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Procedural Considerations on Collection (Assessment) – Part Two: Authority and Limits on Assessment

In the first article in this series about the IRS’s ability to assess tax and additions thereto, we explored the basics of assessment.  In this second article, we’ll examine deficiencies.  In the third article, we’ll examine termination and jeopardy assessments.

Deficiencies, Generally

For purposes of income, estate, gift, and excise taxes, a deficiency is the amount by which the tax imposed by the Code exceeds the amount of tax shown on the taxpayer’s return, plus any amounts previously assessed as a deficiency less any abatement, credit, refund, or other repayment due to the taxpayer.[1]

Statutory Notices of Deficiency

If the IRS determines that there is a deficiency with respect to income, gift, estate, or excise taxes, the IRS may send statutory notice of deficiency (SNOD) to the taxpayer by certified mail or registered mail.[2] The mailing of the SNOD “shall be sufficient” if it is mailed to the taxpayer and his last known address—even if the taxpayer is deceased, under a legal disability, or, in the case of a corporation has terminated its existence.[3]

In the absence of notice to the IRS of the existence of a fiduciary relationship,[4] a SNOD for an estate tax deficiency is sufficient, if addressed in the name of the decedent or other person subject to liability and mailed to his last known address.[5]

In the case of a joint income tax return, the SNOD may be a single joint notice; however, if the IRS has been notified by either spouse that separate residences have been established, then, in lieu of the single joint notice, a duplicate original of the joint notice must be sent by certified mail or registered mail to each spouse at his last known address.[6]

If the IRS has mailed a SNOD to the taxpayer, and the taxpayer files a petition with the Tax Court within the time prescribed in the Code,[7] the IRS may not determine any additional deficiency of income tax for the same taxable year, of gift tax for the same calendar year, of estate tax in respect of the taxable estate of the same decedent, or excise taxes for the same taxable year with respect to any act (or failure to act) to which the petition relates, except in the case of fraud, and except as provided in IRC § 6214(a),[8] in IRC § 6213(b)(1),[9] in IRC § 6851,[10] IRC § 6852,[11] or in IRC § 6861(c).[12]

The IRS may, with the consent of the taxpayer, rescind any SNOD mailed to the taxpayer. Any rescinded notice may not be treated as a notice of deficiency relating to further deficiency notices or to limitations in the case of a petition to the Tax Court.[13]

The taxpayer will not have the right to file a petition with the Tax Court based on such notice.[14] Rescinding the SNOD will not affect any suspension of the running of any period of limitations during which the notice was outstanding.[15]

Restrictions Applicable to Deficiencies and Petition to the Tax Court

Within 90 days (150 days if the notice is addressed to a person outside the United States) after the SNOD[16] is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.[17]

It is critical to understand that the measuring date is the date on which the SNOD was mailed, i.e., the date in the upper right-hand corner of the letter, and not when it is received by the taxpayer. Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.[18]

Except as otherwise provided with regard to termination and jeopardy assessments,[19] no assessment of an income, estate, gift, or excise deficiency and no levy or proceeding in court for its collection may be “made, begun, or prosecuted” until the SNOD has been mailed to the taxpayer.[20] Further, no assessment, levy or court proceeding may be made, begun, or prosecuted until the expiration of such 90-day (150-day period), nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.[21]

If, however, the IRS makes, begins, or prosecutes a levy or proceeding or makes such an assessment during the time the prohibition is in force, the IRS may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered.[22] However, the Tax Court has no jurisdiction to enjoin any action or proceeding or order any refund under this subsection unless a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of that petition.[23]

In any bankruptcy case, the running of the time for filing a petition in the Tax Court with respect to any deficiency will be suspended for the period during which the debtor is prohibited by reason of such case from filing a petition in the Tax Court with respect to such deficiency, and for 60 days thereafter.[24]

If the taxpayer does not file a petition with the Tax Court within the time prescribed, the deficiency, notice of which has been mailed to the taxpayer, will be assessed, and must be paid upon notice and demand from the Secretary.[25] The taxpayer may at any time (whether or not a notice of deficiency has been issued), by a signed notice in writing filed with the IRS, waive the restrictions on the assessment and collection of the whole or any part of the deficiency.[26]

Assessment of Mathematical or Clerical Errors

If the IRS notifies the taxpayer that, on account of a mathematical or clerical error[27] appearing on the return, there is a deficiency, and that an assessment has been or will be made on the basis of the mathematical or clerical error, this notice will not be considered as a notice of deficiency for the purposes of IRC § 6213(a),[28] of IRC § 6212(c)(1),[29] or of IRC § 6512(a).[30] Furthermore, the taxpayer will not have the right to file a petition with the Tax Court based on this notice of the mathematical or clerical error.[31] Each notice under this paragraph shall set forth the error alleged and an explanation thereof.[32]

