Gowen v. Commissioner, TC Memo 2012-40 (February 13, 2012)
The assessment process, though a crucial concept in the administration of federal tax law, is commonly misunderstood by taxpayers, and sometimes even by practitioners. Misinformation about what an assessment is and its consequences can result in hard lessons, as George and Maryalice Gowen recently learned.
The IRS audited the Gowens’ returns for two years and proposed substantial deficiencies. As required by law, statutory notices were mailed to their then-current address. At this point, the Gowens might have obtained information about their options from a tax professional with enrolled agent training. It is unclear why, but George and Maryalice did not file a Tax Court petition within the requisite 90 day period, and the proposed deficiencies became assessments. Nonetheless, it is clear that they disagreed with the audit results, and they requested an audit reconsideration. Their request was granted, but the reconsideration resulted in the same outcome.
The IRS then filed a Notice of Federal Tax Lien with respect to the debt. Still adamant that the audit results were incorrect, the Gowens timely filed a request for a Collections Due Process (“CDP”) hearing with the IRS Appeals Office when they were notified that a Notice of Federal Tax Lien had been filed against their property. At the hearing the Gowens argued that the underlying tax liability was incorrect. But the matter was no longer an exercise to rectify by applying a CPA review course tax computation. The IRS Settlement Officer simply explained to them that the correctness of the liability was no longer at issue, verified that the requirements of applicable law and administrative procedure had been met, and sustained the filing of the NFTL as being proper.
Dismayed that they were being subjected to a tax liability that they did not rightfully owe, this time they took advantage of their right to appeal the CDP decision to the Tax Court. As Judge Swift explained to them, however, their efforts were for naught. They had a chance to contest the audit result when they received the statutory notice of deficiency after the original audit, but they did not. Thereafter an assessment was made and, once the assessment is in place it is a legally enforceable debt to the U.S. government and there are no compulsory mechanisms for challenging it before it is paid. Taxpayers needing professional representation before the IRS should conduct an enrolled agent search or hire an attorney or CPA before an assessment arises. The correctness of the liability became moot once the Gowens allowed the proposed deficiency to ripen into an assessment.
Contrary to popular belief (and to what some IRS notices seem to suggest), the IRS cannot collect a penny from a taxpayer unless and until an assessment takes place. An assessment is an actual event, and until it happens, there is no tax liability. The most common confusion probably occurs with a CP2000 notice, which is sent to a taxpayer when there is a “mismatch” between what is reported on a return and the information reports (i.e., Forms W-2, 1099, etc.) that have been filed with the IRS. These notices contain computations similar to those in an enrolled agent study course. Taxpayers often misinterpret a CP2000 notice as a tax bill. It is not. Rather, it is really just a request for additional information, which CPA preparation courses teach accountants to interpret. For taxpayers who are unclear about the meaning of these notices, accountants or enrolled agents can provide enlightenment. Despite the wording of this and a few other notices, the IRS is legally prohibited from engaging in collection activity before assessment.
Assessment occurs when an IRS official signs a summary record sheet containing basic demographic information about the taxpayer, the amount of the tax, the type of tax, and tax period. All principal assessments must be recorded on Summary Record of Assessments. Although a paper Form 23C is sometimes used for an individual case, as a practical matter Summary Records of Assessment are automated listings of an entire day’s or week’s total amounts processed. They are listed by date, are signed by an authorized assessment officer, but do not contain data that would identify any individual taxpayer. It is the signing of these documents that sets the liability in stone (from a legal perspective) and permits collection activity. An assessment is much like a court judgment; once it is entered, the toothpaste is out of the tube and the taxpayer is generally stuck with it.
The tax liability can make its way to a Summary Record of Assessment in a variety of ways. For example, the IRS will automatically assess any tax shown on a taxpayer’s return or any change that results from a math or clerical error evident from the face of the return. Otherwise, the IRS must generally engage in a deficiency procedure before an assessment can be made. Note that a deficiency assessment does not depend on a tax return being filed. If no return has been filed the IRS can make the assessment based on a “substitute for return” that it creates from the information that has been reported to the IRS.
Although deficiency procedures can take a variety of forms and may or may not include an audit, one mandatory requirement is a Statutory Notice of Deficiency, sometimes referred to as a “90-day letter.” That letter is the taxpayer’s one and only ticket to a Tax Court hearing on the merits of the assessment before it takes place. Although there may be some opportunities to reconsider the assessment after it has been made, these are all done entirely in the discretion of the IRS and the taxpayer has no “right” to contest a properly entered assessment.
CDP hearings, as George and Maryalice Gowen found out, are to consider the propriety of IRS collection activity, not the correctness of the assessment. In a CDP hearing, as well as in a Tax Court appeal of the CDP hearing results, there is no opportunity to challenge the underlying tax liability if the taxpayer has had a prior opportunity to do so on receipt of a notice of deficiency.
Taxpayers and their representatives will sometimes continue negotiations with the IRS after a 90-day letter is issued. The IRS agent may even suggest that the 90-day letter can be retracted. Although this is technically true, it is rarely done. More importantly, the 90-day deadline for filing a Tax Court petition is an absolute procedural requirement; not even the court itself has the authority to permit a hearing on the proposed assessment if the petition is not filed on time.
As a result, if a genuine issue exists with respect to the correctness of a proposed assessment and a Statutory Notice of Deficiency has been issued, it is almost always a wise decision to file a Tax Court petition. An important lesson for conducting CPA or enrolled agent jobs. Once filed, the petition will generally be sent to the Appeals Office, and there will be an opportunity to negotiate a conclusion to the matter without actually having the case heard before the court. If this opportunity is missed, however, taxpayers may find themselves stuck with the liability, much like the Gowens.
Which of the following is a required step before the IRS can make an assessment pursuant to a deficiency procedure?
- Issuance of a Statutory Notice of Deficiency
- An audit
- A Collections Due Process hearing
- Filing a tax return
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