4.8.9  Statutory Notices of Deficiency (Cont. 1)

4.8.9.9 
Reviewing the Notice of Deficiency

4.8.9.9.2 
Area Counsel Review

4.8.9.9.2.1  (07-09-2013)
Mandatory Area Counsel Review

  1. Cases containing any of the following issues require mandatory review by area counsel:

    1. Fraud penalty, including notices where no fraud penalty is asserted against the taxpayer, but the statute of limitations is open because the case involves a fraudulent return prepared by a return preparer. See Allen v. Commissioner. 128 T.C. 37 (2007).

    2. Notices of transferee liability.

    3. Notices asserting substantial deficiencies (in excess of $100,000 per tax period, excluding penalties and interest) based on the following:
      - Indirect method of determining unreported income,
      - Bureau of Labor Statistics, or
      - Information returns (IRP) in which the burden of proof has shifted to the IRS (e.g., the taxpayer asserts a reasonable dispute and has fully cooperated with the IRS in accordance with IRC 6201(d), Assessment Authority. Refer to IRM 4.10.7.6.1, General Burden of Proof.

    4. Notices in burden of proof cases (e.g. exceptions to the statute of limitations due to mitigation, IRC 6501(e) substantial omission of income, accumulated earnings tax, illegal bribes or kickbacks, etc.) except for deficiencies of $100,000 or less per tax period, excluding penalties and interest, based on information returns (IRP).

    5. Notices in cases where there has been or will be a jeopardy or termination assessment.

    6. Notices in cases where there is doubt as to the proper party to whom the statutory notice of deficiency should be sent.

    7. Notices in cases where the issues affect parent and subsidiary corporations, corporate distributions, corporate reorganizations, or similar issues or facts.

    8. Notices in high profile media attention cases where the appropriateness of conducting the examination may be questioned (e.g., cases where the taxpayer is famous or notorious, had a prior criminal case which was the subject of media attention, or any case involving politicians, congressional hearing witnesses, or allegations that the IRS had examined the taxpayer for impermissible reasons).

    9. Notices that involve difficult, complex, or unique legal issues, including notices with alternative positions and complex international issues.

    10. Notices issued on the recommendation of the Department of Justice or the Office of Chief Counsel.

    11. Notices in cases involving coordinated issues.

    12. Notices involving Munro calculations or notices involving oversheltered returns. See IRM 4.8.9.17.6, TEFRA Investor With Open TEFRA Proceeding.

    13. Notices involving listed transactions, transactions of interest, or other reportable transactions unless excepted from mandatory review by issue management team (IMT) counsel in consultation with the IMT.

    14. All final partnership administrative adjustment (FPAA) letters. See IRM 4.31.2.4.2.3, Final Partnership Administrative Adjustment Cases.

    15. Notices where the deficiency plus penalty exceeds $1,000,000 in the aggregate (excluding interest and without considering offsets). Notices falling below this dollar threshold must be reviewed by counsel if other mandatory review criteria apply.

    16. Any notice, regardless of amount, that the area director (or designee) believes warrants area counsel review.

4.8.9.9.2.2  (07-09-2013)
Area Counsel Recommendations

  1. If area counsel suggests changes to the proposed notice, the following actions will be taken:

    1. Area counsel will provide written directions and guidance on how to perfect the notice, if necessary.

    2. The reviewer will consider area counsel's proposed changes and modify the notice as directed, if in agreement.

    3. If the reviewer disagrees with area counsel's recommendations, he or she will discuss the case with his or her group manager.

    4. The Technical Services group manager will then discuss the case with the area counsel attorney to resolve the disagreement.

    5. In order to override area counsel's advice, the case file must include a memorandum from the area director outlining the reason(s) for not following area counsel's recommendations.

  2. Recordation of all written communications to or from area counsel must be kept in the case file.

4.8.9.9.2.3  (07-09-2013)
Area Counsel Review Time Frames

  1. A notice of deficiency subject to mandatory review must be submitted to area counsel with at least 60 days remaining on the statute. If less than 60 days remain, the Technical Services group manager will call the appropriate associate area counsel to advise him or her of the imminent statute case and to coordinate the case review. The case should be hand delivered, if possible.

  2. Area counsel will return the case to the Technical Services reviewer within 45 days of receipt. The reviewer will follow-up on any case that has been pending in area counsel for more than 45 days.

4.8.9.9.2.4  (07-09-2013)
Submitting Cases to Area Counsel

  1. Prepare Form 3210, Document Transmittal, and a cover memo to transmit a case to area counsel for review of a statutory notice. The memo will include the following:

    1. The taxpayer's name and taxpayer identification number

    2. The tax period(s) involved

    3. The earliest statute of limitations date

    4. The reason for review of the statutory notice

    5. The reviewer's name and contact telephone number

    6. The identification of any related cases being submitted for information or related review

    7. Any other information the reviewer feels will assist area counsel in the review of the case

  2. The reviewer should clearly mark the case "priority handling" for any imminent statute.

  3. The reviewer should ensure the case is updated to Review Type 42 and Suspense Code 542 on ERCS to indicate the case is with area counsel for review.

4.8.9.10  (07-09-2013)
Signing and Dating the Notice of Deficiency

  1. IRC 6212(a) authorizes the Secretary (of the Treasury) to issue a notice of deficiency by certified or registered mail. The authority to issue notices of deficiency is further granted to the Commissioner, area directors and campus directors under Treas. Reg. 301.7701-9, Treas. Reg. 301.6212-1(a) and Treas Reg. 301.6861-1.

4.8.9.10.1  (07-09-2013)
Signing Notices

  1. Servicewide Delegation Order 4-8 in IRM 1.2.43.9 delegates authority to sign notices of deficiency to other IRS officials. See IRM 4.8.9.5, Authority to Issue Notices of Deficiency.

