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Internal Rev. Manual (roster)
Assessment Processes: Procedures, Problems, Strategies
Outline for this chapter
For non-filers the very first contact with IRS can occur when the Collection Division begins to explore whether a taxpayer failed to file required returns. This chapter discusses the processes that IRS will follow to learn whether a taxpayer owes tax. This discussion covers both "non-filer" and filed-return processes and procedures leading to the proposal and assessment of unpaid tax. Special concerns attach in non-filer cases over possible referral for criminal investigation. Where taxpayers are personally contacted by Revenue Officers to secure delinquent returns immediate compliance is usually in taxpayer's best interest. This chapter summarizes the components and stages of the deficiency processes the government MUST fulfill. This chapter does NOT discuss the assessment of the Trust Fund Recovery Penalty (100% penalty). The TFRP is discussed in detail in Chapter 13.
There can be no right to collect unless the IRS made a timely assessment and the collection statute has not expired prior to the time that levy is made or a suit for collection commenced. When levy is served on obligors (e.g., financial institutions, retirement fund administrators, taxpayer's debtors) there is no limitation statute that would ever terminate the government's right to receive payment until the debt is paid.
IRS almost never fails to make timely assessments. It is an IRS priority to make timely assessments. Still, checking the actual assessment date is important because the date of assessment marks the beginning of the 10-year period for either making levy or filing a suit to collect. When, for example, taxpayer ("TP") has been classified as currently-not-collectible ("CNC") for an extended period the statute becomes important. CNC accounts are regularly brought to the attention of IRS employees who will re-visit the taxpayer to determine what may have changed (e.g., increased income, an inheritance, etc.). If there is no source the IRS can levy within the remaining period, the statute for collection activity will probably expire.
This same situation can arise where, for example, the taxpayer has been performing under a Partial Payment Installment Agreement ("PPIA") and the 10-year statute was NOT extended by agreement incident to entering the PPIA. For PPIA's the statute (IRC 6159) requires the IRS to revisit the taxpayer every two years or less. If a "re-visit" is occurring at a time when the collection statute is about to expire the facts will affect the strategies a representative must recommend to TP. In any situation where there emerges any contact from the IRS to re-investigate the taxpayer's ability to pay, one must take into account the amount of time remaining under the 10-year collection statute.
A. IRS must assess within 3 years of filing. IRC §6501
1. More than 3-years, sometimes:
Exceptions to the 3-year limit are described in 6501. Such events extend the 3 year period. Common events that make the period longer include fraud (there is no limitation), substantial omission (6 years), agreed extension (varies per agreement’s terms), a “substitute for return" prepared by the IRS under §6020(b) (no limitation - IRS can thereafter assess at any time - but the "collection statute" begins to run from the assessment and not from the filing of the SFR), etc. "Substitutes for Return" ("SFR's") are used by the government when TP has not filed a required return and are discussed below.
Fraud: It has been held "The limitations period is indefinitely extended under sec. 6501(c)(1), I.R.C., if a return is fraudulent, regardless of whether the fraud was committed by the taxpayer or the taxpayer’s preparer." Allen v. Comm., 128 TC No. 4 (2007). Two significant underpinnings should be mentioned. First, the court applied the statute according to its plain meaning. There is nothing in the statute that purports to require fraud on the part of the taxpayer. "In the case of fraud . . ." the statute of limitations is indefinitely extended. Second, the court points to the structure of the tax system, and that it is ultimately the taxpayer's individual responsibility to file complete and correct returns.
2. "Assess" means "make a record"
IRS makes an assessment by “recording” the amount due in the government's Record of Assessment. IRC §6203; Regs. §301.6203-1. It's not much different from the "act of recording" followed to assess tax on real property by local authorities.
3. Demand within 60 days
Within 60 days of the assessment, IRS is required to mail a demand for payment. IRC §6303.
When that demand is sent and the amount is not paid timely a lien comes into existence. IRC 6321 provides "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." This statutory lien is "secret" because there is not yet any public record of the lien. See "Liens." This "first notice" requesting payment will arrive just a few weeks after the assessment was made. If the debt is not immediately paid, there is a sequence of letters IRS will send. Each of those notices is increasingly threatening. See Sequence for the identification and order of the sequence.
B. Verify collectibility: top
A first act to address a taxpayer's "collection problem" is to verify validity of the assessment. Make sure the assessment was made on time. IRS' record-system contains accurate information showing the date of assessment. It is, of course, a "business record" under the rules of evidence and therefore not excluded by the hearsay rule. To learn the exact date the assessment was made request a Summary Record of Assessment as specifically authorized by IRC §6203. Furthermore, IRS keeps record of the date and amount of all assessments in "accounts" based upon a taxpayer's name and number (SSN, EIN, TIN). Taxpayers are entitled to obtain a free printed statement of their "account." All they must do is call IRS' toll-free numbers or use the internet to request a "transcript" which will show the taxpayer's name, identifying number, address, the tax year(s) requested, the amount of the assessment of tax, penalties and interest, and the date of the assessment. Actually, a transcript shows EVERY act occurring with respect to a taxpayer's account. For example, it will show payments received. It will show how IRS pulls refunds from one year to pay taxes owed for another year. EVERY EVENT affecting the balance due on a taxpayer's account will be shown.
