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

Assessment and collection of taxes are the IRS’s bread and butter, and arguably the very reason that the IRS exists at all.  Consequently, it is no surprise that two whole chapters of the Code are dedicated to assessment and collection.  In this article we will examine the statutes of limitation for assessments, as well as some of the idiosyncrasies of the assessment regime.  In two separate series of articles, we will delve into the IRS’s two collection mechanisms: liens and levies.

In this first article, we’ll explore the basics of assessment.  In the second article, we’ll examine deficiencies.  In the third article, we’ll examine termination and jeopardy assessments.

Authority and Edict

The IRS has the authority to make assessment of all taxes (including interest, additional amounts, additions to tax, and assessable penalties) imposed by the Code.[1] Not only does the IRS have the authority to assess taxes, but the IRS must also assess taxes that are determined by the taxpayer or by the IRS itself.[2]

The assessment is made by recording the liability of the taxpayer by the IRS.[3] The IRS will provide a copy of the record of the assessment to the taxpayer upon request.[4] The IRS must also assess and collect criminal restitution for failure to pay any tax imposed under the Code in the same manner as if the amount were the underlying tax.[5]

The IRS may at any time within the period prescribed for assessment, make a supplemental assessment whenever it is ascertained that any assessment is imperfect or incomplete in any material respect – except to the extent of the restrictions contained in IRC § 6213 (Restrictions on Assessment after Filing of Tax Court Petition).[6]

Limitations on Assessment

Generally, the amount of any tax under the Code must be assessed within 3 years after the return (required to be filed by the taxpayer) was filed.[7] This 3-year period applies to limit the assessment of tax whether or not the return was filed on or after its due date.[8] If the IRS does not assess the tax within this period, no proceeding for collection may be begun after the expiration of the period.[9]

A return filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on that last day.[10] So, if Uncle Bill files his return early (fat chance) on April 1st, it will be treated as having been filed on April 15th.  However, the execution of a substitute for return by the IRS[11] will not start the running of the period of limitations on assessment and collection.[12]

There are of course a number of exceptions.

It wouldn’t be tax law if there weren’t.

Tax may be assessed at any time under three circumstances:

  1. If the taxpayer made a false or fraudulent return with the intent to evade tax, the tax may be assessed, or proceeding in court for collection of the tax may be begun without assessment at any time.[13]
  2. If the taxpayer willfully attempts in any manner to defeat or evade tax, the tax may be assessed, or proceeding in court for the collection of such tax may be begun without assessment at any time.[14]
  3. (Finally, and most commonly), if the taxpayer failed to file a return at all, the tax may be assessed, or proceeding in court for the collection of such tax may be begun without assessment at any time.[15]

If the taxpayers substantially omitted items, which is to say omitted from gross income in excess of 25% of the income stated on the return, or is in excess of $5,000, the tax may be assessed, or proceeding in a court for collection of such tax may be begun without assessment at any time within six years after the return was filed.[16]

If both the IRS and the taxpayer consent in writing to the assessment of tax after the expiration of the period of limitations, the tax may be assessed at any time prior to the expiration of the period agreed upon.[17] Interestingly, this extension by agreement does not apply to estate taxes.[18]

If the IRS receives an amended return signed by the taxpayer showing that the taxpayer owes an additional amount of tax, the period of assessment of such additional amount of tax will not expire before 60 days after the day on which the IRS received the amended return.[19]

Erroneous Income Tax Prepayment Credits

If, on any return or claim for refund of income tax, the taxpayer overstates the credit for income tax withheld at the source, or of the amount paid as estimated income tax, the overstated amount credited or refunded may be assessed by the IRS similarly to a mathematical or clerical error, except that the provisions of IRC § 6213(b)(2)[20] shall not apply.[21]

Miscellaneous Issues under IRC § 6201

The IRS may not assess unpaid amounts of estimated income tax required to be paid under IRC § 6654 or IRC § 6655.[22] Nor may the IRS assess unpaid amounts of federal unemployment taxes for any calendar quarter computed under IRC § 6157.[23]

In addition, the IRS must provide reasonable verification of information returns in any court proceeding if the taxpayer asserts a reasonable dispute with respect to any item of income reported on the information return by a third party, and the taxpayer has fully cooperated with the IRS.  In such case, the IRS has the burden of producing reasonable and probative information concerning the deficiency in addition to the information return.[24]

Special Rules Applicable to Certain Employment Taxes

If less than the correct amount of FICA tax is withheld and paid to the IRS with respect to wages or other compensation, proper adjustments with respect to both the tax and the amount to be deducted will be made without interest by the IRS.[25] If the underpayment cannot be adjusted, the amount of the underpayment will be assessed and collected by the IRS.[26]


Footnotes:

[1] Pursuant to IRC § 6201(a)(1).

[2] IRC § 6201(a)(2).

[3] IRC § 6203.

[4] Id.

[5] IRC § 6201(a)(4)(A).

[6] IRC § 6204.

[7] IRC § 6501(a).

[8] Id.

[9] Id.

[10] IRC § 6501(b)(1).

[11] Pursuant to the IRS’s authority in IRC § 6020(b)(2).

[12] IRC § 6501(b)(3).

[13] IRC § 6501(c)(1).

[14] IRC § 6501(c)(2).

[15] IRC § 6501(c)(3).

[16] IRC § 6501(e)(1).

[17] IRC § 6501(c)(4)(A).

[18] Id.

[19] IRC § 6501(c)(7).

[20] Relating to abatement of mathematical or clerical error assessments.

[21] IRC § 6201(a)(3).

[22] IRC § 6201(b)(1).

[23] IRC § 6201(b)(2).

[24] IRC § 6201(d).

[25] IRC § 6205(a)(1).

[26] IRC § 6205(b).

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