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Determining the correct amount tax due (return filed or audit/protest/Tax Court) updated 8/21/04

After a tax is assessed and the IRS is attempting to collect it, you may believe the amount assessed is wrong (too high). Sometimes you can show that the tax amount is wrong. If you have had several opportunities and been unable to convince the IRS that the tax is too high before, it may be difficult now. If the tax period is a long time past or you have lost your records, e.g., due to a fire, flood, divorce or other disaster, it may be difficult or impossible to obtain records and documentation that would establish the correct tax amount due.

Audit reconsideration

You can request the IRS adjust the tax due ("audit reconsideration") and provide information justifying the change (e.g., a "correct" return and substantiation). Getting the IRS to reconsider the tax amount may be difficult if the IRS requested that you file a return and you did not respond. In that case the IRS is often reluctant to reopen the matter feeling you had your chance. If you did not receive the request to file a return due to the request being sent to an incorrect address, the IRS may be more willing to consider adjusting the tax assessed.

Assessment

"Assessment" is a tax term for when the IRS can maintain a tax is due and try to collect it. The IRS can not collect a tax until it is assessed (except "jeopardy assessments" if e.g., it believes a taxpayer is about to leave the country making collection unlikely). By your signing and filing a return you consent to the IRS assessing the tax shown on the return.

The IRS cannot assess or collect tax until all procedural and appeal rights have been used, lapsed or you agree to assessment. Assessment can occur a significant time after a return is due, e.g., because of an audit, protest, Tax Court proceedings, and further appeals, etc. If you did not file a return, the IRS likely will request a return. If the return is not provided the IRS will go through the appropriate “process” then “assess” a tax amount.

Delay occurs in assessing the Internal Revenue Code § 6672 "trust fund recovery penalty" (personal liability for " persons responsible to collect and pay over employment taxes who 'willfully' fail to do so"), because the IRS typically takes as much as a year or more to act after an employer fails to pay employment taxes, and normally takes additional time attempting to collect from the employer before the IRS tries to assess responsible persons. Responsible persons also have procedural or appeal rights that can result in further delay in assessment.

Audit

The IRS can audit your return and seek substantiation or “proof” that the correct income and expenses have been reported. The IRS auditor normally provides a report (“revenue agent’s report” or “RAR”) and the opportunity to discuss any appropriate corrections. The auditor wants to address all issues and correct the RAR before finalizing it rather than have to respond later on appeal, etc. After all issues have been discussed, you can agree to all, some, or none of the items determined by the IRS audit.

See also, IRS correspondence audits.

Protest or Appeal

You can “protest” the un-agreed audit items to the IRS “Appeals” division for review by someone else within the IRS. Generally you have 30 days to appeal, but additional time can be allowed. The job of Appeals is to freshly review of the matter (but not to re-do the audit), and does not have separate contact with the auditor to discuss the case. The Appeals division job is to resolve matters and has more authority to settle issues than the audit section, but does not simply trade 1 issue for another, and must have a basis to concede a point. Again, you can agree to all, some or none of the remaining items with Appeals.

Notice of Deficiency (90 day letter) and Petition to Tax Court

If you do not protest the proposed assessment, or after Appeals makes its decision that an un-agreed tax should be assessed, the IRS normally issues a “90 day letter” or “notice of deficiency” and you have 90 days (150 days if you are out of the country) to file a petition to the United States Tax Court. There are NO extensions to the 90 days. The Tax Court is based in Washington D.C., but “sits” in major cities throughout the US, e.g., Kansas City or St. Louis, Missouri. Tax Court availability is important because you can have your tax matter heard outside the IRS without having to pay the tax first (payment first can be burdensome or impossible for large liabilities).

United States District Court or Court of Claims Refund Claim

The alternative to Tax Court is to pay the tax in full and file a refund claim with the IRS. If the refund claim is rejected or not approved within six months, you can file a refund suit with the US District Court (or Court of Claims). There is an exception to full payment for employment taxes where you can pay the tax for 1 employee for 1 calendar quarter to file a refund claim and contest the full tax.

You have the right to appeal lower court decisions (unless you elect to proceed as a Tax court "small case") to higher courts, e.g., the U.S. Court of Appeals for the circuit you reside in. Appeals to the U.S. Supreme Court are discretionary and they do not take most cases. After all of your rights are exhausted, the IRS will assess the tax determined, if any.