1. 10 years to "make levy"
§6502 – Within ten years from the date of assessment (not necessarily the same as the transcript Code 150 date of filing where an "SFR" was used - see next paragraph) the levy must be made or court-action commenced. IRS can take much longer than 10 years to collect. "Levy" refers to the things IRS can do to take property without going to court. The law provides IRS all power necessary to take away property through its administrative processes.The processes and procedures describing exactly how the IRS makes a levy are discussed in "Levies." There are situations where the IRS can file a lawsuit to collect instead of making a levy. That subject is discussed at "IRS Judicial Alternatives."
In the case of a Substitute for Return: The transcript will reflect the date the SFR was filed at Code 150 on the transcript, and the tax amount will be $0.00. However, unagreed SFR cases require that the deficiency procedures be followed. Hence, no ASSESSMENT DATE (Code 300) will be entered until the date following expiration of the 90-day freeze of section 6213. The 10-year "make-levy" collection statute does not begin to run until the Code 300 date.
A timely-served levy does not expire at the end of the 10-year period. Regs. 301.6343-1(b)(1)(ii). The law only requires that a levy be made within the 10-year collection period. IRC 6502. IRM 22.214.171.124.1.2 correctly requires that the continuous wage-levy be released upon expiration of the 10-year statute. That is because wages unlike, for example, bank accounts do not constitute payments owed the taxpayer which are "fixed and determinable." Taxpayer has no "fixed" right to wages until the required services are performed. Thus, when the 10-year "make-levy" period expires the IRS cannot levy on any right to receive payments that accrue for the first time after that date.
b. Example: future payments
Thus, for example, where IRS serves a timely levy upon TP's fixed and determinable right to receive payments in the future (e.g., a retirement plan) the levy must be honored no matter how much time passes if the obligation has not been paid and the levy released. See "Notice of Levy in Special Cases."
2. Suspending the "make-levy" statute
The period in which levy must be made or a suit to collect must be brought is suspended under in situations listed in the statute. IRC 6503 (e.g., SND issued, TP outside US, Bankruptcy). The 10-year period simply stops running for the entire period it is "suspended."
4. Debt reduced to judgment
Where tax claim is reduced to a judgment the lien survives until the judgment is satisfied. IRM 126.96.36.199.2(4). A judgment lien attaches to real property and lasts for a period of 20 years. It may be renewed for one additional 20-year period. See 28 USC sec. 3201. The Department of Justice Judgment Collection Manual is a very valuable resource on collecting tax judgments.
5. "Substitutes for Return" - no expiration
Where a substitute for return is prepared by the IRS under section 6020(b) the statute of limitation for assessment and collection never starts running. IRC 6501(b)(3).
II. Processes leading to assessments (filed and unfiled returns) top
A. Upon Filing:
Assessments are made promptly when returns are filed with the IRS. §6201, §6203, Regs. §301.6203-1. IRS checks the calculations based on the numbers reported on the return. If a "math error" appears, IRS will correct the computation. If more tax should have been reported, IRS will correct the figure, assess the extra amount immediately, and mail a letter demanding payment. If the reported tax was too high IRS will send a refund. "Math errors" are to be assessed without following the deficiency procedures.
Things are more complicated when taxpayers don't file returns. For example, when there is a sudden break in filing returns IRS' processes will likely result in letters being sent to require TP to either file the tardy return or explain why TP does not have to file. “Delinquent Returns” can be worked by various IRS functions. AUR ("Automated Under Reporter unit) and ASFR ("Automated Substitute for Return) tend to work from a “matching program.” The Collection Division also works on delinquency cases. Many times the Collection Division will forward cases where no return is secured from TP. Cases are often sent to Examination, AUR or ASFR depending upon how much information about omitted income is possessed by the IRS. Where IRS has any evidence at all to support the view that a non-filing taxpayer likely violated the duty to file a return, IRS' programs will move forward to assign the case for analysis, contact TP, extract financial information from TP and/or third parties (e.g., banks, employers, business records and etc.). The next several paragraphs describe many important elements that can be involved. Where cases come from, the power of the government to extract information from all sources, and the special dangers that can be associated where "non-filer" cases are worked will be described.
Resources published in the Internal Revenue Manuals (IRM's) that should be consulted in "Non-filer" representations include the list below. The full text of the listed IRM's is produced when the links are selected. These manuals contain a very large amount of "administrative-house-keeping" information that will be of no concern or interest to taxpayers and their representatives. Very useful provisions describing IRS' processes and procedures for developing "non-filer" cases and associated requirements are thoroughly expressed in these parts:
IRM 5.1.11 including IRM 188.8.131.52 through 184.108.40.206.3.1 detailing Collection Division processes and procedures concerning delinquent returns
IRM 5.1.11 (cont. 1) including 220.127.116.11.3.2 through 18.104.22.168 as a continuation of the first part of 5.1.11
IRM 4.12.1 detailing "non-filer" processes and procedures for the compliance/examination division
IRM 5.18.1 detailing the Automated Substitute For Return ("ASFR") program
1. Beware - Extra care required: top
Elevated additional concerns can exist any time a return was not filed. IRM 25.1.1 and 25.1.2 are two of the twelve sections in the FRAUD HANDBOOK. These two sections of the handbook are valuable resource for representatives. Together, these manuals describe how IRS employees will address any emerging possibility of fraud. There is a compilation of the "Indicators of Fraud" contained in 22.214.171.124 that expresses fact-situations that sometimes draw heightened scrutiny.