  2. As it relates to Technical Services, Servicewide Delegation Order 4-8 delegates the authority to sign statutory notices of deficiency to TCO and TA reviewers GS-09 and above for office audit cases and RA reviewers GS-12 and above for field (RA, TA, and TCO) examination cases.

  3. Delegated individuals may sign the notices in any of the following ways:

    1. Manually sign the name of the specified official followed by the initials of the delegated signing official.

    2. Imprint the specified official's signature using a signature stamp followed by the initials of the delegated signing official.

    3. Add the initials of the delegated signing official to the machine-imprinted, specified official's signature.

    4. The specified official may personally sign or imprint his or her signature and title using a signature stamp.

      Note:

      "Signing official" must always be a delegated official pursuant to Servicewide Delegation Order 4-8.
      "Specified official" must always be a delegated official pursuant to Servicewide Delegation Order 4-8 but may, and generally would be, above the organizational level of the "signing official."
      The "specified official's signature" is the signature of the individual designated by the particular function (e.g., Technical Services territory manager), which is issuing the notice of deficiency, for having his or her signature reflected on the notice as the issuing official.

  4. Signature stamps are locally procured with only the delegated officials having access. Proper security procedures should be used to prevent unauthorized use.

4.8.9.10.2  (07-09-2013)
Dating Notices

  1. Two dates are included on the notice letter:

    1. The date the letter is issued.

    2. The last day the taxpayer can file a petition with the United States Tax Court.

  2. The date the letter is issued. This is the same date the letter is mailed to the taxpayer. See IRM 4.8.9.11.3, Records of Mailing.

  3. The last day the taxpayer can file a petition with the United States Tax Court. This date is 90 days after the notice is issued (150 days if either the taxpayer is outside the United States when the notice is mailed or the notice is mailed to an address outside the United States). See Exhibit 4.8.9-2, Computation of Last Day to File a Petition with United States Tax Court and Computation of Default Date, for details of how to compute this date.

    Caution:

    While not typical, there have been times when a notice of deficiency was mailed to a taxpayer the IRS knew was outside the United States, but for whom the IRS only had a domestic address. Because of the affect the suspense period has on the assessment statute expiration date (ASED) of a case, as well as the protection of taxpayer rights, it is imperative that the taxpayer is provided the proper time period in which to file a petition with the United States Tax Court. If a situation similar to this is encountered, the reviewer should coordinate with area counsel to determine the proper suspense period based on the specific facts and circumstances of the case. The reviewer should clearly communicate the proper suspense period to the suspense unit personnel who will be completing Letter 531 with the last day the taxpayer can file a petition with the United States Tax Court.

  4. The reviewer preparing the notice of deficiency does not complete the date the letter is issued or the last day the taxpayer can file a petition. These dates are completed by the person who mails the notice of deficiency.

4.8.9.11  (07-09-2013)
Disposition of Copies

  1. Notices of deficiency will generally be prepared in duplicate.

    1. The original, including all statements and attachments, is sent to the taxpayer by certified mail (if addressed to a person within the United States) or registered mail (if addressed to a person outside the United States).

    2. A copy is kept in the case file as evidence that the notice of deficiency was sent to the taxpayer. See Pietanza v. Commissioner, 92 T.C. 729 (1989). The file is then retained by the issuing office pending its ultimate disposition.

4.8.9.11.1  (07-09-2013)
Separate Notices to Joint Filers

  1. Married filing joint taxpayers are given separate notices of IRS actions that may affect their joint and several liability and collection thereof.

  2. The IRS must send the joint notice of deficiency to each spouse even when they reside at the same address.

    1. Send the same joint notice of deficiency to each spouse in separate envelopes. For example, prepare duplicate originals of the notice to John and Mary Smith. Address one envelope to John Smith and one envelope to Mary Smith. Send both notices by certified or registered mail.

    2. Ensure that separate notices of deficiency are sent to each spouse at all last known addresses.

    3. Document how the notices were sent in the case activity record.

  3. Either one or both spouses may file a petition to the United States Tax Court for joint returns. If both spouses want to petition, they can both sign a single petition or they can each file a separate petition.

4.8.9.11.2  (07-09-2013)
Power of Attorney

  1. If a Form 2848, Power of Attorney and Declaration of Representative, is received by Technical Services, the reviewer should check the status of the representative as described in IRM 4.11.55.1.2.2, POA Not Authorized to Practice Before the IRS.

  2. If a taxpayer is represented by a duly authorized power of attorney and the Form 2848 is appropriately annotated, a copy of the notice mailed to the taxpayer(s) will be sent to the representative by regular mail. Letter 937 (DO), Transmittal Letter for Power of Attorney, is used as the cover letter to transmit the copy of the notice. The enclosure section of the letter should indicate Letter 531 or Letter 902 (DO), as appropriate.

  3. If the power of attorney does not cover all years in the notice of deficiency, the notice should not be sent to the representative. Instead, Letter 4368, Statutory Notice Not Sent to Representative - Tax Periods Not Specified, should be included with the taxpayer's notice of deficiency. The letter advises the taxpayer why a copy of the notice was not sent to the representative identified on Form 2848. If Form 2848 does not include all periods and a subsequent Form 2848 is submitted by the representative, a new page 2 must be signed by the taxpayer.

  4. Effective with the March 2012 revision, Form 2848 requires a separate form for each taxpayer for married filing joint taxpayers.

  5. Effective with the October 2011 revision, Form 2848 requires an affirmative action by the taxpayer to check the box to indicate that a copy of all correspondence will be received by the representative.

