A Pirate’s Life: The Treacherous Voyages of Tax Appeals

In tribute to Ceci Berman’s classic article on bankruptcy appeals as ninjas: tax appeals are the pirates of the appellate world.^[1] These swashbuckling appeals arrive unpredictably from the exotic land of IRS administrative proceedings. From there, adventurers must choose one of two routes: prepayment jurisdiction or refund jurisdiction in the district courts or the Court of Federal Claims. The rules are very different for each forum, potentially leading the unwary sailor to founder on unfamiliar procedural shoals long before reaching any of the federal circuits. This article charts the strange course of judicial review of taxes. Along the way, it detours into some current developments of general interest, even to uninitiated landlubbers.

The Strange Home Port: Agency-Level IRS Proceedings as the Starting Point

To an experienced tax practitioner, the word “appeals” does not conjure images of three-judge panels or oral argument. Instead, it refers to the IRS Independent Office of Appeals (IRS appeals), which can review an examination before it reaches the courts.^[2] If the taxpayer disagrees with the examiner’s findings, the taxpayer may request a conference with IRS appeals, where an appeals officer reviews the matter with an eye toward litigation risk.^[3] If unsuccessful, the taxpayer may request post-appeals mediation (PAM) under the guidelines in Revenue Procedure 2014-63.^[4] A new appeals officer, unconnected to the underlying case, will be assigned.^[5] The taxpayer may also retain an independent co-mediator.^[6] Although PAM may be used for both legal and factual disputes, eligibility is limited and not all cases and issues qualify.^[7]

Scylla or Charybdis? Prepayment Review in the Tax Court vs. Refund Jurisdiction in an Article III Forum

Most tax collections start with a statutory notice of deficiency, a “90-day letter,” or a “ticket to the Tax Court.”^[8] If the taxpayer does nothing, the deficiency becomes assessed by operation of law,^[9] giving the IRS instate access to some of its most dreaded weapons: levies and garnishment under I.R.C. §§6321 and 6331, and administrative offset I.R.C. §6402.^[10] Taxpayers appealing to certain circuits have access to equitable tolling of the deadline, but the standard is higher than excusable neglect.^[11]

There are two routes: 1) prepayment review in the administrative Tax Court;^[12] or 2) refund jurisdiction in an Article III forum.^[13] Neither is without peril.

• Prepayment Review in the Tax Court — The Tax Court can review the IRS’s determinations without prepayment of the taxes and penalties due. In addition to review of notices of deficiency, the Tax Court also has jurisdiction to review other agency actions like collections issues,^[14] innocent spouse relief,^[15] whistleblower award disputes,^[16] and interest abatement actions.^[17] Additionally, Congress has authorized certain tax-related declaratory judgments. For example, to determine 501(c)(3) status.^[18]

The Federal Rules of Evidence apply.^[19] However, the Tax Court Rules of Practice and Procedure are different from the Federal Rules of Civil Procedure in important ways that can waylay the unprepared. For example, the Tax Court offers a simplified “small tax case” procedure for disputes with less than $50,000 at stake.^[20] These “S-cases” feature relaxed procedural rules and informal methods of proof, and require no formal briefs.^[21] These features help pro se taxpayers, but there is a catch: neither party can appeal.^[22]

Discovery is another area with meaningful differences. Under Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974), parties are expected to exchange documents and information informally first. The typical storm of formal discovery — interrogatories, requests for production, and requests for admission — does not usually occur. Indeed, discovery should be relatively important, since the IRS has already gathered its evidence during the examination phase.^[23]

Stipulations under Tax Ct. R. 91 are another unique feature. Often called “the bedrock of Tax Court practice,”^[24] this robust stipulation regime, coupled with Branerton’s informal discovery obligation, creates a pretrial culture radically different from most other forums. By rule, parties must stipulate to the fullest extent possible all relevant non-privileged matters, “regardless of whether such matters involve fact or opinion or the application of law to fact.”^[25] The stipulation requirement is enforced through orders to show cause under Tax Ct. R. 91(f) and sanctions under Tax Ct. R. 104.^[26]