a. Referral to the Criminal Investigation Division ("CID")
Criminal referral is very often an elevated possibility in "non-filer" cases. Throughout the Manuals every contact-employee in every function is required to look for opportunities to refer cases to CID. The Manuals applicable to Collection and Examination employees are full of repetitious admonitions to make criminal referrals. It is an important part of the government's intention to maximize voluntary compliance. One can acquire an experience in the astounding frequency with which the manuals admonish IRS agents to make referrals by simply looking for the word "criminal" in every single section of the Manuals viewed. When you have opened one of the links simply do a "ctrl +F" (Windows) or a "cmd +F" (Mac) search for the word "criminal." Where unfiled returns have brought IRS to the taxpayer to explore whether a return (or returns) should be filed, TP has likely already lost the opportunity to meet the "voluntary disclosure" policies to avoid possible prosecution. See "Voluntary Disclosures."
b. Penalties: Fraud
A variety of penalties may be applicable in "non-filer" cases. The fraud penalty is very costly, and many times the superficial facts of the case present an appearance of fraudulent failure to file. A full development of the facts may reveal that TP's delinquent conduct is the product of some other situation. Develop the facts fully as the representation begins. This is of increased importance where there has been a history of non-filing. Such patterns can constitute evidence from which "willfulness" may lawfully be inferred, and may require development of the facts that will defend against assertion of the fraud penalty.
c. File a return to start the statutes running
The statutes of limitation on assessment and collection never start running until a return is filed by TP. The filing of a government-prepared return under IRC 6020(b) (discussed below) will never start the 10-year statute. TP should file required returns as a matter of law and as a matter of practicality for purposes of starting the statute.
d. Insulating talkative taxpayers
Make decisions about insulating TP from direct IRS oral interviews when a summons is not issued. It is amazing what ill-phrased, shallow explanations witnesses sometimes offer to explain why returns were not filed - statements of the kind that can inadvertently suggest a willful, fraudulent conduct underlying the failure to file. The truth must be known and witnesses prepared based on the facts of their case.
2. Non-filers: What the Collection Division does top
There are two kinds of Collection Division employees who establish contact with the public. Employees in the Automated Collection System ("ACS") only deal by phone calls and correspondence. When you call the number on the various collection notices, you are talking to ACS. Other employees who make face-to-face contact to collect unpaid tax are Revenue Officers ("RO's"). "Delinquent return” cases coming to the Collection Function are covered by two IRM parts, both being designated in the main index to the IRM's as “5.1.11.” Those parts consist of different sub-parts, so both must be consulted. These parts of the IRM explain where “delinquent return” cases come from, how they are to be worked in the Collection function, and where the Collection function sometimes refers these cases for further development or completion. When Collection works a “delinquent” case it is typically done with close attention applied to the issue of whether or not there is a “first firm indication of fraud.” In those situations, the case may be referred to the Criminal Investigation Division – the people whose job is to detect tax crimes and put violators in prison.
a. The first IRM 5.1.11 describes the process from receipt of the non-filer case through the stage where decisions will be made about how (and whether) to proceed if a return cannot be secured.
IRS programs produce reports identifying taxpayers who filed returns previously but who have not timely filed for the succeeding period(s). Some of those cases are assigned to Collections to make contact with TP and "survey" the situation. These programs are summarized at IRM 126.96.36.199 and at 188.8.131.52.1.
If information seems to warrant opening a "non-filer case" summons power can be applied to compel TP to produce every kind of record imaginable. See 184.108.40.206.2. Basic summons statutes include IRC 7602, 7609 (third-party) and IRC 7604. The US Attorney Manual on Summons Enforcement provides a detailed description of the enforcement process and all of the rules governing an administrative summons. Summons enforcement can introduce extremely harsh consequences where TP steadfastly refuses to respond. A non-technical explanation of the process is accessible through this link.
a. Any person having books, records, documents of any kind and description that may contain evidence relating to a taxpayer's tax-related affairs can be summoned under 7602. Any person who fails or refuses to obey the summons can also become subject to the Summons Enforcement Procedures. Common third-party summons-practice involves financial institutions, companies that handle billing and employee-payroll, accountants, identifiable regular customers and the like.
b. Uncooperative taxpayers who fail to voluntarily provide books and records (including bank records, for example), statements and descriptive evidence may face a Summons Hearing. They can be compelled to give testimony under oath. IF IRS is pushed to the point of a summons, depending upon the facts of TP's situation the case is more likely going slide toward a criminal referral based upon what transpires and is recorded.
A main, specific objective expressly mandated in the IRM's is to quantify what income is needed to maintain TP’s style of living and likely sources/origins and amounts of income being received. IRM 220.127.116.11. When field personnel (RO's) appear on the doorstep they are closely studying the environment. Among other things, Revenue Officers (RO's) will remain alert to evidence sufficient to support a referral to Examination and Criminal Investigation.
