Most Litigated Tax Issues

Date01 March 2015
Published date01 March 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22034
Caroline D. Strobel
Most Litigated Tax Issues
The National Taxpayer Advo-
cate is required to report to
Congress the 10 most litigated
tax issues that have appeared in
federal courts over a 12-month
period. The period used in this
report was June 1, 2012, through
May 31, 2013. The cases dis-
cussed here were considered the
important cases relevant to tax
1. The Internal Revenue
Code (IRC) authorizes the
Internal Revenue Service
(IRS) to impose a penalty
if a taxpayer’s negligence
or disregard of rules or
regulations caused an
underpayment of tax, or if
an underpayment exceeded
a computational threshold
called a substantial under-
statement. The IRS is also
authorized to impose five
other accuracy-related pen-
alties. During the review
period, taxpayers litigated
these penalties less fre-
quently than the negligence
and substantial understate-
ment penalties, and thus
these other penalties were
not reviewed.
2. The deductibility of trade
or business expenses has
long been among the 10
most litigated issues in the
Annual Report. During the
review period, 135 cases
were identified involving a
trade or business expense
issue. The courts affirmed
the IRS position in the vast
majority (approximately
74%) of cases, while tax-
payers fully prevailed only
about 2% of the time. The
remaining cases involved a
split position.
3. When preparing a tax
return, taxpayers must
report gross income for the
taxable year to determine
the tax they must pay. The
reporting of gross income
has been among the most
litigated issues in each
of the Annual Reports
to Congress. During the
period of this report, the
majority of cases involved
taxpayers failing to report
items of income, including
wages, interest, dividends,
and annuities.
4. Under the IRC, the IRS
may examine any books,
records, or other data rel-
evant to an investigation
of a civil or criminal tax
liability. To obtain this
information, the IRS may
serve a summons directly
on the subject of the inves-
tigation or any third party
who may possess relevant
information. If a person
summoned under the IRC
neglects or refuses to obey
the summons; produce
books, papers, records, or
other data; or give testi-
mony, as required by the
summons, the IRS may
seek enforcement of the
summons in a U.S. District
A person who has a sum-
mons served on him or her
may contest its legality if the
government petitions to enforce
it. Thus, summons enforcement
cases are different from many
other cases described in other
most litigated issues because
often the government, rather
than the taxpayer, initiates the
litigation pertaining to sum-
mons enforcement. If the IRS
serves a summons on a third
party, any person entitled to
notice of the summons may
challenge its legality by filing a
motion to quash or by interven-
ing in any proceeding regarding
the summons. Generally, the
burden on the taxpayer to estab-
lish the illegality of the sum-
mons is heavy.
The report identified 117
federal cases decided during the
relevant period that included

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