Expert witness practice in the Tax Court also diverges sharply from district court norms. Under Tax Ct. R. 143(g), an expert’s written report may be substituted for direct testimony — the so-called “talking report” — meaning the expert’s report effectively stands as the witness’ testimony, subject to cross-examination at trial. This eliminates lengthy direct examinations but requires the written report to be comprehensive and persuasive on its face. Deposition practice is similarly available only by stipulation, for unavailability of a witness, or exceptional circumstances.^[27]

After trial, the Tax Court can require either simultaneous or seriatim post-trial briefs under Tax Ct. R. 151, with simultaneous briefing being the norm.^[28] By default, opening briefs must be filed within 75 days after the conclusion of trial, and answering briefs are due 45 days thereafter; for seriatim briefs, reply briefs are due 30 days later.^[29]

• Refund Jurisdiction in a District Court or the Court of Federal Claims — Those with enough treasure to bury might take the other route: refund jurisdiction, in either a U.S. district court or the U.S. Court of Federal Claims. The district court offers the only jury-trial forum. The Court of Federal Claims, sitting in Washington, D.C., offers no jury but provides judges experienced in government-contract and monetary-claim litigation, broader discovery than the Tax Court, and tax precedent that occasionally diverges from the regional circuits. As the plaintiff, the taxpayer bears the burden of proof.^[30]

Administrative exhaustion is a prerequisite for a refund suit. The taxpayer must file a claim for refund (Form 843) with the IRS. When filing a refund claim, a taxpayer must be mindful of the “variance doctrine,” stemming from I.R.C. §7422(a) and Treas. Reg. §301.6402-2. Under this doctrine, a taxpayer cannot raise in a refund suit a claim for recovery that was not raised in the refund claim.^[31] Both the factual and legal bases for the refund must be specifically stated in the claim itself.^[32] The full-payment rule of Flora v. United States, 362 U.S. 145 (1960), requires payment of the entire amount in dispute.^[33]

Familiar Seas: Arriving in the Circuit Court

Both routes lead to the federal circuits. For Tax Court cases, I.R.C. §7482(a)(1) gives the circuit court appellate jurisdiction “in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.”^[34] Most cases are appealed to the circuit containing the individual’s legal residence or the entity’s principal place of business or principal office, measured at the time the Tax Court petition was filed.^[35] If there is none, venue lies in the District of Columbia Court of Appeals.^[36] The parties may also stipulate to an alternative appellate venue.^[37] For refund suits, the appellate path follows the ordinary federal appellate framework to a circuit court of appeals (including the Federal Circuit, for taxpayers choosing the Court of Federal Claims).^[38]

As with Article III courts, interlocutory appeal from the Tax Court is available. A Tax Court judge may certify that an order involves a controlling question of law with substantial ground for disagreement, and that immediate appeal may materially advance the litigation’s resolution.^[39] The court of appeals may then, in its discretion, permit the appeal if application is made within 10 days after the entry of the order — though, as in other federal practice, such permission is the exception rather than the rule.^[40]

Ambushed: The Armada of Assessable Penalties

To complicate matters, there are penalties that do not require a notice of deficiency. Certain penalties are “assessable,” and can be imposed without first issuing a notice of deficiency, which deprives taxpayers of their ticket to prepayment review in the Tax Court. Common examples are the failure to file and failure to pay penalties.^[41]

Four categories of assessable penalties are particularly devastating. First, the promoter penalty under I.R.C. §6700 targets any person who organizes or sells an interest in a tax shelter and makes a gross valuation overstatement or a false statement regarding tax benefits. The penalty is assessed directly, and under I.R.C. §6703(c), the promoter must pay 15% of the assessed penalty before filing a refund claim and, if necessary, bringing suit. Commentators have questioned whether this structure violates the Due Process Clause or the Eighth Amendment.^[42] Second, tax return preparer penalties under I.R.C. §6694 apply where a preparer understates a taxpayer’s liability due to an unreasonable position, or willful or reckless conduct. Like promoter penalties, review of these penalties requires a 15% deposit under §6694(c).