4. Initiate limited SFR's: top
The Collection function has authority to apply the “deficiency procedures” (outlined below at II.B.4.) and to establish a “Substitute for Return” ("SFR") to support assessment of a deficiency in tax. The "deficiency procedures" always consist of exactly the same steps regardless of which program (collection, exam, ASFR or AUR) is proposing the deficiency. In IRM 5.1.11(cont. 1) IRM 18.104.22.168.7 lists the kinds of returns Collections may establish under the SFR-processes of 6020(b). However, some kinds of returns are NOT on the approved list. Collections is not authorized by the manuals to prepare Forms 706, 709, 1040, 1041 and 1120, for example. When those kinds of returns are to be established by the SFR-processes it will be done by either the ASFR-unit or by the appropriate examination program.
b. The second part of IRM 5.1.11 (IRM 5.1.11(Cont. 1)) continues the discussion of the processes involved in referring the matter for purposes of completing development of the case and making the assessment. Frequently, the case will be transferred to other functions, depending on the circumstances – primarily ASFR (below at 4) where the IRS possesses third-party reports from W-2’s and 1099’s. However, some referrals proceed to the Compliance function for commencement of examination processes, including issuance of summonses to obtain information.
The method and resources for computing items that should have been reported on various kinds of returns the Collection Division "works" is expressed at 22.214.171.124.7.2. ERRORS do occur in IRS computations at times. Therefore, if you are dealing with Collections with regard to an unfiled return and Collections is proposing an assessment based upon their own computations, obtain the information about their methods from IRM 126.96.36.199.7.2 and check the components to determine whether errors occurred. Right of Appeal: TP will be provided the opportunity to submit a disagreement with Collection's work to Appeals. IRM 188.8.131.52.7.3.
Did the RO not ask TP to file a delinquent return? Where evidence of willfulness or fraud enters the thinking of the RO the previous version of the manuals directed "do not ask for the delinquent return" and refer the matter to Criminal Investigation. See - 184.108.40.206(1) and 220.127.116.11.2. The same admonition was applied to Revenue Agents when they encounter evidence of willfulness and fraud. Specific guidance was that no return or payment was to be requested from the taxpayer at the prior version of IRM 18.104.22.168.1. The newer, current version of the manuals does not express such language and there is not at present a part 22.214.171.124.1. See the current 126.96.36.199 which refers agents to 188.8.131.52.6 (do not solicit returns where fraud is apparent or failure to file was apparently willful). To prepare for events as they may unfold when an agent believes evidence of willful failure to file or fraud is present, consult IRM 25.1.1 and 25.1.2 of the FRAUD HANDBOOK.
3. What Examination does - unfiled returns: top
a. The examination division is staffed with various kinds of tax examiners. "Delinquent returns” worked by Examination will be conducted under the detailed guidance and provisions of IRM 184.108.40.206 et seq. and at IRM 4.10. Examiners (Revenue Agents) are also trained to apply special attention to evidence of "willfulness" and/or "fraud" as reasons for the failure to file. Referrals to criminal investigation are encouraged and actively sought.
1. Non-filer Guidance in IRM:
At IRM 4.12.1 a detailed description expresses how examiners will handle non-filer examinations. 4.12.1 should be consulted in order to comprehend the processes and procedures that will be encountered.
IRM 4.10 is a very important resource. It contains many sub-parts. It is a very lengthy and extremely useful resource for representatives concerning examination of income tax returns. This link opens to the IRS' Index to Part 4, Examination Process, posted on the internet. Scroll down to IRM 4.10 and you will find the many subparts posted under IRM 4.10 specifically addressing the examination of income tax returns. You can select the link provided there to any subpart appearing in the index. [Note: Not all existing parts of the IRM's appear in the list posted to the IRS' main indices. Researchers can usually locate "unposted" manuals by using the "advanced search" options at the IRS' official web site.] Whenever representatives are engaged to address an IRS examination, Part 4, Examination Process, provides strong, useful resources to help address TP's best interests throughout the course of the examination. It is one of the best possible resources describing IRS processes and procedures that representatives can consult at every stage of an examination.
If the examiner concludes that TP should have filed a return, TP will be faced with choices. Two of those choices are to either file a return ("delinquent return secured by examination") or remain steadfast in the refusal to file. If TP doesn't file a return at the end of the process, or if TP does not agree to the examiner’s conclusions about reportable items, then a “substitute” will be prepared. IRC 6020(b) and IRM 220.127.116.11 et seq. From that point forward IRS will follow the steps involved in the deficiency procedures described below.
4. "ASFR" prepares "SFR's" for unfiled returns: top
The "Automated Substitute for Return Unit" (“ASFR”) relies upon reports of income filed by payers on forms W-2 and 1099. ASFR is the place where SFR's are so often prepared and lodged in the IRS data system. The ASFR-unit’s sequence is listed where TP has been unresponsive to the request to file a return. IRM 18.104.22.168.1 et seq. Though the ASFR materials are published under Part 5 of the IRM’s (Collection Process) ASFR is not a unit within the Collection Function. It is described at 22.214.171.124 through 3.
a. ASFR communications
ASFR sends one and sometimes two requests to TP requesting that a return be filed. If Collection has already attempted and failed to obtain a delinquent return and “matching program” information is possessed by the IRS then ASFR will not repeat the request to file a return if Collections forwards the case to ASFR.