  6. Document the case activity record (Form 9984) for any actions taken regarding the power of attorney that may appear to be in conflict with the Form 2848 instructions, including but not limited to the following:

    1. If a copy of the notice of deficiency is not sent to the representative because the Form 2848 does not cover all years included in the notice.

    2. If a copy of the notice of deficiency is sent to the representative but the Form 2848 (pre-March 2004 revision) specifies the original is to be sent.

4.8.9.11.2.1  (07-09-2013)
Unenrolled Return Preparer

  1. Under Circular 230 (31 CFR 10.7(c)(viii)) and Treas. Reg. 601.502(b)(5)(iii), an unenrolled return preparer may only represent a taxpayer in the examination process for the tax returns that unenrolled return preparer prepared. An unenrolled return preparer may not represent a taxpayer beyond the examination process.

  2. A copy of a notice of deficiency will not be sent to an unenrolled return preparer even if authorized to receive information at the examination level. A copy of the statutory notice of deficiency is not sent (even if authorized to receive such notice) because receipt of the statutory notice may indicate to the unenrolled return preparer that his or her power to represent the taxpayer goes beyond the scope of the examination process.

  3. The taxpayer will be notified that a copy of the notice was not sent to the unenrolled return preparer using Letter 4369, Statutory Notice Not Sent to Representative - Limitations to Practice Before the IRS.

4.8.9.11.3  (07-09-2013)
Records of Mailing

  1. Each Technical Services territory manager must maintain a record of the dates the notices were mailed since:

    • The validity of the date of notice could be challenged by the taxpayer.

    • The Tax Court does not have jurisdiction over a case when the taxpayer files a petition after the 90th/150th day or, if later, the date shown on the notice as the last day to file the petition.

    • The Commissioner has the burden of proof in establishing the date of mailing.

  2. The record of certified and registered mailing is kept on PS Form 3877 together with the certified or registered mail numbers, which are supplied by the United States Postal Service.

    1. Across the first line of each form, type the following or use a stamp to imprint:
      "Notices of Deficiency, for the years indicated, have been sent to the following taxpayers."

    2. The certified/registered mail number is entered along with the name and address of the addressee. Multiple addresses are entered separately.

    3. In the "Remarks" column, enter the years to which the notice is applicable or the date of death in estate tax cases.

    4. The designated employee will stamp the notice envelope with the following:

      Certified Mail No._____
      Or  
      Registered Mail No._____

    5. The certified/registered number will be entered on the envelope.

    6. The notices and the PS Form 3877 are taken to the mail room. The mail room employee will compare the count and numbers used with the envelope notices.

    7. The IRS employee will indicate delivery to the mail room by dating PS Form 3877 as part of the permanent record of mailing. The United States Post Office staff will sign and insert the postmark on the PS Form 3877.

    8. The receipted forms will be numbered consecutively and retained in separate folders for a period of 10 years. These receipted forms are kept with the mailing records for notices of determination of worker classification but should never be commingled with any other mailing records.

4.8.9.11.4  (07-09-2013)
Consequences of an Incorrectly Mailed Notice

  1. If the notice is incorrectly addressed and or mailed, the taxpayer may raise a challenge that the notice does not conform with statutory requirements.

  2. A notice may be determined to be invalid if it is not mailed to the last known address or if it is not mailed by certified or registered mail, as required. Furthermore, a notice that is mailed to an address outside the United States by certified mail rather than registered mail may also be held to be invalid.

  3. If the notice of deficiency is invalid and the assessment statute has expired, any assessments based on the notice cannot be made and, if already made, must be abated.

4.8.9.12  (07-09-2013)
Preparing a Notice of Deficiency for an Estate Tax Case

  1. Estate and gift groups are responsible for preparing the statutory notices for estate tax cases and for securing counsel approval, if required, prior to forwarding the cases to Technical Services.

  2. Technical Services RA reviewers are responsible for performing limited reviews of the notices, as defined in IRM 4.8.9.9.1, Before Issuing Notice of Deficiency, to ensure the notices are legally sufficient and ready for signature and mailing.

  3. Extra care and diligence must be used when dealing with the notice of deficiency for an estate tax case because the assessment statute cannot be extended. The following forms are used in an estate tax notice of deficiency:

  4. Letter 902 (DO), Notice of Deficiency

    1. The first paragraph is modified for the deficiency, penalties, and type of tax.

    2. The first paragraph should include, after the deficiency and penalty amounts, the following statement: "Plus interest to be computed at the legal rate on the amount due."

  5. Form 4089-B, Notice of Deficiency Waiver

    1. Change "Tax Year Ended" to "Date of Death."

    2. Penalties and additions to tax are entered in columnar format under the "Deficiency" heading. Each penalty is listed separately.

  6. Form 3614–A, Estate Tax. This form is used to show the adjustments to the taxable estate and to show how the deficiency was calculated.

  7. Form 886–A, Explanation of Items. Language for certain explanatory paragraphs may be found in IRM Exhibit 4.10.10 - 2Standard Explanations, Appeals IRM 8.17.4.11.1, Available Sample Paragraphs, and IRM 4.25.1, Estate and Gift Tax Examinations. The language may need to be modified for a particular case.

  8. Form 6180, Line Adjustments-Estate Tax.

  9. Form 3229, Computation of Credit for Tax on Prior Transfers.

4.8.9.13  (07-09-2013)
Preparing a Notice of Deficiency for a Gift Tax Case

  1. Similar to notices of deficiency for estate tax cases, estate and gift groups are responsible for preparing the notice of deficiency for gift tax cases. Technical Services RA reviewers are responsible for performing a limited review of the notices to ensure they are legally sufficient and ready for signature and mailing.

  2. The following forms are used when preparing a gift tax notice of deficiency:

    1. Letter 902 (DO), Notice of Deficiency. The first paragraph is modified for the deficiency, penalties, and type of tax. The first paragraph should also include the following statement, "Plus interest to be computed at the legal rate on the amount due."