Third, penalties for failure to file reports of foreign bank and financial accounts (FBARs) under 31 U.S.C. §5321 are assessed by the IRS under delegation from the Financial Crimes Enforcement Network. FBAR penalties carry no statutory partial-payment option at all; therefore, the Flora prepayment rule applies and there is no review without full payment first. Constitutional challenges to FBAR penalties are gaining traction. However, the 11th Circuit has held that willful FBAR penalties are subject to the Eighth Amendment’s Excessive Fines Clause, trimming a $35.4 million penalty it found grossly disproportionate.^[43]

Finally, there is the trust fund recovery penalty under I.R.C. §6672. When an employer fails to remit withheld employment taxes (the “trust fund” portion consisting of the employees’ income tax and FICA withholdings), the IRS may assess a penalty equal to 100% of the unpaid trust fund taxes against any “responsible person” who willfully failed to collect or pay over the taxes.^[44] The full-payment rule, ordinarily the tax system’s most formidable boarding net, is mitigated by the concept of divisible taxes: Because the trust fund recovery penalty is computed on a per-employee per-period basis, the responsible person can often test liability for the entire assessment by paying one employee’s penalty for one period.^[45]

The Last Stand: Collection Due Process

Collection due process (CDP) hearings offer a last stand. The concept is straightforward: Before the IRS files a notice of federal tax lien (I.R.C. §6320) or issues a levy (I.R.C. §6330), the taxpayer can request a hearing before the IRS Independent Office of Appeals. At the hearing, the taxpayer may raise challenges to the appropriateness of the proposed collection action, offer collection alternatives (such as an installment agreement or offer in compromise), and occasionally challenge the underlying tax liability, but only if the taxpayer had no prior opportunity to dispute the liability.

If the taxpayer is dissatisfied with the appeals determination, a petition to the Tax Court must be filed within 30 days unless equitably tolled.^[46] However, reaching the Tax Court may not guarantee a hearing on the merits. In Commissioner v. Zuch, 605 U.S. 422 (2025), the Supreme Court held 8-1 that if a taxpayer’s liability is eliminated — for example, because the IRS applied tax refunds to the outstanding balance instead — the Tax Court loses jurisdiction over the CDP case entirely.^[47] Justice Gorsuch, in a lone dissent, warned that the decision hands the IRS “a roadmap for evading Tax Court review.”^[48] Congress has moved quickly; H.R. 6506 (Taxpayer Due Process Enhancement Act), if passed, would prohibit the IRS from crediting overpayments against disputed liabilities during CDP proceedings.^[49]

When it addresses the merits of a CDP case, the Tax Court reviews for abuse of discretion, sustaining the IRS unless the determination was arbitrary, capricious, or without sound basis in fact or law.^[50] When the underlying liability is properly at issue, the Tax Court reviews the determination de novo; otherwise, abuse of discretion applies. In CDP cases themselves, the Tax Court has at times applied what practitioners describe as a hybrid scope of review, nominally applying abuse of discretion but considering new evidence presented by the taxpayer that was not part of the administrative record.^[51]

The Call to Adventure: Current Issues in Tax Law

• Rogue’s gallery: The IRS’s Dirty Dozen — Each year, the IRS publishes its “Dirty Dozen” list. Although the “Dirty Dozen” is not a formal statement of IRS enforcement priorities, it serves as a useful barometer of the issues drawing the agency’s attention. The 2026 list includes IRS impersonation, fake charities, abusive undistributed long-term capital gains claims, overstated withholding schemes, and non-cash charitable contribution arrangements.^[52]

Syndicated conservation easements (SCEs) under I.R.C. §170(h), which have been a fixture on the “Dirty Dozen” list from 2021 through 2024, are a particularly heavily litigated form of charitable contribution.^[53] In an SCE transaction, investors form partnerships to purchase property, which is then conserved via an easement. In a typical SCE transaction, investors acquire partnership interests in an entity that holds real property. The partnership then donates a conservation easement over the property and claims a corresponding non-cash charitable deduction, which flows out to the partners’ personal tax returns. The value claimed for donation purposes is generally much higher than the purchase price, typically depending on an income method appraisal that factors into the property’s potential for mining or development use.