IRS collects information. If the evidence supports a determination that TP owes a tax that has not been self-reported, IRS will produce a report. The report shows how the evidence results in computation of tax due. IRS mails that report with the 30-day letter described below. TP then has options to agree with IRS, file a protest to obtain a conference with IRS Appeals, or do nothing. Depending on what TP does in response to the 30-day letter, the next step to move toward assessment when TP does not agree is the 90-day letter - the Statutory Notice of Deficiency. The events that follow issuance of the 90-day letter are described below. If the string of processes results in the determination that TP has failed to report and pay the amount of tax computed by the IRS, the IRS will make the assessment. TP's account will reflect the date and amount of the assessment of all amounts. (This chapter does NOT discuss the assessment of the Trust Fund Recovery Penalty. The TFRP is discussed in detail in Chapter 13. The TFRP process does not require a SND. Rather, the process provides a 60-day protest period. Also, TP is provided no judicial opportunity to challenge the assessment before it is recorded in the IRS records. Instead, if IRS records the assessment, TP's only judicial remedy is through refund litigation. The process is summarized in Chapter 13.)
c. Deficiency processes - 30-day letter: top
The process starts when the 30-day Letter with computation-report is mailed by the IRS function that computes the amount of unpaid tax. It could be ASFR, AUR, Examination or Collections depending upon who worked the case.
1. Notices on the IRS web site
Letter 2566 is 30-day form letter from ASFR. Other units use different form-letters but they all generally state the same matters. The ASFR-letter is a bit different from letters from AUR or Examination because announces “We have no record you filed – we propose to assess.” It provides alternatives to taxpayer to file, agree with the proposed assessment, or explain why TP is not required to file. Notices on the internet: Most of the language of letters and notices (but not the actual forms on IRS letterhead) the IRS sends individuals can be located on the official IRS web site here and here. Business notices can be located on the IRS web site here. Many notice and letter forms are not mentioned in the lists.
2. Letter 950 is used by field groups to transmit a final report and notify TP of the 30-day appeal period.
TP's obligation to cooperate: Where TP firmly declares that the income reports being relied upon by ASFR (or any IRS function) to compute tax due, the IRS falls under a duty to investigate the underlying reported item(s). IRC 6201(d). This is also the situation where TP filed a return but does not report amounts the IRS knows about from W-2's and 1099's. Those cases are handled by AUR, described below. But this does not become active unless the taxpayer has fully cooperated. In Joseph T. McQuatters, TC Memo 1998-88 The court points to the legislative history of 6201(d), quoting the following: "Fully cooperating with the IRS includes (but is not limited to) the following: bringing the reasonable dispute over the item of income to the attention of the IRS within a reasonable period of time, and providing (within a reasonable period of time) access to and inspection of all witnesses, information and documents within the control of the taxpayer (as reasonably requested by the Secretary). [H. Rept. 104-506, at 36 (1996), 1996-3 C.B. 49, 84]." The same language appears in the statute. Thus, 6201(d) seems not available where TP has received and ignored the various notices, did not produce records and information, refused to meet with the IRS and etc.
d. Next stage - the 90-day Statutory Notice of Deficiency ("SND"): top
If TP files no protest to appeal the proposed tax shown in the report the program (ASFR, AUR, Collections or Exam) that worked the case prepares the Statutory Notice of Deficiency (“SND”).
The whole of IRM 4.8.9 is an excellent resource because it states in thorough detail the processes relating to the preparation and issuance of the 90-day Notice of Deficiency. Many cases relating to Notice-based issues are cited and many IRM cross-references are provided. This part of the IRM is a centralized resource from which further research can be launched concerning the technical requirements and processes involving Notices of Deficiency.
1. Notice of last filing date
Letter 3219 is the 90-day letter ("SND"). It explains the deficiency proposed, shows the computation of tax determined to be due, and provides TP the opportunity to agree. It also notifies TP of the right to file a petition with the Tax Court for a redetermination of tax. By law, the SND also notifies TP of the right to contact the Taxpayer Advocate, and it is required to state the last date for filing the petition with the Tax Court. See last sentence of IRC 6213(a).
a. IRC 6212 provides authority to issue the SND.
b. “Last known address” requirement:
The law requires the SND to be mailed to the TP's last known address. Sometimes disputes erupt over whether TP received the SND, whether IRS mailed the SND, and whether IRS used the correct address . See the authorities cited concerning this requirement at IRM 126.96.36.199.2 et seq. The manuals also lay out the rules that govern the issue of whether TP properly provided a new address that IRS was obligated to use. Phone calls and different return addresses on correspondence DO NOT meet the notice requirements. IRS knows that failure to use the correct address is fatal to the validity of the SND. The requirement is statutory. IRC 6213. Remedy: If TP did not receive the required notice and the IRS administrative files do not contain the evidence to establish correct mailing occurred, rules discussed below automatically entitle TP to a reconsideration. Furthermore, the invalidity of the underlying assessment is open to challenge before Appeals in a Collection Due Process hearing under IRC 6330(c)(2)(B).
e. Deficiency process: the 90-day freeze: top
When the SND is mailed everything is on “hold” pending the TP’s response to the SND. IRC 6213
1. 90 days to file petition
Under 6213 TP has 90 days to petition US Tax Court
a. IRS cannot assess, collect or issue additional SND’s during the period
b. SND tolls the statutes for assessment and collection
2. Deficiency process - if no petition:
If no petition is filed in Tax Court, IRS makes the assessment at the end of the "freeze-period."
a. Authority to assess where TP fails to file a petition is stated at IRC 6213(c).