    2. Form 4089-B, Notice of Deficiency - Waiver. Change "Tax Year Ended" to "Calendar Period." Penalties and additions to tax are entered in columnar format under the "Deficiency" heading. Each penalty is listed separately.

    3. Form 3615-A, Gift Tax. This form is used to show the adjustments and how the deficiency was determined.

    4. Form 886-A, Explanation of Items. This form is used to explain each adjustment made. Certain standard language may be found in IRM Exhibit 4.10.10 - 2, Standard Paragraphs.

4.8.9.13.1  (07-09-2013)
Prior Period Adjustments

  1. When adjustments are made to taxable gifts from prior periods and no deficiency is proposed for that period, the adjustment for the prior period and any explanations are included in the statement following the tax computation for the first taxable period covered by the notice of deficiency.

  2. If sufficient time does not remain on the statute of an overassessment year to advise the taxpayer to file a claim for refund, the case will be coordinated with the estate and gift attorney who prepared the notice. The estate and gift attorney will review the case files and determine whether the statute may remain open under IRC 6511, Limitations on Credit or Refund, or IRC 6512, Limitations in Case of Petition to Tax Court.

4.8.9.14  (07-09-2013)
Multi-Year Examination Cases with At Least One Agreed or No-Change Year and One Unagreed Year

  1. IRM 4.10.8.6, Multi-Year Examination Cases With At Least One Agreed/No-Change Year and One Unagreed Year, contains instructions for field and office examiners to split cases containing at least one agreed or no-change year(s) and one unagreed year(s) into separate case files when the case closes to Technical Services. It also includes a list of documents required in each of the files.

  2. For RGS purposes, both the agreed or no-change year(s) and the unagreed year(s) should have been split into two separate files by the examining agent on the RGS server.

4.8.9.14.1  (07-09-2013)
Agreed/No-Change Year(s) Not Required to Remain Associated With Unagreed Year(s)

  1. The agreed or no-change year(s) is not required to remain with the unagreed year(s) if the issues raised in the unagreed year(s) are not related to or dependent on the issues raised in the agreed or no-change year(s).

  2. If the multi-year case is not selected for EQMS review and the agreed or no-change year(s) is not needed for informational purposes, the following procedures should be followed for the agreed or no-change year(s):

    1. Close the year(s) to CCP in Status Code 51 for assessment,

    2. Annotate Form 3198, Special Handling Notice for Examination Case Processing, "The YYYYMM was closed separately to Technical Services for issuance of a Statutory Notice of Deficiency," and

    3. Move the electronic case file by RGS CEAS (Correspondence Examination Automation Support) to the appropriate RGS group code for assessment and closure. RGS group codes change periodically. See http://mysbse.web.irs.gov/exam/rgs/qrg/default.aspx, RGS quick reference guide site, for the latest group codes.

4.8.9.14.2  (07-09-2013)
Agreed/No-Change Year(s) Required to Remain Associated with Unagreed Year(s)

  1. If after review of the case files, the reviewer determines the agreed or no-change year(s) should remain associated with the unagreed year(s) and if the multi-year case is not selected for EQMS review, then the reviewer will fax the forms listed below to CCP. See http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/cont/23510.aspx for current fax numbers for CCP.

    1. Form 3198 instructing CCP to make a partial assessment,

    2. Form 4549, and

    3. Form 5344 with appropriate entries completed for a partial assessment.

  2. Once the partial assessment has been made (CCP will fax back to Technical Services the documentation for the assessment), the related case file(s) will be closed to appeals via IDRS command code AMCLS, Disposal Code 07 and $1 in Item 18 of Form 5344 for the agreed case.

    Note:

    A new Form 5344 should be prepared with the appropriate entries for the closure to appeals.

4.8.9.14.3  (07-09-2013)
Cases Selected for EQMS: 210 Days or Less Remaining on the Statute of Limitations

  1. If a multi-year case is selected for EQMS, and the earliest statute of limitations of a return in the case file has 210 days or less remaining, the case will be excluded from the EQMS sample.

  2. The EQMS selection sheets will be faxed, mailed or sent via secured e-mail to the appropriate EQMS site with the following explanation: "The YYYYMM year(s) of the (name and TIN of taxpayer(s)) case is excluded from the EQMS sample as the SOL of the YYYYMM return has 210 or less days remaining."

  3. The case file should then be closed using the procedures in IRM 4.8.9.14.1, Agreed/No Change Year Not Required to Remain Associated With Unagreed Year(s), or IRM 4.8.9.14.2, Agreed or No Change Years Required to Remain Associated With Unagreed Year(s), depending on whether the agreed or no-change year(s) should remain associated with the unagreed year(s).

4.8.9.14.4  (07-09-2013)
Cases Selected for EQMS: More Than 210 Days Remaining on All Statutes of Limitations

  1. If the multi-year case is selected for EQMS and the statute of limitations of all returns is more than 210 days, the agreed or no-change file and unagreed file must remain together.

    • Place the sample selection sheet on top of Form 3198.

    • Update the returns to Status Code 23 and Review Type 33 on ERCS.

    • Route the case with Form 3210Document Transmittal, using ground service mail to the appropriate EQMS review site. The Form 3210 will be notated in the remarks section "Alert: Live Case included, return case to (Technical Service office address) after review."

  2. EQMS will review the case within 10 business days and return the case to the originating office via ground service mail for preparation of the statutory notice of deficiency.

  3. Once received back from the EQMS review site, the case will be assigned to a reviewer who will determine if the agreed or no-change year(s) should remain associated with the unagreed year(s).

