BEAT THE IRS IN TAX COURT When you decide to take on a legal battle with the IRS, you are asking for a fight in one of the toughest forums in the country. By following six rules, however, you will increase the chances that you can

(MONEY Magazine) – In January 1990, Nader E. Soliman, a Germantown, Md. anesthesiologist, was on his way to making tax history. After a five-year dispute with the Internal Revenue Service over his 1983 income tax return, he scored an upset victory when the United States Tax Court ruled that he could deduct $5,017 in home- office expenses, even though he spent most of his time on the job at three hospitals. But, though Soliman won, the IRS wouldn't quit. Fearing that thousands of taxpayers would claim the same coveted write-off, the IRS appealed the case to the Supreme Court, where it finally won last January. As Dr. Soliman learned, challenging the IRS in Tax Court over an alleged tax deficiency can be a struggle: On average over the past six years, the court decided just 10% of cases in favor of taxpayers and issued split decisions 37% of the time. The IRS won the rest. The agency prevails so often because in Tax Court you bear the burden of proof. Yes, as unfair as it seems, the IRS is presumed correct when it issues a deficiency notice that you choose to challenge. The only way you can win is to prove to one of the 41 Tax Court judges that the IRS was wrong. Nonetheless, the 69-year-old Tax Court can be a helpful ally when the IRS demands taxes you don't owe, as victors Mary and Ed Gee of Foster City, Calif. (see pages 116 and 117) and University of Michigan accounting professor James Reece (pictured below) will gladly attest. Despite its name, the Tax Court is independent of the IRS and, unlike the equally independent U.S. District Court and the U.S. Court of Claims -- the other federal courts where tax cases are heard -- you can go to Tax Court without paying the disputed tax in advance. Furthermore, the Tax Court will come to you; judges travel to 79 locations around the country to hear tax disputes. However, before you decide to take on the IRS, read this article carefully. It will show you how you can improve your chances in court by following six simple rules, culled from interviews with more than 40 tax lawyers and preparers, former IRS officials, Tax Court judges and taxpayers who have faced them, and from watching several cases in action:

RULE 1: Don't be cowed by the IRS. Your ticket to court is an official IRS Notice of Deficiency, in which the government outlines the back taxes and penalties it says you owe and informs you of your right to petition the Tax Court within 90 days if you want to fight back without paying up first. Last year the IRS issued more than 1.6 million deficiency notices to taxpayers who had disagreed with the results of an audit or hadn't resolved a computer- generated demand for more taxes. If you have legitimate grounds to contest the tax, you can turn to the Tax Court. File the petition quickly (cost: $60; the address is on your deficiency notice) and by registered mail, so you will have a receipt to prove that it was sent during the 90-day window. If you're not fully confident about the merits of your case, get a second opinion from your tax pro while you're waiting for the petition papers to arrive. Expect to pay about $100 to $225 for an hour's consultation. RULE 2: Don't pay more for Tax Court counsel than necessary. A tax lawyer or one of the handful of certified public accountants or enrolled agents admitted to practice before the court can give you an estimate of your case's potential cost up front. In general, a quick settlement without a trial might run $1,500 to $2,000, but fees for representation in a full-blown trial can easily exceed $15,000. Take heart: You can probably navigate Tax Court without a lawyer if the alleged deficiency is $10,000 or less for each year at issue. Reason: With such relatively low sums at stake, you can elect on your petition to have your case heard as a small case, the Tax Court equivalent of a small-claims court proceeding. Indeed, each year about a third of the 30,000 Tax Court petitioners opt for small-case status. About 90% are settled before the judge weighs in, but again taxpayers win roughly only 10% of the cases that go to trial. In a small case, your petition comes as a simple preprinted form. You just fill in the blanks. Moreover, if the IRS doesn't settle the case beforehand, you won't be held to arcane rules of evidence in the relatively informal trial. Instead, the judge will accept most any documents or testimony you think is relevant and will often help you develop your case by eliciting facts. Thanks to these procedures, most small-case taxpayers are able to complete their own petitions -- perhaps with behind-the-scenes coaching from a tax pro -- and represent themselves in court. Small-case Tax Court is especially appropriate when you have facts that can be readily explained, such as the business nature of your entertainment expenses or the types of repairs you made to a rental property. If your case turns on a complicated point of law, however, you will probably need to hire a lawyer or C.P.A. or an enrolled agent admitted to practice in Tax Court. If you can't afford the fees but live near one of the 14 Tax Court-approved legal clinics, you can seek free legal advice from law students who work under the supervision of a professor who has been admitted to practice before the court. Larger cases follow all the formal rules of courtroom practice and procedure. They are generally no place for an amateur. Says Lapsley W. Hamblen Jr., chief judge of the Tax Court: "Unlike in small cases, the judge in a regular case exercises less discretion to bend the rules of evidence to help out a taxpayer. So it's preferable to have counsel." If you're determined to go it alone, however, read the Rules of Practice and Procedure -- United States Tax Court ($9.50 from the court; 400 Second St. N.W., Washington, D.C. 20217), a dense, 174-page manual. If possible, get help preparing for your case from a seasoned tax pro. RULE 3: Go for a settlement. When you send your petition to the Tax Court, a clerk forwards it to the IRS, where it is automatically routed either to one of its 1,350 appeals officers for a possible settlement or -- if you already tried settling after your audit -- to one of 950 attorneys who must prepare the case for trial. Even IRS lawyers settle disputes, however. Indeed, with some 30,000 Tax Court petitions filed each year and a backlog of more than 40,000, "it's imperative that the IRS settle, since it simply doesn't have the resources to try all the cases," says Peter K. Scott, director for IRS policies and practice at the accounting firm Coopers & Lybrand in Washington, D.C. and former IRS deputy chief counsel. Roughly 80% of Tax Court petitions are settled, with an average reduction in 1992 of 57% in cases with proposed deficiencies below $100,000. If your petition is sent to the local IRS appeals office, you'll get a call or letter asking you to visit to discuss your case. You can attend or let your accountant, enrolled agent or lawyer represent you. Let your adviser decide: Many pros want to handle the conference alone because issues can often be broached more dispassionately in your absence. Whether you go or send in a clone, don't skip the appeals conference. Unlike auditors, IRS appeals officers take into account the hazards of litigation when considering your case. "The IRS doesn't want to risk an unfavorable decision in court that might encourage other taxpayers to exploit the tax law's ambiguity," says Frederick W. Daily, a San Francisco tax attorney and author of Stand Up to the IRS (Nolo, $19.95). "So if the IRS thinks you have a chance of winning, it will often try to settle." The cases the IRS is likeliest to settle are ones in which the facts are in dispute. Take Barbara Wolfe, 55, of Keyport, N.J. In 1988, she received a deficiency notice for $116,857, five years of taxes and penalties on income that the IRS said her husband, who worked on oil pipelines, had failed to report. The notice went to Wolfe because neither she nor the IRS could locate her husband, from whom she had been separated since 1986. In her Tax Court petition, Wolfe claimed she was an "innocent spouse," a designation that absolves one spouse of taxes allegedly incurred by the other, if the first spouse can prove that he or she had no way of knowing about the understatement. One fact in her favor: Wolfe's husband had worked out of the country for two of the five years in dispute. The day before the case was set for trial in 1991, the IRS' lawyer offered to knock off two years' worth of the tax and all penalties, reducing the bill by 65%, to $39,910. Wolfe accepted. "I wanted to fight on," she says. "But when I considered the cost of going to court and the possibility of losing, it wasn't worth the risk." RULE 4: Be cooperative in pretrial preparation. Before a judge hears your case, you and the IRS attorney must agree to as many facts as possible and present them to the court in writing. You must also swap the evidence that each side plans to offer. If you don't cooperate, you run the risk of angering the judge and could face restrictions in court on the evidence you can present. "Many taxpayers feel mistreated by the IRS and carry their ill will over to the court system," says Tax Court chief special trial judge Peter Panuthos. "They only end up compromising their own cases." RULE 5: Present the strongest argument you can, through detailed documentation and credible testimony. As in an audit, your best records are receipts, canceled checks, invoices or an original diary to verify your expenditures. If your record keeping became sloppy because of an illness, get a letter from your doctor attesting to the affliction. Your oral testimony is crucial too. Woody Rowland, a former IRS attorney now in private practice in San Rafael, Calif., once tried a Tax Court case for the IRS involving a woman who raised breeding horses. The IRS had disallowed her losses of some $75,000, claiming that the business was a hobby. "Her losses were so great for so many years that it was hard to believe she was in it as a business," says Rowland. Surprise! "At the trial, the woman explained what it was like to stay up all night with the mares when they were foaling and how much time and effort the horses required. I knew I had lost as soon as I heard her." RULE 6: Know when to shut up. In both small and regular cases, you may be questioned under oath by the IRS attorney. Be businesslike and polite, but don't volunteer any information. "The biggest mistake people make is rambling on," says David M. Sokolow, a Washington, D.C. tax attorney. "They inadvertently say things that muddle the issue or undermine their case." In Tax Court, as in life, sometimes mum's the word.

FOOTNOTE: American University in Washington, D.C.; University of Bridgeport in Connecticut; University of Denver; Georgia State University in Atlanta; Illinois Institute of Technology Chicago-Kent College of Law, and Loyola University, also in Chicago; Loyola University in New Orleans; University of Minnesota in Minneapolis; University of New Mexico in Albuquerque; New York Law School and Yeshiva University, both in New York City; Southern Methodist University in Dallas; Villanova College in Philadelphia; and Widener University in Wilmington, Del.