3. Deficiency process - petition filed with Tax Court: But if TP filed a petition, IRS must await the finality of the Tax Court processes before assessing. IRC 6213. There is a statute that states the IRS may assess only the amounts determined by Tax Court. IRC 6215. Nothing more can be tacked on for that tax period - no more tax, no more additions to tax.
C. RETURN FILED - adjustment processes preceding deficiency process top
Where a return was filed there are two IRS functions that will usually propose deficiency assessments based on the returns. The AUR-program typically works only from information reports and deals by correspondence only. The Examination function examines all tax returns to verify reported income, deductions, credits and etc. - sometimes through "office audit" (you go to the IRS' offices) and at other times through field examinations (the Revenue Agent appears at your premises to conduct the examination). Estate Tax Attorneys are also considered field-examiners. This section also provides discussion about early-resolution "mediation" programs named "Fast Track Mediation" ("FTM") and "Fast Track Settlement" ("FTS").
AUR handles cases where a filed return appears to have omitted income amounts reported to the IRS on Forms W-2 and 1099.
a. CP 2000 IS the 30-day letter from AUR
From the “Automated Under-Reporter” unit (AUR) a notice CP2000 will arrive. Since it is based on third-party reports, the CP2000 automatically describes proposed changes without any prior communication with TP. CP2000 simultaneously provides notice of right to Appeal. No other examination is necessary to propose adjustments to the return.
b. SND comes next
If TP does not respond and does not request an appeal within the 30-day period, the SND (90-day letter) will be served. The “deficiency processes” above at items B.4.c through e are the same.
c. Duty to investigate information reports
Every taxpayer may deny the information reports being relied upon. The IRS is obligated to obtain proof to meet the burden described in IRC 6201(d). However, 6201(d) has no effect where the taxpayer has not been "fully cooperative."
2. Examination where TP responds: Expediting the exam top
Representatives should comprehend several parts of IRM 4.10 because examiners are required to observe and apply those sections as the examination progresses. The following link opens through your internet browser to the entire index: IRM Part 4. If representatives are engaged for purposes of examinations, IRM Part 4 is going to be an important resource to consult in many situations. This link is provided at various places through this outline so you don't have to return to this exact location to connect to the IRS' web site.
a. Examination progression:
Generally IRM 4.10 and all of the many items indexed at that page express the examination guidelines and mandates. This link opens to the IRS' Index to Part 4, Examination Process, posted on the internet. Scroll down to IRM 4.10 and you will find the many subparts specifically addressing the examination of income tax returns. Examinations tend to follow these stages:
1. Examination of books and records will proceed at the pace and in the sequence controlled by the examiner. IDR's (information document requests) will tend to describe the documentary evidence and explanation sought by the examiner. Keep track of the inventory of items you deliver in response to the IDR's. Consider scanning everything possible into electronic files and delivering responses on a CD. It greatly facilitates the process of inventory-control and organization.
2. Summons authority can be applied where TP fails to respond to the examiner's requests. 7602, 7609 (third-party). The US Attorney Manual on Summons Enforcement provides a detailed description of the enforcement process.
3. Examiners are advised to regularly propose conclusions as issues are concluded. It is designed to expedite closing and to promote resolution through discussion. SOME EXAMINERS will GUARD their CONCLUSIONS until the very last moment. It is contrary to the provisions of the manuals (discussed next).
3. Insist upon these benefits as the exam progresses: top
a. Proposing adjustments regularly:
IRM 188.8.131.52 et seq (published in continuation-1 of IRM 4.10.7) requires examiners to regularly propose adjustments as the examination progresses. This is very beneficial to the taxpayer and representatives should insist upon adherence to this guideline. It promotes prompt termination of the examination. If an examiner's conclusions are cloaked until the arrival of the 30-day letter transmitting the examiner's final report TP can be placed in a difficult situation. That approach is sometimes unfair and is an inefficient way to identify and resolve issues.
1. It is appropriate to persistently ask the examiner to state positions at the earliest stages. You have plenty of support in the IRM's to buttress your insistence.
2. Eliciting the examiner's views and conclusions will enable the parties to comprehend exactly where misunderstandings, evidence that may be lacking, and errors may lie. It will facilitate resolution to communicate very regularly and fully.
3. Where the evidence provided to the examiner supports TP's position and the examiner is expressing disagreement, consider taking the matter to FTM (Fast Track Mediation) discussed next. Through "FTM" representatives obtain an opportunity to "get a free look" at how the respective positions will tend to be received by Appeals. FTM is not a binding process, and TP may still appeal the matter later if the FTM-session does not produce an outcome acceptable to the TP.