  4. If the reviewer determines it would not be beneficial to appeals or area counsel to have the agreed or no-change year(s) information associated with the unagreed year(s) issues, the agreed or no-change year(s):

    • Should be closed to CCP in Status Code 51 for assessment.

    • Notate Form 3198"The YYYYMM year(s) were closed separately to Technical Services for a statutory notice of deficiency."

    • Move the electronic case file for the agreed or no-change year(s) by RGS CEAS to the appropriate CCP RGS group for assessment and closure. See http://mysbse.web.irs.gov/exam/rgs/qrg/default.aspx, RGS quick reference guide site, for the latest group codes.

  5. If the reviewer determines it would be beneficial to appeals or area counsel to have the agreed or no-change year(s) information associated with the unagreed year(s) issues, the agreed or no-change year(s):

    1. The reviewer will submit the paperwork to CCP to make a partial assessment for the agreed case. Once the assessment has been made, the related case file(s) should be closed to appeals via AMCLS, Disposal Code 07, and enter $1 in Item 18 of Form 5344.

    2. Normal closure procedures for the unagreed year(s) should be followed.

4.8.9.15  (07-09-2013)
Overassessments and Claims

  1. Multiple year examinations can result in a proposed deficiency for one or more years and a proposed overassessment for other year(s). To protect the taxpayer's right of appeal, careful consideration must be given to the statute of limitations for the overassessment year(s).

  2. Generally, because the adjustments are related, the IRS will not process the overassessment until the deficiency can be assessed. However, if the issue(s) generating the overassessment is not related to, or is not the result of, the deficiency proposed in the other year(s), then the overassessment may be processed as prescribed in IRM 1.2.13.1.17, Policy Statement 4-41.

  3. While the taxpayer may be advised in a notice of deficiency that there is an overassessment, the Tax Court has no authority to review or redetermine an overassessment.

  4. The issuance of a notice of deficiency (and subsequent petition filed with the Tax Court) for the deficiency year does not extend the statute of limitations for the overassessment year.

  5. The combination of (3) and (4) above could cause taxpayers to lose the refund to which they may be entitled if the statute on the overassessment year(s) expires before the deficiency year is resolved. Therefore, taxpayers will be invited to file a claim for refund.

4.8.9.15.1  (07-09-2013)
Claim for Refund Invitation

  1. When there is a proposed overassessment in one year (resulting from a related issue or adjustment from the deficiency year), the taxpayer will be advised in the notice of deficiency of the right to file a claim for refund within the time provided by law.

  2. The following paragraph should be used and included in the explanation of adjustments/items if the taxpayer has not filed a claim for refund to protect the overassessment.

    "When final determination is made as to the deficiency(ies) proposed in this letter, the overassessment(s) for (list year(s)) will be scheduled for adjustment to the extent allowable and applied as set forth in IRC 6402, provided you file a claim for refund on the enclosed Form 843, Claim For Refund and Request for Abatement, Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return, with the IRS prior to the expiration of the statutory period for filing timely refund claims. See IRC 6511."

  3. The following paragraph should be used and included in the explanation of adjustments if the taxpayer has filed a timely claim for refund to protect the overassessment.

    "When final determination is made as to the (deficiency or deficiencies) proposed in this letter, the (overassessment or overassessments) for (list year(s)) will be scheduled for adjustment to the extent allowable and applied as set forth in IRC 6402."

4.8.9.15.2  (07-09-2013)
Disallowed Claims for Refund and Examination Results in Deficiency

  1. In cases involving claims for refund, protests, or hearings, taxpayers could contend that they are entitled to deductions that were not claimed on their return or that items of income reported on their return should be excluded in whole or in part from taxable income.

  2. If the examination of a return and the claim for refund filed for the same year result in a deficiency and the taxpayer does not exercise any appeal rights, a notice of deficiency is issued. The following actions will be taken regarding the claim for refund issues.

    1. The taxpayer will be notified in the notice of deficiency that the claim has been considered.

    2. Immediately after the summary of the tax liability, or as an attachment to such forms, the following paragraph will be included:
      "In making this determination of your (list year) tax liability, consideration has been given to your claim(s) for refund filed on (date). This is your notice of claim disallowance. If you choose not to petition the Tax Court, but still want to contest the disallowance, you may do so by filing such a suit with the United States District Court having jurisdiction or the United States Court of Federal Claims. The law permits you to do this within two years from the date of this letter."

  3. If additional deductions or reduction in income requested in the claim for refund are not allowed, a clear and adequate explanation of why they are not allowed will be included in the explanation of adjustments. The following paragraph may be used in the explanation of adjustments when the additional issues raised in the claim are not allowed.

    "The issue(s) raised (in your claim for refund) (in your protest) (at the hearing) requesting a deduction in the amount of $--- for (year(s)) has been considered and it has been determined that no deduction is allowable (follow with proper explanation of reason for non-allowance)."

4.8.9.15.3  (07-09-2013)
Claims and Petitions to the United States Tax Court

  1. If a taxpayer invokes the jurisdiction of the Tax Court in redetermining the amount of the deficiency, the taxpayer is precluded from instituting suit at a later date in the courts on a claim for refund filed for the same kind of tax for the same taxable year.

  2. A claim for refund filed for the same kind of tax in the same taxable year raising an additional issue, which cannot be conceded, must be included in the petition. The taxpayer should be advised to include the claim issue in the petition.

  3. If the claim issue is not being litigated by anyone in any court, the following paragraph should be included at the beginning of the explanation of adjustments/items.

    "If a petition to the United States Tax Court is filed against the deficiency proposed herein, the issue set forth in your claim for refund should be made part of the petition to be considered by the Tax Court in any redetermination of your tax liability."

