Chapter Four: The Notice of Deficiency
With only a few exceptions, the IRS cannot assess an income, estate, or gift tax deficiency until after sending a statutory notice of deficiency. See IRC §§ 6212 and 6213(a). The statutory notice of deficiency, the "90-day letter", gives the taxpayer ninety days to file a petition in the United States Tax Court challenging the proposed deficiency, (150 days if the taxpayer’s address is outside of the country on the day the notice of deficiency is mailed, and the taxpayer is actually out of the country on that day). See IRC §6213(a). The IRS cannot assess a proposed deficiency until after the ninety day period. If the taxpayer files a petition with the Tax Court, then the IRS cannot assess the proposed deficiency until after the Tax Court's decision becomes final. See IRC §6213(a).
A notice of deficiency must be sent by registered or certified mail to the taxpayer’s last know address. So long as both requirements are met, the notice is sufficient even if the taxpayer is deceased, or is under a legal disability. If the proposed deficiency is from a joint return, a single notice is sufficient unless either spouse has notified the Service that separate residences have been established. Once the Service proves that a notice was mailed by registered or certified mail to the taxpayer’s last known address, it enjoys a strong presumption of delivery, even if it is never received by or signed for by the taxpayer. See Wilson v. Commissioner, 564 F.2d 1317 (9th Cir. 1977). But also see Pietanza v. Commissioner, 92 T.C. 729 (1989).
If the IRS uses an address other than the last known address, the notice is not invalid if the taxpayer receives the notice in time to file a timely petition. See Erhard v. Commissioner, 96-2 USTC ¶50,331. Additionally, if the notice is not sent by registered or certified mail, but the taxpayer receives the notice in time to file a timely petition, the notice is still valid. See Balkissoon v. Commissioner, 995 F.2d 525 (4th Cir. 1993).
The last known address is defined as the last known permanent address or legal residence of the taxpayer, or the last known temporary address of a definite duration or period to which all communications during such period should be sent. The IRS is entitled to rely on the last address listed on the taxpayer’s most recent tax return, unless there is clear and concise proof of a change of address being made with the IRS. See Pomeroy v. U.S. 864 F.2d 1191 (5th Cir. 1989). Additionally, once the Service mails a notice of deficiency by registered or certified mail to the taxpayer’s last known address, the IRS need not take further steps to assure its delivery, even if said notice is returned as undeliverable. But also see IRM 4253.5 (1-30-87) and Armstrong v. Commissioner, T.C. Memo 1990-191.
If the notice of deficiency is not sent to the taxpayer’s last known address, but the taxpayer eventually receives the notice, the taxpayer can either file a petition with the tax court, pay the tax and file a claim for refund, or begin an action in federal district court seeking an injunction. If a petition with the Tax Court is filed, the Court will dismiss the case. Prior to doing so, however, the Court will determine one of two things: (1) the notice was valid, thus the petition is late; or (2) the notice was invalid because it was sent to the wrong address. If the case is dismissed for the latter, the assessment, if made, is also invalid, and the Service must issue another notice of deficiency. An invalid notice of deficiency does not suspend the running of the statute of limitations on assessment.
The IRS can not issue a notice of deficiency without first making a determination of a taxpayer’s liability. However, if the notice of deficiency does not reveal that no such determination was made, it is presumed to have occurred. See Clapp v. Commissioner, 875 F.2d 1396 (9th Cir. 1989). However, if no determination is made, then the notice is invalid. See Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987).
If the taxpayer pays a tax liability in full, prior to the issuance of a notice of deficiency, then no deficiency exists and the IRS need not issue a notice of deficiency prior to assessment. However, if the taxpayer pays only part of a liability, or pays the total liability in full after the issuance of a notice of deficiency, then the Tax Court’s jurisdiction is unaffected by the subsequent payment. Additionally, if the taxpayer makes full payment in the form of a bond rather than directly to the liability, the Tax Court’s jurisdiction is also unaffected. See IRC §6213(b)(4) and Rev. Proc. 84-58.
Exceptions to the notice of deficiency requirement include:
The tax shown on a return (and any tax paid) may be assessed by the IRS without prior notice to the taxpayer. See IRC §§ 6201(a) and 6213(b)(4). Such assessments are known as summary assessments. They are also referred to by the misnomer of "self-assessment."
Additional income taxes arising from mathematical errors can also be summarily assessed. Assessments based on mathematical errors, however, cannot be collected until after the IRS has given the taxpayer notice of the assessment. The taxpayer then has sixty days to request an abatement of the assessment. The IRS must abate the assessment if a timely request is made by the taxpayer. After an abate-ment, the additional taxes attributable to the mathe-matical error will be subject to the statutory notice of deficiency procedures. See IRC §§ 6213(b)(1) and (2). Mathematical errors include mistakes in arithmetic, incorrect use of an IRS table, inconsistent entries on a return, omissions of information required to substantiate an item on the return, and a claim that exceeds a limitation imposed by statute or regulation. See IRC 6213(g).
- Termination and Jeopardy Assessments:
Termination assessments (IRC §6851) and jeopardy assessments (IRC §6861) can be made by the IRS without prior notice to the taxpayer. They can be made only if the IRS determines that collection of a proposed additional tax will be prejudiced or jeopardized by further delay. Termination assessments are used to assess proposed tax deficiencies before the close of the taxpayer's current taxable year or before the taxpayer's tax return is due for a preceding taxable year. Jeopardy assessments can be used for any taxable year but only if the taxable year has ended. A taxpayer may seek expedited administrative and judicial review of termination and jeopardy assessments. See IRC §7429(a).
If the taxpayer does not timely file a petition in the Tax Court, then the deficiency will be assessed and the IRS will proceed with collection. See IRC §6213(c). The taxpayer, however, can still pursue an administrative claim for refund after paying the assessed tax deficiency. If the refund claim is denied, or if the IRS fails to act on the claim within 6 months, then an action for refund can be commenced in a federal district court or the United States Court of Claims. See IRC §7422. Pursuant to IRC §6511, a claim for refund must be filed within the later of three years from the date the return was filed or two years from the date the tax was paid. Additionally, if a claim for refund relates to an overpayment of self-employment tax attributable to a Tax Court employment status proceeding under Code § 7436, and the claim would otherwise be prevented by operation of any law, such credit or refund may be allowed or made if a claim is filed on or before the last day of the second year after the calendar year in which the Tax Court decision becomes final. This exception does not apply where the taxpayer previously compromised his/her tax liability for the same year(s) in issue in the litigation. Lastly, if the taxpayer was unable to manage his or her financial affairs by reason of a medically determinable physical or mental impairment that can be expected to result in death or that lasts for a continuous period of not less than 12 months, the running of the statute of limitations for claiming refunds is suspended (IRS Restructuring and Reform Act of 1998).
Once a notice of deficiency is issued by the IRS, the Tax Court obtains jurisdiction of the matter if a timely petition is filed with the Tax Court. If a petition is not timely filed, the Tax Court will not have jurisdiction of the matters in issue. See Cerrito Est. v. Commissioner, 73 T.C. 896 (1980).
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