Within 60 days after notice of an assessment of a mathematical or clerical error is sent, the taxpayer may file a request for an abatement with the IRS.[33] Upon receipt of such request, the Secretary shall abate the assessment.[34]

Any reassessment of the tax with respect to which an abatement is made under this subparagraph is subject to the deficiency procedures prescribed by this subchapter.[35] In the case of any abated assessment, no levy or proceeding in court for the collection of the assessment may be made, begun, or prosecuted during the 60-day period in which the assessment may be abated under this paragraph.[36]

If the amount applied, credited, or refunded[37] is in excess of the overassessment attributable to the carryback, the IRS may assess the amount of the excess as a deficiency as if it were due to a mathematical or clerical error appearing on the return.[38]

Assessment of Amount Paid

If a taxpayer pays a tax, the IRS may assess a deficiency upon the receipt of such payment.[39] In any case where the amount is paid after the notice of deficiency is mailed,[40] the payment will not deprive the Tax Court of jurisdiction over such deficiency determined without regard to such assessment.[41]

Determinations Made by Tax Court

If the IRS asserts a claim for an additional amount of deficiency prior to the hearing or rehearing of the petition, the Tax Court has the jurisdiction to redetermine the correct amount of the deficiency even if the redetermined amount is greater than the amount listed in the SNOD, and to determine whether any additional amount, or any addition to the tax should be assessed.[42]

In redetermining a deficiency of income or gift tax, the Tax Court may consider other years or calendar quarters as necessary to correctly determine the amount of such deficiency, but in doing so has no jurisdiction to determine whether or not the tax for any other year calendar quarter has been overpaid or underpaid.[43] Notwithstanding the fact that the Tax Court may not redetermine other years not listed on the SNOD, the Tax Court may apply the doctrine of equitable recoupment.[44]  The date on which a decision of the Tax Court becomes final shall be determined according to the provisions of IRC § 7481.[45]

Assessment of Deficiency found by the Tax Court

If the taxpayer files a petition with the Tax Court, the entire amount redetermined as the deficiency by the decision of the Tax Court that has become final will be assessed and must be paid upon notice and demand from the IRS.[46] No part of the amount determined as a deficiency by the IRS but disallowed as such by the final decision of the Tax Court may be assessed or be collected by levy or by proceeding in court with or without assessment.[47]

Assessment of Interest

If any amount of tax imposed by the Code is not paid on or before the last date prescribed for payment, interest on such amount shall be paid for the period from such last date to the date paid.[48] Interest on any tax shall be paid upon notice and demand, and shall be assessed, collected, and paid in the same manner as taxes.[49] Interest on any tax may be assessed and collected at any time during the period within which the tax to which such interest relates may be collected.[50]


Footnotes:

[1] IRC § 6211(a)(1).

[2] IRC § 6212(a).

[3] IRC § 6212(b)(1).

[4] Under IRC § 6903.

[5] IRC § 6212(b)(3).

[6] IRC § 6212(b)(2).

[7] IRC § 6213(a).

[8] Relating to assertion of greater deficiencies before the Tax Court.

[9] Relating to mathematical or clerical errors.

[10] Relating to termination assessments.

[11] Id.

[12] Relating to the making of jeopardy assessments.

[13] IRC § 6212(d).

[14] Id.

[15] Id.

[16] As authorized in IRC § 6212.

[17] IRC § 6213(a).

[18] Id.

[19] IRC § 6851 (termination), IRC § 6852 (same), and IRC § 6861 (jeopardy)

[20] IRC § 6213(a).

[21] Id.

[22] Id.

[23] Id.

[24] IRC § 6013(f)(1).

[25] IRC § 6213(c).

[26] IRC § 6213(d).

[27] As defined in IRC § 6213(g)(2).

[28] Prohibiting assessment and collection until notice of the deficiency has been mailed. See IRC § 6213(b)(1).

[29] Restricting further deficiency letters. See IRC § 6213(b)(1).

[30] Prohibiting credits or refunds after petition to the Tax Court. See IRC § 6213(b)(1).

[31] See IRC § 6213(b)(1).

[32] Id.

[33] IRC § 6213(b)(2)(A).

[34] Id.

[35] Id.

[36] IRC § 6213(b)(2)(B).

[37] Under IRC § 6411.

[38] IRC § 6213(b)(3).

[39] IRC § 6213(b)(4).

[40] Under IRC § 6212.

[41] IRC § 6211.

[42] IRC § 6214(a).

[43] IRC § 6214(b).

[44] Id.

[45] IRC § 6214(d).

[46] IRC § 6215(a).

[47] Id.

[48] IRC § 6601(a).

[49] IRC § 6601(e)(1).

[50] IRC § 6601(g).

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