  4. Upon default of a notice of deficiency that includes a claim where the language in IRM 4.8.9.15.2 (2)(b), Unpaid Claims for Refund and Examination Results in Deficiency, is not included in the notice of deficiency, Letter 906, Final Full Claim Disallowance Letter, must be sent by certified mail (or registered mail if mailed to a person outside of the United States) to the taxpayer.

4.8.9.15.4  (07-09-2013)
Claims Relating to Net Operating Loss or Capital Loss

  1. Generally, the time to file a claim for refund related to a net operating loss or capital loss carryback is 3 years after the due date of the return (including any extension of time to file) for the tax year of the loss.

  2. Depending upon the circumstances, a Tax Court proceeding may or may not affect a carryback-related refund claim. A Tax Court proceeding is conclusive with respect to an NOL or capital loss carryback that is an issue in the proceeding, even though the loss year itself is not before the court. However, taxpayers may still be entitled to refunds based on the carrybacks that were not at issue, even for deficiency years. For overassessment years, as with non-carryback-related claims, the limitation period for carryback-related claims is unaffected by the issuance of a deficiency notice. An application for tentative refund allowance (Form 1045, Application for Tentative Refund, or Form 1139, Corporation Application for Tentative Refund) is not a claim for refund and, therefore, does not protect the refund statute of limitation.

  3. Because of the complex nature of cases with net operating or capital losses, any update of a carryback statute must be coordinated with, and the files reviewed by, the designated technical person. This is necessary to determine whether the statute may remain open under IRC 6511 and what actions are appropriate to protect the taxpayer's right of appeal.

4.8.9.15.4.1  (07-09-2013)
Tentative Carryback Refund

  1. IRC 6213(b)(3), Assessments Arising Out of Tentative Carryback or Refund Adjustments, states:

    "If the Secretary determines that the amount applied, credited, or refunded under section 6411 is in excess of the overassessment attributable to the carryback or the amount described in IRC 1341(b)(1) with respect to which such amount was applied, credited, or refunded, he may assess without regard to the provisions of paragraph (2) the amount of the excess as a deficiency as if it were due to a mathematical or clerical error appearing on the return."

  2. Tentative carrybacks are filed using Form 1139 for corporations and Form 1045 for individuals.

  3. If the examination of a carryback year results in an adjustment solely to the tentative carryback, the deficiency is not subject to notice of deficiency procedures. The case should close directly from the examination group to CCP for assessment. Since the deficiency is due solely to the disallowance of the carryback, in whole or in part, Form 2285, Concurrent Determinations of Deficiencies, is also not required. Form 3198 should reflect the case involves restricted interest and is being sent to CCP for immediate assessment.

  4. On the other hand, if the examination of a carryback year results in disallowance of the tentative carryback (in whole or in part) and other general adjustments, notice of deficiency procedures are applicable. The notice of deficiency will include all adjustments, including the adjustment to the tentative carryback. Additionally, upon default the case will be routed to the restricted interest reviewer to complete Form 2285 in order for interest to be properly computed. The Form 3198 should reflect the case involves restricted interest and is being sent to Technical Services for preparation of a notice of deficiency. Refer to IRM 4.8.8.9, Restricted Interest Cases, for additional information regarding restricted interest.

4.8.9.15.5  (07-09-2013)
Rescinding Notices of Claim Disallowance

  1. If a claim for refund is denied and additional tax is due, a statutory notice of deficiency is issued for the additional tax due. If the language found in IRM 4.8.9.15.2, Unpaid Claims for Refund and Examination Results in Deficiency, is included in the notice of deficiency, then the notice also serves as the certified claim disallowance letter.

  2. Per section 4.03 of Rev. Proc. 98-54, 1998-2 C.B. 531, "limitations regarding credits, refunds, and assessments relating to the rescinded notice are void and the rights and obligations of the parties that existed prior to the issuance of the notice of deficiency are reinstated." Based on this, if a notice of deficiency is subsequently rescinded (IRM 4.8.9.28), the certified claim disallowance included within the notice is also rescinded.

  3. The Service has not adopted procedures for rescinding a "stand alone" certified notice of claim disallowance. There is case law that suggests a "stand alone" certified claim disallowance may be rescinded. See Cadrecha v. United States, 104 Fed.Cl.296, 302–3 (Fed.Cl., 2012). Certified claim disallowance letters should only be rescinded with area counsel approval.

  4. The taxpayer's two-year period for bringing suit may be extended by agreement in writing between the taxpayer and the Service under IRC 6532(a)(2), Periods of Limitations on Suits. Form 907, Agreement to Extend the Time to Bring Suit, is used for this purpose.

4.8.9.16  (07-09-2013)
Special Issues

  1. The following includes instructions for issues requiring non-routine treatment when preparing notices of deficiency.

4.8.9.16.1  (07-09-2013)
Accumulated Earnings Tax, IRC 531

  1. In a proceeding before the Tax Court involving accumulated earnings and profits, the burden of proof as to the allegation that earnings and profits have been permitted to accumulate beyond the reasonable needs of the business is on the Commissioner, unless notification is sent to the taxpayer under IRC 534(b), Burden of Proof.

  2. If notification is sent to the taxpayer and (1) the taxpayer timely submits (within 60 days after the mailing of the notification, Treas. Reg. 1.543-2(d)(2)) the statement (i.e., the grounds on which the taxpayer relies to establish that there has been no accumulation of earnings and profits beyond the reasonable needs of the business) and (2) in the statement such grounds are supported by sufficient facts on which taxpayer relies to show the basis for the taxpayer's position that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business per IRC 534(c), Burden of Proof, then the burden of proof will be on the Commissioner as to the grounds given in the statement. See Treas. Reg. 1.534–2(a)(2), Burden of Proof on Commissioner.

