Issues that tend to be litigated
Income tax disputes that reach court often involve how income should be classified, whether expenses were business costs or personal ones, when income was earned, and whether a transaction had substance beyond its tax result. Unreported income cases built from bank deposit analysis are another frequent category. Accuracy and late-filing penalties are often litigated alongside the underlying tax. Partnership audits now proceed under a centralized regime, which changes who controls the dispute on behalf of the partners. Where both a federal and a New York case are possible, the order in which they proceed can matter, because a federal change usually has to be reported to the state as well.
Federal and New York starting points
Federally, a notice of deficiency opens the door to Tax Court without prepayment, while paying and suing for a refund leads to district court or the Court of Federal Claims. For New York personal income tax, disputes usually move from a notice to either a conciliation conference or a petition to the Division of Tax Appeals, where an administrative law judge hears the case. Decisions there can be reviewed by the Tax Appeals Tribunal and then by the state courts. Filing deadlines differ by route and are short enough that a notice should be dated and calendared the day it arrives.
Preparing the case
Litigation turns on proof, so we look first at which records exist and who can testify about them. Gather the return and its workpapers, the examination report, bank and brokerage statements, contracts, and correspondence showing why an item was treated as it was. Accountants who prepared the return may become witnesses, which affects how we communicate with them. We then talk through the strength of each issue, the prospects for settlement, and how a decision might affect other years.