Before any final report and 30-day letter are issued the manager is required to become involved. IRS tends to hurry past this step and managers tend to not involve themselves. Change that behavior when TP’s position is very sound. Develop an organized presentation and confer face-to-face with that manager. This does not displace FTM-rights or appeal rights. IRM 184.108.40.206(4) requires managerial involvement before a 30-day letter is issued. [This is located in IRM 4.10.8 (Cont. 1)]. This may promote resolution of issues much more rapidly and may obviate the necessity of filing an appeal.
c. Using FTM: top
Fast Track Mediation ("FTM") must be offered in most situations. IRM 220.127.116.11.3.1. See Pub 3605. FTM can be used as an alternative to the much longer process of a formal appeal. It is also potentially useful where there is a protracted examination. FTM can sometimes expedite closing disputes because it places both sides before the Appeal Officer much faster that the traditional appeal path.
1. FTM is not viewed as being available until the end of the examination:
There may be institutional resistance to TP's insistence upon submitting to FTM before the examination is ready for closing on a final report. Not so in the case of "FTS." While the IRM commands that TP shall be offered Fast Track Mediation ("FTM") the offer is typically not extended until it is mentioned for the very first time in a 30-day letter.
2. IRM 18.104.22.168 (the Appeals part of the IRM's) indicates that FTM is expected to occur at the end of the examination. There is absolutely no reason why TP cannot insist upon FTM as proposed adjustments are presented throughout the course of the examination, but the government' materials reveal that for resolving issues in ongoing examinations, FTS is the "magic-name" that must be used to obtain Appeals' involvement
Note: Estate & Gift is within SBSE. IRM 4.25.1 expressly advises that both FTM as well as FTS ("Fast Track Settlement") are available in E&G examinations.
1. YOU must propose FTS
Nowhere in the IRM's are examiners required to offer "Fast Track Settlement" as they are "Fast Track Mediation." And FTS is mentioned in just a single publication that addresses the Appeals Alternative Dispute Resolution programs. According to Pub 4167 FTS is specifically intended to promote resolution of fully developed issues in dispute while the examination of other issues is ongoing. It is not a process that many know about. Descriptions of the availability and procedural guidelines for FTS are found in two main places: Announcement 2006-61 and IRM 8.26.2. The only place in Part 4 of the IRM's (Examination Process) where it is mentioned is at 4.25.1 concerning Estate & Gift examinations.
2. Use while exam on other issues progresses
FTS is intended to "resolve tax controversies at the lowest level without sacrificing the quality and integrity of those determinations." IRM 22.214.171.124. Initiating the process can be done by either TP or by Exam. Count on it: Exam is NOT going to initiate the process. Both parties must agree to the process and sign a statement to that effect. IRM 126.96.36.199. If the Examination function will not agree to submit to FTS there is no remedy TP can apply to force Exam to join in the submission. FTS actually invokes Appeals "settlement authority under Delegation Order 66 when needed to effect a settlement based on the hazards of litigation." Therefore, expect this process to frequently result in a hazards-percentage settlement proposal in most situations. IRM 188.8.131.52. After all, the process is available only for fully developed issues where both parties are fully apprised of all the evidence and the applicable rules of law. Neither party is obligated to accept the settlement proposal from Appeals. IRM 184.108.40.206(2). This program is specifically intended to produce settlement of disputes before the 30-day letter issues. IRM 220.127.116.11(1). FTS is specifically intended to accomplish the objectives expressed in IRM 18.104.22.168.1:
". . . resolving issues at the lowest level possible, using settlement authority during Exam process, reducing overall case cycle time, reducing taxpayer burden, reducing overall resource needs for the Service." (emphasis supplied)
3. Qualifying Criteria
4. Examination - TP not responsive top
IRS has power to summon TP and 3rd parties to produce records and to give testimony. §7602, §7609 (3rd party summons). The US Attorney Manual on Summons Enforcement provides a detailed description of the enforcement process. Keeping records and producing them on demand is required by the law. And where a person refuses to do so the summons enforcement processes can result in things as extreme as an arrest. See non-technical discussion of the matter through this link.
Summonses do not have to be issued to tie a taxpayer in knots. IRS can simply compute adjustments on the basis of substantiating evidence it possesses. Where TP fails to substantiate deductions, credits and etc. the IRS can simply disallow all credits, deductions etc. and compute a deficiency.
c. The same Deficiency Process as above will be followed, culminating in the SND followed by assessment where TP does not respond.
D. Penalties: No deficiency procedures apply. top
Useful resources include the Penalty Handbook at IRM 20.1.1 et seq.
The Penalty Handbook is an excellent resource to representatives. It identifies each of the penalties, the elements of available defenses, analytical tables provided as guidance to IRS employees in considering TP-defenses and other valuable information. IRS employees will tend to rely upon these manuals. IRM 20.1.1 is the main resource listing all penalties and penalty factors. There are TWO IRM's bearing that number. The second publication is formally designated as IRM 20.1.1(cont. 1). IRM 20.1.2 relates directly to the IRC 6651 penalties. IRM 20.1.3 relates directly to the Estimated Tax Penalties. IRM Exhibit 20.1.1-2 is published as part of IRM 20.1.1(cont.1). There, the manual provides a chart addressing "Penalty Relief" and "Penalty Reason" and are provided as resource-references for IRS employees. Representatives should review those two charts when penalties are being asserted against TP.