SCE transactions have been designated “listed transactions” that receive enhanced scrutiny.^[54] SCE cases are particularly resource-intensive because they pose difficult questions of market value and ecological importance of the donated property, and there are plenty of them. As of May 2026, there were over 1,100 active conservation easement cases, with approximately 740 docketed in Tax Court and another 400 under examination by the IRS.^[55] To put that figure in perspective, the Tax Court only received 18,549 petitions for review in 2025.^[56] In terms of trial calendar availability, during 2026, the Tax Court anticipates conducting only 155 regularly scheduled trial sessions and 100 special sessions (reserved for cases that demand lengthy trials).^[57]

The IRS launched a settlement initiative in 2020 to resolve docketed cases involving SCEs.^[58] More recently, on May 13, 2026, the IRS announced yet another settlement initiative targeting conservation easement disputes.^[59] Given the sheer volume of pending cases, the complexity of the underlying legal issues, and the IRS’s sustained focus on SCEs over the past several years, the latest settlement initiative is unlikely to mark the end of SCE litigation. Rather, SCEs will likely remain a prominent feature of the tax enforcement landscape for the foreseeable future.

• IRS Scrutiny of Puerto Rico’s Act 60 — Puerto Rico’s Act 60, formally known as the Puerto Rico Incentives Code of 2019, is a tax incentive law designed to attract businesses, entrepreneurs, and investors to the island. Act 60 allows qualifying residents and businesses to pay reduced tax on Puerto Rico-source income in exchange for relocating and meeting residency and operational requirements. U.S. citizens who establish bona fide residency in Puerto Rico may qualify for a 0% Puerto Rico tax rate on capital gains accrued and realized after they become Puerto Rico residents, plus full exemptions from Puerto Rico taxes on interest and dividends that qualify as Puerto Rico-sourced. To qualify as a “bona fide resident,” an individual must: 1) be present in Puerto Rico for at least 183 days of a taxable year under I.R.C §7701(b); 2) not have a “tax home” outside of Puerto Rico under §911(d)(3); and 3) have a “closer connection” to Puerto Rico than to any U.S. state or foreign country under §7701(b)(3)(B)(ii).^[60] Businesses can get a flat 4% corporate Puerto Rico tax rate on qualifying Puerto Rico-sourced export services income.

IRS enforcement in this area has intensified significantly over the last five years, focusing on whether taxpayers satisfied the bona fide residency requirements, properly sourced capital gains realized after relocating to Puerto Rico, and incorrectly treated pre-relocation appreciation as Puerto Rico-source income.^[61] Enforcement efforts have accelerated at both the federal and territorial levels. In December 2025, the GAO recommended expanding IRS review of Act 60 beneficiaries, and the IRS committed to prioritizing compliance efforts.^[62] Puerto Rico likewise increased oversight, auditing nearly 1,800 Act 60 decree holders in 2025, strengthening applicant screening requirements, and implementing new annual reporting obligations.^[63]

• GAAR, Matey: General Anti-Avoidance Rule and Equivalent U.S. Doctrines — Tax takes on a lot of international flavor in the interconnected global economy. General Anti-Avoidance Rule (GAAR) is an international tax term for the doctrines that tax transactions that lead to outcomes that are just too good to be true, even though they at least arguably comply with the letter of the law. Several countries have adopted some version of GAAR, and while the specifics vary, the idea is the same: Schemes designed primarily to avoid tax, can be disregarded or recharacterized.

The U.S. has its own GAAR-equivalent doctrines. The economic substance doctrine, codified in §7701(o), disallows tax benefits from transactions that cannot be explained except as tax avoidance.^[64] Closely related to the economic substance doctrine is the step transaction doctrine, which permits the IRS to collapse “a series of transactions designed and executed as parts of a unitary plan to achieve an intended result…regardless of whether the effect of so doing is imposition of or relief from taxation.”^[65] The IRS may view the transaction as a whole and tax the overall result, cutting through the formal structure to reach the underlying economic reality. The “substance over form doctrine” works similarly, letting the IRS to look past the legal labels of a transaction to determine its true economic reality.^[66]

Finally, the business purpose doctrine requires any transaction to have a genuine non-tax reason to qualify for the tax treatment the taxpayer claims.^[67] If the primary or sole reason for the transaction is to avoid or minimize taxes, the IRS can re-characterize or disregard the transaction.^[68]

Together, these doctrines form the domestic answer to GAAR: A motley crew of anti-avoidance principles that give the IRS — and IRS appeals — broad authority to look past the form of a transaction and ask whether a transaction truly deserves the tax treatment it claims.

