A Comprehensive Analysis of Cases Litigated in the Small Case Division of the U.S. Tax Court

This paper identifies a problematic area of the U.S. tax system involving the Small Case Division of the U.S. Tax Court (Small Tax Case Court) and makes policy recommendations that will help the Court operate more efficiently. In the Small Tax Case Court, a relatively small taxpayer can challenge the Internal Revenue Service (IRS) with minimal cost and formality. Little research has been conducted with respect to the type of issues litigated in the Small Tax Case Court and the success rate of taxpayers on these issues. In this paper, we present our analysis of the 1,660 cases which have been litigated in this court for the period 2001 through 2009. We identified the issues in each case and found that most of the issues fall into four main categories: family, penalties, trade or business expenses, and gross income. We also found that taxpayers won on all issues in 113 of the 1,660 cases, for a success rate of approximately 7 percent. For the four main issue categories, the taxpayer success rate was 11 percent for matters that involved family issues, 13 percent for penalties, 3 percent for trade or business expenses, and 6 percent for gross income. The Court ruled in favor of the IRS on most issues because taxpayers did not provide adequate substantiation or because they blatantly underreported income. From a policy standpoint, we believe that taxpayers should be informed that their chance of winning in the Small Tax Case Court is very low to nil if their claims are unsubstantiated or if they pursue an overly aggressive reporting strategy. Our hope is that if taxpayers know that their chance of winning in these types of situations is highly unlikely, they will stop litigating such issues in the Small Tax Case Court. A reduction in the number of cases involving spurious claims will allow the Court to be more efficient and more effective. We make other policy recommendations that would improve the U.S. tax system, including one that would provide taxpayers with greater access to professional representation by waiving the examination requirement for CPAs and enrolled agents (EAs) who would otherwise have represented taxpayers in the Small Tax Case Court. For taxpayers, we provide a number of recommendations as to how taxpayers should substantiate their claims, which will (1) help them make better decisions regarding whether to litigate, and (2) increase their success rate in the Small Tax Case Court.