Ordinarily, taxpayers file their income tax returns each year with the IRS and hear nothing more. Rather, the Internal Revenue Service (“IRS”) simply processes the tax return, assesses the reported amount of tax due, and accepts and credits the taxpayer’s payment against the reported tax amount. In this manner, life moves on until the same process is repeated again the next year.
But, there are times in which the IRS disagrees with the amount of tax reported on a taxpayer’s return. In these instances, the IRS must utilize so-called “deficiency procedures” to communicate to the taxpayer the IRS’ belief that adjustments should be made to the return. These deficiency procedures provide taxpayers with significant procedural rights to contest the IRS’ determinations. This article discusses the deficiency procedures including the Notice of Deficiency (“NOD”) the IRS must issue prior to making an assessment of federal tax. This article also discusses the taxpayer’s right to challenge the IRS’ determinations in the NOD through filing a petition with the United States Tax Court (“Tax Court”).
The Notice of Deficiency
The NOD is the formal correspondence from the IRS to the taxpayer asserting that additional taxes are due. It may be issued after a tax return has been filed or even where the taxpayer fails to file a return.
The Internal Revenue Code (the “Code”) provides information that should be in the NOD. See I.R.C. § 7522. However, the Tax Court has been more generous with the IRS, holding that a NOD may be valid even without all the required information. See Jarvis v. Comm’r, 78 T.C. 646 (1982). Indeed, the Tax Court only requires the NOD to “provide a formal notification that a deficiency in taxes has been determined.” Pietz v. Comm’r, 59 T.C. 207, 213-14 (1972); see also Rochelle v. Comm’r, 116 T.C. 356 (2001) (IRS’ failure to include in NOD information required under the RRA of 1998 did not invalidate the NOD).
The IRS is not required to issue a NOD with respect to all federal taxes. Rather, a NOD may be issued only for: (1) income taxes; (2) estate, gift, and generation-skipping transfer taxes; (3) self-employment taxes; (4) certain withholding taxes (e.g., those regarding payments to non-resident aliens and foreign corporations); and (5) certain excise taxes (e.g., those imposed on public charities and private foundations). The IRS may also issue a NOD to go after third parties, such as transferees and fiduciaries, regarding income, estate, and gift taxes. See I.R.C. § 6901.
The IRS utilizes various form numbers to issue a NOD to a taxpayer. Generally, the type of NOD will be governed by the circumstances. For example, the IRS commonly utilizes CP3219A to propose adjustments to a taxpayer’s tax return where the IRS received information from a third party that does not match the taxpayer’s tax return.
The “Last-Known Address” Rule
As discussed above, the IRS gets somewhat of a pass regarding the form and substance necessary to constitute a valid Notice of Deficiency. The same cannot be true with respect to the delivery requirements for a NOD. More specifically, the Code requires that the IRS deliver the NOD to the taxpayer’s last known address either by certified or registered mail. See I.R.C. § 6212. The taxpayer’s last known address, for these purposes, is the last address reported by the taxpayer on his or her most recently filed return. However, a taxpayer may formally change his or her last known address through the filing of a Form 8822, Change of Address.
Taxpayers who do not receive a NOD may challenge any subsequent assessment of federal tax. In most cases, taxpayers will discover the IRS’ failure to comply with the last known address when the taxpayer receives IRS collection notices. Here, taxpayers may file a petition with the Tax Court and move to dismiss the petition for failure of the IRS to properly deliver the NOD. After the motion to dismiss has been filed, the IRS must produce a copy of the NOD and proof of proper mailing. If it cannot, the Tax Court will dismiss the petition in the taxpayer’s favor. See, e.g., Pietanza v. Comm’r, 92 T.C. 729 (1989), aff’d, 935 F.2d 1282 (3d Cir. 1991).
The “90-Day” Rule
If the Notice of Deficiency is properly delivered, the taxpayer has 90 days to file a petition with the Tax Court unless the NOD was mailed to a taxpayer outside the United States. Because the 90-day period is jurisdictional, the Tax Court is unable to grant additional time to file the petition. See Estate of Cerrito v. Comm’r, 73 T.C. 896, 898 (1980).
The “timely-mailed, timely-filed” rule provides that a taxpayer’s petition is timely filed with the Tax Court if the taxpayer mails the petition via a proper mail service (including USPS) and the letter is postmarked within the 90-day period. For certified mail deliveries, the postmark date is the date USPS stamped the green card. See Treas. Reg. § 301.7502-1(c)(2). More recently, taxpayers can avoid the mail and file their petitions electronically with the Tax Court.
If a taxpayer misses the 90-day filing period, the taxpayer is unable to challenge the pre-assessment procedures of the IRS. Accordingly, the IRS will assess the tax and mail the taxpayer a demand for full payment. Because the taxpayer has lost his or her right to challenge the determination in the Tax Court, the taxpayer must full pay the taxes, penalties, and interest; file an administrative claim for refund with the IRS; and if the claim for refund is denied or unanswered, sue the United States in the federal district court or U.S. Court of Federal Claims.
The Tax Court Petition
Conversely, taxpayers who timely petition the Tax Court may raise arguments as to why the proposed adjustments are in error. Without doubt, the substance of the petition is extremely important. And a failure to properly challenge the IRS’ determinations can be costly.
Thus, taxpayers should properly raise all issues in their petition. If a taxpayer fails to raise an issue, the Tax Court may consider the argument waived. See T.C. Rule 34(b)(4); Toyota Town, Inc. v. Comm’r, T.C. Memo. 2000-40. Indeed, in one case, the Tax Court held that although a NOD proposed adjustments for several tax years, the taxpayer was limited to challenging the proposed adjustments in only one year because that was the year the taxpayer raised in his petition. See O’Neil v. Comm’r, 66 T.C. 195 (1976).
Additional requirements for the petition may be found in Rules 31 through 34 of the Tax Court Rules of Practice and Procedure.
The Notice of Deficiency provides significant procedural rights to taxpayers. After receipt of a NOD, taxpayers should calendar the 90-day deadline to ensure the filing of their petition is timely. In addition, taxpayers should utilize the 90-day grace period to ensure that they have all the information necessary to file a proper petition with the Tax Court. Taxpayers who miss the 90-day deadline or improperly fail to raise issues in their petitions run the risk of having to fight the IRS through collections, such as levies or lien filings.
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