1. IRC §6651(a) – late file/late payment
a. IRS automatically assesses these penalties without prior notice. IRC 6665 is the statute that permits penalty-assessment without application of the deficiency procedures described above at II.B.4.c et seq. HOWEVER, where IRS is proposing to assess more tax than was reported on a return, IRS will also propose to assess delinquency penalties because the amount will not be paid until after the time it should have been paid with a return. No amount of such a penalty can be assessed unless and until the deficiency processes culminate in an assessment. It is only when the IRS can assess the underlying that the related penalty can also be assessed. Until a tax becomes due through the processes there can be no basis for assessing the penalties associated with that tax.
b. Notice of the assessed penalty is mailed to TP without prior communication from the IRS.
1. This notice invites TP to agree or explain why the penalty should not be applied. If TP does nothing the assessment will stand. TP is provided the opportunity to prove the penalty should not be applied based on the evidence. Where available, use documentation as proof.
a. Police and fire reports
b. Medical or hospitalization proof
c. Proof of absence from U.S.
d. Registered or CM-RRR proof of mailing and etc. to establish TP's timely compliance.
c. If TP disagrees then evidence of “reasonable cause” should be provided to support TP's position. IRS will consider the response and either
1. Abate the penalty, or
2. Send written notice rejecting the defense. A 30-day period is provided to request Appeals hearing. During the time the matter is pending with Appeals all collection activity is suspended.
2. IRC §6654 – quarterly estimated tax penalty
This penalty is always computed and assessed automatically after returns are filed and the failure to meet the required amounts is revealed.
a. General rule – no “reasonable cause” defense can be raised.
b. Waiver of the penalty is possible under §6654(e)(3) relating to casualties, etc.
After assessment following any of the procedures described above, the amount assessed becomes a debt due and owing. The case becomes a collection matter. The various collection notices and letters will begin arriving.
III. Challenges to assessments top
A. Where procedures were followed correctly
If an assessment is made and IRS fulfilled the statutory requirements:
1. Reconsideration Procedures:
See Reconsideration Procedures. Where evidence not previously submitted to the IRS is available, then representatives might request reconsideration if TP meets the qualifying criteria.
[Abatements: IRC 6404(a) permits IRS to abate the unpaid portion of any tax which is excessive, assessed after expiration of the statute, or which is erroneously or illegally assessed. But the statute proceeds to specifically provide that income, estate and gift taxes cannot be abated. IRC 6404(b). No claim for abatement of such taxes can be filed according to 6404. This dilemma is likely a major consideration underlying the administrative determination to institute the reconsideration procedures.]
2. Claims for Refund:
Whether or not there is new evidence, TP may pay the tax and file a claim for refund. If IRS rejects the claim TP can file suit for a refund.
1. Mandatory Reconsideration:
IRS Policy Statement 2-89 published in IRM 22.214.171.124.15 specifically states that a request for reconsideration will be considered if there was an IRS computational or processing error in assessing the tax. This is the TP's best alternative in most cases where some systemic, procedural error occurred. For example, IRS' failure to issue any notice in the manner required in any situation (income tax, trust fund, transferee, jeopardy/termination and etc.) is a fatal error. Reconsideration provides an expeditious remedy.
2. CDP Hearing:
Under IRC 6330(c)(2)(B) TP is specifically authorized to challenge the existence of the underlying liability where TP did not receive a notice of deficiency. However, if a notice was either received or if it was mailed as required, this same statute will typically bar TP from challenging the tax at Appeals. See summary at "Reconsideration Procedures" and the discussion at "TP's Due Process Alternatives" in the top-menu.
3. Refund litigation
It is a repugnant alternative to taxpayers because the entire assessment must be paid (unless the tax is "divisible" as with the trust fund tax under IRC 6672).
TP may submit an offer in compromise based on doubt as to liability. The chart at IRM 126.96.36.199.3 specifically provides that if the administrative file does not support the assessment the tax is to be abated in full and a withdrawal of the offer secured. At other places in the IRM's and also in Form 656-B taxpayers are advised that OIC is not appropriate when the entire liability is in dispute. See paragraph III of the outline on compromises. Nevertheless, the chart at IRM 188.8.131.52.3 openly makes a different declaration. There are unspoken elements. What is not openly disclosed by this part of the IRM is that this offer was in "processable" form or it would not have been received. THAT means that some amount was offered to compromise the liability and the required accompanying payment was included in the submission to the IRS. This IRM also is also not revealing that the possibility of tendering a successful "DATL" offer is less likely in relation to the levels of review the case may have encountered in its history. If exam disagreed with TP's view of the law, and the examiner's conclusions were sustained by Appeals and perhaps by Counsel upon review of a proposed notice of deficiency, the odds of obtaining a successful OIC based upon DATL do not favor TP. top