• Treasure Maps: Penalty and Interest Relief Under §7508A, Kwong, and Abdo — For some taxpayers, the Court of Federal Claims’ decision in Kwong v. United States, 179 Fed. Cl. 382 (2025), is a map to treasure that would otherwise remain buried forever. In Kwong, the court held that the taxpayer’s refund suit was timely because the two-year limitations period under I.R.C. §6532 was postponed by the mandatory disaster relief extension in the 2019 version of I.R.C. §7508A(d).^[69] Under that version, the automatic extension period ran from “the earliest incident date” of the disaster declaration to “60 days after the latest incident date.”^[70] The court concluded that, for the COVID-19 pandemic, the automatic extension began on January 20, 2020, and ended on July 10, 2023 (COVID-19 postponement period).^[71]

Aside from filings deadlines, §7508A(d) lists other tax-related acts (for example, paying taxes and filing returns) whose deadlines are disregarded during a declared emergency. In Abdo v. Commissioner, 162 T.C. 148 (2024), the Tax Court held that postponement during those time periods is “mandatory.”^[72] Many commentators (including the National Taxpayer Advocate) believe that the IRS cannot impose interest or penalties for failure to file returns, failure to pay taxes, or failure to make estimated tax payments during the COVID-19 postponement period.^[73] Tens of millions of taxpayers who paid such penalties and interest may be entitled to refunds or abatement.^[74]

However, the IRS is not taking these rulings lying down. Notice of Action AOD 2026-01 indicates that it will not apply the reasoning of Abdo beyond its facts. In Kwong, a notice of appeal has been filed.^[75] A protective claim, submitted via IRS Form 843, preserves a taxpayer’s right to claim a refund while a contingency remains unresolved and the taxpayer’s right to the refund may not be determinable until after the statute of limitations expires.^[76] A valid protective claim does not need to state a particular dollar amount, but it must identify and describe the contingencies affecting the claim, be sufficiently clear and definite to alert the IRS to the essential nature of the claim, and identify the specific year or years for which a refund is sought.^[77]

• The Constitutional Cannonade: Jarkesy and the Right to a Jury Trial — Tax penalties, assessable and otherwise, share a feature that may prove constitutionally fatal: none afford a jury trial before the government takes the money. In SEC v. Jarkesy, 603 U.S. 109 (2024), the Supreme Court held that, for most monetary penalties, the Seventh Amendment requires a jury trial absent some unbroken historical tradition of summary collection.^[78] Taxes themselves qualify, but as detailed in last year’s Twelve Angry Taxpayers, monetary tax penalties were historically collected against the taxpayer by suit with jury access.^[79] This practice spanned from the Navigation Acts, through the founding era, and into the Civil War before Congress authorized the administrative collection of a “penalty” without suit in 1867.^[80] Under Jarkesy, primary tax liability may still sail under the “revenue” flag, but penalties share key characteristics of claims that historically belonged in an Article III forum with the right to a jury trial.

This theory is working its way through the courts. In Hirsch v. United States Tax Court, No. 25-739, the Center for Taxpayer Rights, as amicus curiae, raised the historical argument,^[81] and the government was ordered to respond to Hirsch’s petition for certiorari.^[82] The Supreme Court, however, denied certiorari on June 22, 2026. The most important lower-court decision to date is United States v. Sagoo, 2025 WL 2689912, No. 4:24-CV-01159-O (N.D. Tex. Sep. 19, 2025), in which the U.S. District Court for the Northern District of Texas held that FBAR penalties cannot be assessed until after jury proceedings.^[83]

Conclusion

Tax appeals commandeer familiar procedural expectations, force practitioners into unfamiliar waters, and punish the unwary with jurisdictional consequences that cannot be undone. During their travels, they cross in and out of agency proceedings until they reach the more familiar federal appellate system. Along the way, they take no prisoners, as the government employs extraordinary powers to seize and collect taxes and penalties. The IRS can even ambush its prey with assessable penalties that offer no chance for a hearing before assessment. These brash, boisterous adventures bring a genuine element of piracy to the appellate world.

This column is submitted on behalf of the Appellate Practice Section, Elaine Walter, chair, and Benjamin Paley, Matthew Cavender, Huiping (Lily) Liu, Nick McNamara, Sydney D’Angelo, Darren M. Goldman, and Brian C. Tackenberg, editors.

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