  3. Letter 572, Proposal to Issue a Notice of Deficiency for Excess Accumulated Earnings Under IRC 531, is the notification letter sent to the taxpayer and is sent by certified or registered mail. The letter is issued before the notice of deficiency unless the statute of limitations is imminent. Officials delegated to sign notices of deficiency pursuant to Delegation Order 4-8, Rev. 1 (formerly DO-4-8 and DO-77, Rev. 28), IRM 1.2.43.9, are also empowered to sign notifications under IRC 534(b), Burden of Proof.

  4. The notice of deficiency is prepared using Letter 531. The sample paragraphs that may be used in the explanation of adjustments for accumulated earnings tax cases are contained at Exhibit 4.8.9-4, Accumulated Earnings Tax Sample Paragraphs.

  5. Refer to IRM 4.8.8.2 for additional information regarding cases involving accumulated earnings tax under IRC 531.

4.8.9.16.2  (07-09-2013)
Failure to File (FTF) and Failure to Pay (FTP) Penalties -Delinquency Penalties

  1. Penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.

  2. Penalties encourage voluntary compliance by the following:

    1. Defining standards of compliant behavior.

    2. Defining consequences for noncompliance.

    3. Providing monetary sanctions against taxpayers who do not meet the standard.

  3. A penalty is subject to deficiency procedures if the related tax underpayment being assessed is subject to deficiency procedures. For example, if a taxpayer under examination files a delinquent return with the examiner, the tax shown on the delinquent return is not subject to deficiency procedures. Similarly, the associated delinquency penalties (failure to file (FTF) and failure to pay (FTP), if applicable) are not subject to deficiency procedures. However, if an examiner later determines additional tax is due on the delinquent tax return, that additional tax is subject to deficiency procedures, as are the associated delinquency penalties, if applicable.

  4. A return is considered timely filed if it is received on or before the due date (including extensions) of the return. If the return is postmarked by the United States Postal Service (or designated delivery service) on or before the due date (including extensions) it is also considered timely filed. When more than one United States Postal Service postmark date appears on the envelope, the earlier postmark date is considered the date the return was mailed.

  5. IRC 6081 and the related regulations provide for a reasonable extension of time to file a return. The "reasonable extension" is not to exceed 6 months (unless the taxpayer is abroad). If the taxpayer has a valid extension of time for filing a return, the taxpayer is not liable for the FTF penalty for the duration of the extension period. The computation of the FTF penalty begins immediately after the extended due date.

  6. An extension of time to file is not an extension of time to pay.

  7. The IRS may void a previously granted automatic extension where the taxpayer's Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return; Form 7004, Application for Automatic Extension to File Certain Business Income Tax, Information, and Other Returns; or Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, is invalid.

  8. Reviewers should refer to IRM 20.1.2, Failure to File/Failure to Pay Penalties, for more details on these penalties.

4.8.9.16.2.1  (07-09-2013)
Failure to File Penalty

  1. The failure to file (FTF) penalty under IRC 6651(a)(1), Failure to File Tax Return or to Pay Tax, applies to any delinquent return or substitute for return, except when the failure to file was due to reasonable cause and not willful neglect.

  2. The amount used to compute the penalty is the tax required to be shown on the return that is not paid on or before the date prescribed for payment. Absent an extension of time to pay affected by IRC 7508, Time for Performing Certain Acts Postponed by Reason of Service in Combat Zone or Contingency Operation, or IRC 7508A, Authority to Postpone Certain Deadlines by Reason of Presidentially Declared Disaster or Terroristic or Military Actions, the date prescribed for payment is generally the return due date without regard to extensions.

    Note:

    The amount used to compute the penalty is not decreased by late payments, even if those payments are made prior to the extended return due date.

  3. The penalty is computed at a rate of 5% per month or part of a month that the return is late. However, the penalty may not exceed 25% of the unpaid tax in the aggregate.

  4. When the failure to pay (FTP) penalty under IRC 6651(a)(2) applies to the same period as the FTF penalty, the FTF penalty is reduced by the amount of the FTP period charged for that period. However, since the FTP penalty under IRC 6651(a)(2) does not apply to additional deficiencies (i.e., late filed returns), the reduction generally does not need to be considered when computing the FTF penalty includible as part of the deficiency. See IRM 4.8.9.16.2.2.

  5. If the return was filed more than 60 days late and it is due (without regard to extensions) after 12/31/2008, the minimum FTF penalty is the lesser of $135.00* or 100% of the tax required to be shown on the return that was not paid on or before the date prescribed for payment. The reduction for the FTP penalty charged for the same period does not apply when the minimum FTF penalty is assessed.

    Note:

    *For returns due (without regard to extensions) before 1/1/2009, the minimum penalty is the lesser of $100 or 100 percent of the tax required to be shown on the return that was not paid on or before the due date (without regard to extensions).

  6. If the minimum FTF penalty was applied to tax shown on the return, the reduction for FTP penalty charged for the same period must be considered when computing the FTF penalty includible in the deficiency, unless the minimum penalty still applies.

    Example:

    Taxpayer A filed his return 6 months late, reflecting a $400 balance due, which was paid with the return. There was no extension of time to file or pay. IRS assessed the $135 minimum FTF penalty based on the tax shown on the return, and a FTP penalty of $12, or $2 per month.

    Upon examination of the return, an additional deficiency of $200 is determined. The total unreduced FTF penalty is now $600 x 5% x 5 months, which is $150.00, and which now exceeds the minimum FTF penalty. Since the FTP penalty was charged on $400 for the same five months as the FTF penalty, the total FTF penalty must be reduced by $10, which is the amount of the FTP penalty charged for those five months. The reduced FTF penalty is $140, of which $40 is includible in the notice of deficiency.

