In this time of pandemic, both the IRS and the Tax Court have curtailed their access to mail. While this may be a relief to some taxpayers, it can have grave consequences for others. Where a taxpayer mails a petition to the Tax Court and the IRS doesn’t notate the taxpayer’s account, the tax may automatically assess. The result is a premature assessment. The IRS may start collecting the tax it perceives to be assessed, including offsetting refunds the taxpayer may especially need now. Up until I read recent postings on the ABA’s Pro Bono & Tax Clinics listserv about this issue, I had not considered this consequence of the Tax Court’s closing. Of course, this is not novel to this virus, but the virus reminds us of the consequences of premature assessment. I write to explain what happens to cause premature assessments and how to resolve them.
In tax procedure 101 you learn that defaulting on a notice of deficiency serves as one of the ways the IRS can make an assessment against a taxpayer. Most people who receive a notice of deficiency do not file a Tax Court petition, whether because they default on the notice, don’t understand the notice, or may not have received the notice. Only about 3% of the taxpayers to whom the IRS sends the notice of deficiency petition the Tax Court. I do not know why the percentage hovers at such a low number, but the default rate on the notice has existed at a high rate for many years.
Making an assessment after the default on the notice requires careful timing at the IRS because of the statute of limitations and because of the injunction against assessment if the taxpayer files a Tax Court petition. On the one hand, the IRS does not want to wait too long after default, because the suspension of the statute of limitations on assessment triggered by the sending of the notice of deficiency comes to an end 60 days after the 90 period within which the taxpayer must petition the Tax Court. To explain it another way, the IRS generally has three years from the due date of a taxpayer’s return within which it must make an additional assessment. If the IRS sends a notice of deficiency, that three-year period gets suspended for the 90 period during which the taxpayer can petition the Tax Court plus an additional 60 days pursuant to IRC 6213 and 6503. Sometimes, the IRS sends the notice of deficiency close to the end of the three-year statute of limitations on assessment, so it must stand ready to make an assessment quickly after the 90 period ends.
On the other hand, IRC 6213 enjoins the IRS from making an assessment during the 90 period and during the time a Tax Court case exists. So, for the 97% of cases in which the taxpayer does not file a petition with the Tax Court, the IRS must wait until the 90 period runs until it makes the assessment. On the 91st day, the IRS does not receive a formal notification from the Tax Court that the taxpayer did not file a petition. The Tax Court could not send such a notification even if it wanted to do so because timely petitions need only be timely mailed. The Tax Court may not know for several days after the 90th day whether a taxpayer has filed a petition because of the mail times involved.
The Tax Court does notify IRS Chief Counsel’s office when it receives a new petition. IRS Chief Counsel’s office almost immediately thereafter notifies the IRS of the existence of a petition and the IRS, upon the receipt of this notice, puts an indicator on the taxpayer’s file not to assess the tax until the end of the Tax Court case. To accommodate the lag in time for petitions to arrive at the Tax Court, to move from the Tax Court to Chief Counsel’s office and from Chief Counsel’s office to the IRS office that inputs the code stopping the assessment, the IRS must build in an additional period of time beyond 90 days before it makes an assessment on the 97% of the cases that do not respond to the notice. If it chooses a period that is too long, it begins to sweat about making a timely assessment. If it chooses a period that’s short, it makes an assessment prematurely in violation of the injunction against assessments during the 90-day period and the pendency of the Tax Court case.
So, like Goldilocks, the IRS must pick a period that’s just right for the vast majority of the cases. In the last couple of decades, the IRS has sent out about one million notice of deficiency a year and about 30,000 people have petitioned the Tax Court year. Here are some statistics on premature assessments from the years 2012-2014:
This system works well when the Tax Court clerk’s office and the IRS offices handle cases efficiently. It can break down when inefficiencies occur. During an ordinary year, the most inefficient time occurs at year’s end when many employees at both the Court and the IRS take leave for the holidays and also take leave because of the end of the federal leave year which sometimes extends into the second week of January. As a result, my experience of many years was that most premature assessments occurred during this period because of the time frame set for holding off on the assessment after the end of the 90 days and the absence of enough employees to cause the machinery to run smoothly.
Several years ago a group of Taxpayer Advocate Service employees and Appeals employees studied this. The group found there were several reasons for premature assessments:
- Non-compliance with established procedures
- Lack of understanding of premature assessments
- Assessments made early in the default assessment period before a case appears on a docket list
- Late docket lists due to unforeseen circumstances
The group also made several suggestions for fixing the problem:
The closure of the Tax Court clerk’s office for months adds a whole new dimension to the problem. Taxpayers whose petitions arrived in the Tax Court starting about March 9 did not have their petition processed until a couple of weeks ago. Taxpayers whose petitions would have arrived at the Tax Court after the Clerk’s office closed still await processing. Obviously, though due to no fault of the Tax Court or the IRS, this blows a hole in the system. The IRS would have no idea who has filed a petition and, if it has its normal filters in operation, will have made assessments against many who may have petitioned.
What should petitioners do to resolve a problem of a premature assessment? Keeping in mind that 70% of the people who petition the Tax Court do so pro se, the problem here really involves getting out information to people rather than the actual fix. Chief Counsel attorneys do a great job of fixing premature assessments. They have a process for notifying the IRS and causing the IRS to reverse the assessment, refund any money collected and put the case in the posture that should have existed prior to the premature assessment. Representatives should know or can easily find out how to pull the correct levers in order to reach the right attorney in Chief Counsel’s office and fix the premature assessment.
Pro se taxpayers will need help. Maybe that help can come in part from the Court and postings on its website. Maybe that help can come from Chief Counsel attorneys affirmatively looking for premature assessments rather than waiting for the taxpayer to raise their hand. Maybe that help can come from clinics telling their clients why a premature assessment was made and seeking to reverse the process. Everyone in the system wants the system to work. If we find a way to identify the people against whom a premature assessment was made (and this could be someone who received a notice of deficiency in mid-January who has not yet filed a Tax Court petition) then the fix is the easy part.