While certain provisions of the Internal Revenue Code (IRC) authorize deviations from the regular assessment procedures, these happen only when certain requirements are met – including the possibility that the collection process may be rendered ineffectual. These deviations from typical assessment procedures can result from circumstances such as an insolvent taxpayer, a taxpayer attempting to flee the country, or an impending statute of limitations deadline.
In general, however, the tax assessment process follows statutorily prescribed steps.
Based on the results of an examination conducted by a revenue agent, where the agent makes a finding of either deficiency or liability, a letter is sent to the taxpayer advising him of his right to file a protest, present additional evidence, or otherwise put into issue the results of the examination within 30 days. The taxpayer is given the right to request a conference for this purpose, or to appeal the examination results to the Appeals Office. Throughout the entire conference, the IRS has the authority to make a settlement, should one be agreed upon by the parties.
Statutory Notice of Deficiency
If, however, the parties are not able to come to an agreement, then a statutory notice of deficiency is issued to the taxpayer. This notice provides details of the deficiency, including the nature and amount of the taxpayer’s liability.
The notice is brought before the US Tax Court through a Petition that must be filed within 90 to 150 days. The minimum jurisdictional requirement for the US Tax Court to hear the petition is the issuance of the statutory notice of deficiency. Without the notice, the tax court has no jurisdiction, and the petition cannot be heard.
Service to the Taxpayer
Similar to any judicial proceeding where service to the parties is required, before the US Tax Court can proceed on hearing the petition, service of the notice of deficiency must first be made on the taxpayer.
This notice of deficiency informs the taxpayer that he has the right to contest his liability in court. If the requirements of proof of notice and demand for payment have not been met, interest on the liability is capped after 30 days.
Once the tax court takes judicial cognizance of a petition, however, no further notices of deficiency may be brought against the taxpayer. Should the taxpayer have any additional liabilities that arise after the first statutory notice of deficiency, they must be brought in the same proceeding.
Burden of Proof
The burden of proof in such a case lies with the taxpayer. The actions of the IRS are presumed to be valid and correct. This assumes, however, that the IRS was able to make the necessary allegations and reasonable evidence to support the statutory notice.
The logic behind this is that it is the taxpayer who is in the best position to provide all necessary evidence to disprove his liability. This is why it is so important for any taxpayer to maintain meticulous, complete, and organized records dating back to at least six years from his most recent return.
If the court is satisfied that the taxpayer has provided sufficient and credible evidence supporting his claim, then the burden shifts to the IRS.
In some instances, however, the burden of proof lies primarily with the IRS. This includes any assessments of penalties, an allegation of fraud, or additional tax liabilities in addition to those contained in its initial petition. The IRS also has the burden of proof to show a reasonable connection between the taxpayer and illegal and criminal acts if it claims that the income assessed originated from illegal activities.
–By Jin Kim. Jin Kim is a tax attorney at Sacramento Law Group LLP. She represents clients with tax debt in offers in compromise, audits, cannabis taxation matters, and other tax resolution services.