the Department of Justice shows a precipitous decline.  Perhaps, the decline should come as no surprise given the decline in revenue officers over this period.  Without revenue officers to initiate these cases, there can be no referrals to DOJ.  The number is getting close to approaching zero which is bad news for tax administration.  Again, of course, the pandemic plays a role, but the slide started before the pandemic arrived.

Figure: Screen-Shot-2022-01-25-at-12.20.20-AM.png

This is a good time to mention an excellent article recently published in Tax Notes regarding collection or the need for more resources at the IRS in order for it to engage in meaningful collection efforts.  Attached is the article.  The decline in suits is more than matched by the decline in liens, levies and seizures.  The chart below shows the amazing decline in these activities.  This chart shows not only the recent drop off as a result of the pandemic but also the 10-year decline as the IRS’ resources were squeezed by Congressional budgetary action.

Figure: Screen-Shot-2022-01-25-at-12.21.00-AM.png

No big surprises that the IRS is struggling in its enforcement efforts, that these efforts have declined significantly over the past decade or that they declined significantly during the pandemic.  Still, a pretty bleak picture of the IRS’ ability to pursue meaningful collection action when needed.

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