It seems easy to surmise that a notice of assessment of a taxpayer’s liability is intended to inform the taxpayer that he is required to pay his tax liability. The end game for any assessment is, of course, the collection of taxes.
Sometimes, however, the notice of assessment may not actually end in the taxpayer paying tax liabilities.
A Finding of Overstatement and Refund/Reversal
Sometimes, rather than finding taxpayer liability, the assessment process may actually yield the finding that the taxpayer overstated or overestimated his income tax payments. When this happens, the IRS may make a summary assessment of the overstatement and issue a refund to the taxpayer.
More often, however, the IRS opts to make a reversal of the overstated prepayment credit rather than issue a refund. Of course, if any refund or reversal was also made erroneously, the IRS may again make an assessment and collect the improperly claimed credits.
Restitution
Restitution, as defined, is the restoration of something to its rightful owner. In criminal cases, for instance, restitution may be made to a party litigant of property stolen from him by an accused.
In a tax case, the party litigant would be the IRS, and restitution involves the return to it of any tax-related losses due to a defendant’s criminal conduct. Obviously, this means that the taxpayer was involved in criminal conduct, and in the resulting criminal case, restitution may be included as part of his plea deal. For this purpose, the IRS has the authority to assess and administratively collect restitution for failure to pay a tax under the Internal Revenue Code. And given that restitution-based assessment is based on criminal conduct, the statute of limitations does not apply. Once the assessment is made, however, the statute of limitations does begin to run as it pertains to the collection.
Furthermore, whereas the burden of proof typically lies with the taxpayer, when it involves criminal conduct and illegally sourced income, the IRS first has the burden of proof to show evidence that there is a credible link between the taxpayer or defendant and the illegal activity that generated the income.
Math or Clerical Errors
Math or clerical errors on a return are generally considered mistakes, which can be summarily assessed by the IRS. This could involve mistakes in computation, the use of a formula or table, an omission that was required to be included on the return, or an entry of a deduction or credit that exceeds the statutory limits.
Since the IRS can conduct an inquiry and issue a notice of assessment summarily, the only time that a taxpayer may assert an argument or make an issue of the assessment is after he receives the notice. Then, however, he can request a 60-day abatement during which time the IRS cannot collect on the deficiency. If the taxpayer requests an abatement, and abatement is granted, the IRS then must follow regular deficiency procedures and reassess the assessed deficiency or tax liability.
Immediate Assessment in Receivership and Bankruptcy Cases
If the taxpayer is involved in a pending receivership proceeding or the taxpayer or his estate is undergoing bankruptcy proceedings, the IRS can make an immediate assessment of any deficiency. In a receivership proceeding, however, immediate assessment may only be made after a receiver is appointed. And in a pending bankruptcy case, the assessment must be determined as a deficiency by the bankruptcy court in exercise of its jurisdiction.
-By Jin Kim. Author of the Sacramento Tax Blog and other local tax publications.