Anatomy of a Federal Tax Controversy

Anatomy of a Federal Tax Controversy

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  • Step one: The IRS conducts a tax audit. A tax audit is an examination of your income and expenses to ensure that you correctly reported your tax liability. All types of tax returns are subject to audit, including income, business, estate, and gift tax returns.
  • Step two: The 30-day letter
    • If a revenue agent determines that a deficiency exists and the taxpayer does not agree, the agent prepares a “Revenue Agent Report” (RAR). Included with the RAR is a cover letter and a settlement agreement.
    • The cover letter is known as a “30-day letter” because it informs the taxpayer of the right to request a conference with the IRS Appeals Division within 30 days.
    • A taxpayer who receives a 30-day letter faces a strategic decision between requesting a conference with the IRS Appeals Division or doing nothing.
  • Step three: If a taxpayer requests an Appeals conference but the parties do not come to an agreement, or if the taxpayer simply ignores the 30-day letter, the IRS will send the taxpayer a notice of deficiency (i.e., a “90-day letter”).
    • The notice of deficiency provides the taxpayer with two options: (1) pay the asserted deficiency and follow the refund procedures or (2) petition the tax court to contest the claimed deficiency within 90 days of the date the notice was mailed.
    • The mailing of the notice of deficiency begins a period during which the IRS is prohibited from assessing tax. If the taxpayer petitions the tax court, the “prohibited period” continues until the tax court’s decision is final.
  • Step four: Taxpayer petitions the Tax Court
    • Issues that can be raised in Tax Court: The taxpayer can challenge the deficiency claimed by the IRS and any overpayment claimed by the taxpayer.
    • The taxpayer can appeal the resulting decision to the Court of Appeals for the circuit in which the taxpayer resided at the time he filed the petition.
  • Step five: If the taxpayer does not respond to a notice of deficiency either by petitioning the Tax Court in the time provided or by paying the tax outright, the IRS will make an assessment.
    • Once an assessment is made, it becomes a debt of the taxpayer.
    • The IRS must give notice and demand for payment to the taxpayer as soon as practical and within sixty days of making an assessment.
    • If the taxpayer refuses or neglects to pay the tax after notice and demand for payment, the amount of the tax liability becomes a lien on all of the taxpayer’s real and personal property until it is paid.

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