An assessment is the recording of a tax liability into the IRS system on Form 23-C (Assessment Certificate). IRC §6203. Assessment is one of the conditions precedent to collecting the tax. The information recorded includes the taxpayer’s name, social security number, year in question and the amount and type of tax involved. The date Form 23-C is signed is called the assessment date. This date is important because it triggers two statutes of limitations: (1) notification of the taxpayer and (2) collection of the tax. Taxpayers can obtain proof of assessment.
The IRS has three methods in which it assesses taxes. IRC §6203. The first method is the automatic assessment that occurs when a taxpayer files a return without paying the tax due. This is sometimes referred to as self-assessment. The second is the deficiency assessment that occurs after examination and administrative and judicial review. If the taxpayer files a petition to the Tax Court after receipt of a Statutory Notice of Deficiency, assessment is postponed until the Tax Court’s final decision. The third method of assessment is the termination or the jeopardy assessment. An example of this kind of assessment may occur when the IRS believes the taxpayer is planning to leave the country in an effort to evade paying the tax liability.
After the taxpayer has failed to respond to the administrative 30-day letter, the IRS will automatically issue a Statutory Notice of Deficiency, commonly referred to as a 90-day letter or stat notice. (There is one other 90-day letter that deals with Innocent Spouse Relief.) The 90-day letter may not come for several months after the audit has ended, and it must be sent to the taxpayer by certified mail. It is sent to the taxpayer’s address that is on file with the IRS. The 90-day letter provides the taxpayer with an opportunity to file a petition with the Tax Court for a redetermination of the deficiency.
After receiving the 90-day letter the taxpayer has three options; firstly, the taxpayer can file a petition to the Tax Court (this is the course of action most often taken in the Tax Clinic). The second option is to pay the amount in dispute and file a lawsuit for refund in the U.S. District Court or the U.S. Court of Federal Claims. This option is not available to most of the clients in the Tax Clinic simply because they are not likely to be in a position to pay the deficiency upfront. Furthermore, the Clinic does not handle refund suits. Thirdly, the taxpayer can again do nothing and the matter will move into the collections process.
If a taxpayer comes to the Tax Clinic before the 90-day period expires, then most likely the student attorney will file a petition with the Tax Court. The only cost associated with the filing of the petition is a sixty dollar ($60.00) filing fee, and if necessary, the student attorney can request that this fee be waived. It will be waived if it is shown that the taxpayer cannot afford the filing fee. When the client comes into the Tax Clinic the student attorney should notice the date on the 90-day letter, because the taxpayer has ninety days from the date on the face on the 90-day letter to file a petition in the Tax Court (150 days if the taxpayer resides outside the United States). This ninety day statute of limitations is of utmost importance in preserving the client’s rights. If the taxpayer does not respond to the 90-day letter, the amount will be assessed and the matter will be turned over to the collections division of the IRS. A student attorney who inadvertently fails to file a petition may receive a failing grade in the clinic.
Any petition filed with the Tax Court on or before the last day of the ninety day period shall be treated as timely. The 90-day letter is treated as if it was received by the taxpayer as long as it was sent to the taxpayer’s last known address. The ninety day period cannot end on a Saturday, Sunday, or a legal holiday observed in the District of Columbia. If it does, the petition is due on the next business day.
In general, the issuance of the 90-day letter followed by the filing of a petition to the U.S. Tax Court by the taxpayer triggers §6212(c)(1), which prohibits the IRS from determining any additional deficiency of income tax for the same taxable year, of gift tax for the same calendar year, or of estate tax in respect of the taxable estate of the same decedent.
During that ninety day period, the statute of limitations on the making of assessments or the collection by levy or a proceeding in court, in respect of any deficiency shall be suspended until sixty days after the taxpayer has a final decision form the Tax Court. §6503(a)(1)
The IRS has 3 years from the date the return was filed to issue a notice of deficiency. A return is deemed filed on the last day of filing for the tax year if it was filed early. Also, the IRS may file a substitute return for nonfilers. However, the statute of limitations on assessment will not begin to run in the following cases:
- False return
- Willful attempt to evade tax
- No return filed or
- Extension by agreement
There is a 6 year statute of limitations on assessment if the taxpayer omits in excess of 25% of the amount of gross income. For some time there has been a debate as to whether this 6 year statute applied only to the actual income left off the return or whether it could also apply to an overstatement of basis. Recently the Supreme Court in U.S. v. Home Concrete and Supply, LLC, SCT. 2012 stated that § 6501(e) is limited to income left off the return and that overstated basis did not constitute income left off of the return. Effective for returns filed after July 31, 2015 (and for returns filed prior to July 31, 2015 if the § 6501 limitations period calculated without regards to the new legislation has not expired), Congress overruled the Supreme Court and amended § 6501 (e) (1)(B) to define gross income as including an overstatement of basis or unrecovered cost. (Surface Transportation and Veterans Care Choice Improvement Act of 2015). The 6 year limitations period arises in the clinic frequently, where the taxpayer did not report the distribution from a retirement account. It may also arise if the client overstates a basis in an asset to claim larger depreciation or reduce the capital gain upon disposition.
IRC §6201: Assessment Authority
IRC §6202: Mode or Time of Assessment
IRC §6203: Method of Assessment
IRC §6501: Limitations on Assessment