4.8.9.16.2.2  (07-09-2013)
Failure to Pay Penalty

  1. The failure to pay (FTP) penalty under IRC 6651(a)(2) applies to originally filed delinquent returns or to substitute for returns only. The penalty for failure to pay amounts not shown on a return (e.g., examination deficiencies or other subsequent adjustments) under IRC 6651(a)(3) applies after 21 calendar days (10 business days, if the amount in the notice and demand is $100,000 or more) from the notice and demand for payment (23C date) and therefore is not asserted on an examination report on a delinquently filed return.

  2. Since there is no failure to pay penalty on a deficiency for a tax return that has been filed, only a notice of deficiency for a substitute for return will include a failure to pay penalty. See IRM 4.8.9.16.2.1 (4) and (6), Failure to File Penalty, concerning coordination of failure to file and failure to pay.

  3. The FTP penalty for failure to pay amounts shown on the return as filed, applies on the amount due from the return due date to the date paid. The FTP rate is one-half of one percent (.005) per month, or portion thereof, not to exceed 25% (50 months).

4.8.9.16.2.3  (07-09-2013)
Fraudulent Failure to File (FFTF) Penalty

  1. For late filed returns, the fraudulent failure to file (FFTF) penalty with respect to tax shown on a filed delinquent return is not subject to deficiency procedures. It must be assessed prior to the expiration of the normal statute and must be approved by area counsel prior to assessment.

  2. When the FFTF penalty is proposed on a delinquent return, the reviewer must ensure the examiner sent the taxpayer a 30 day letter that was approved by area counsel. If the 30 day letter was not sent to the taxpayer and if adequate time remains on the statute, the reviewer must send the case back to the examiner to secure area counsel approval (if not already approved) and to issue the 30 day letter. The group must suspend the case for the normal 30 day period.

  3. If no protest was received from the taxpayer, the examiner should have made a partial assessment of the FFTF penalty before the case was sent to Technical Services for the notice of deficiency. See IRM 4.8.9.16.2.6, Delinquent Return Filed During Examination. A TC 240 with Reference Number 686 should be present on the taxpayer's module to indicate the assessment was made. Thus, the notice of deficiency will not reflect the FFTF penalty on the portion of total corrected tax attributable to the return as filed (delinquent return). See IRM 20.1.2.2.7.5, Fraudulent Failure to File-IRC 6651(f).

  4. When the FFTF penalty is proposed on a substitute for return (SFR), the penalty is based on the total corrected tax per the examination. The FFTF penalty asserted on an SFR is subject to deficiency procedures and is included in the notice of deficiency. In such a case, the notice requires area counsel approval prior to issuance.

4.8.9.16.2.4  (07-09-2013)
Penalty Explanations

  1. The following penalty explanation is used for the failure to file penalty under IRC 6651(a)(1) when the failure to pay penalty under IRC 6651(a)(2) does not apply (i.e., delinquent return filed):

    Since you did not file an income tax return for the taxable year ended December 31, YYYY within the time prescribed by law and you have not shown that your failure to file on time is due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(a)(1) of the Internal Revenue Code.

  2. The following penalty explanation is used for the failure to file penalty under IRC 6651(a)(1) when the failure to pay penalty under IRC 6651(a)(2) does apply (i.e., substitute for return):

    Since you did not file an income tax return for the taxable year ended December 31, YYYY within the time prescribed by law and you have not shown that your failure to file on time is due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(a)(1). Since you also did not pay your tax when due, we have reduced the amount of this penalty by the amount of your late payment penalty for any month where both penalties apply.

  3. The following penalty explanation is used for the fraudulent failure to file penalty under IRC 6651(f):

    Since you did not file your return within the time prescribed by law, you have not shown that such failure to timely file your returns was due to reasonable cause, and the failure to file your returns timely is determined to be fraudulent for the taxable year ended December 31, YYYY, a penalty of 15 percent per month up to a maximum of 75 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(f).

  4. The following penalty explanation is used for the fraudulent failure to file penalty under IRC 6651(f) when the failure to pay penalty under IRC 6651(a)(2) does apply (i.e., substitute for return):

    Since you did not file your return within the time prescribed by law, you have not shown that such failure to timely file your returns was due to reasonable cause, and the failure to file your returns timely is determined to be fraudulent for the taxable year ended December 31, YYYY, a penalty of 15 percent per month up to a maximum of 75 percent of the tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(f). Since you also did not pay your tax when due, we have reduced the amount of this penalty by the amount of your late payment penalty for any month where both penalties apply.

  5. The following alternative penalty explanation will be used for the delinquency penalty following the explanation of the fraudulent failure to file penalty:

    "In the alternative, if the fraudulent failure to file penalty is determined not to apply, the failure to file penalty under IRC 6651(a)(1) does apply. Since you did not file a tax return for the taxable year ended December 31, YYYY within the time prescribed by law and have not shown your failure to file was due to reasonable cause, a penalty of 5 percent per month up to a maximum of 25 percent of the total tax is added to the amount required to be shown as tax on such return as provided by IRC 6651(a)(1)."

  6. The following penalty explanation is used for the failure to pay penalty under IRC 6651(a)(2) for substitutes for return:

    Since you have not shown that the underpayment of tax for the taxable year ended December 31, YYYY was due to reasonable cause, a penalty of 0.5 percent per month (but not to exceed 25%) is added to the tax from the due date of the return (without regard to extension) until the date of payment as provided by IRC 6651(a)(2).

4.8.9.16.2.5  (07-09-2013)
Substitute for Return IRC 6651(g)

  1. Per IRC 6651(b), Returns Prepared for or Executed by Secretary, a substitute for return (SFR) is prepared by the IRS when it is determined that a taxpayer is liable for filing the tax return but failed to do so after receiving notification from the IRS.

  2. If a taxpayer fails to file a delinquent return when requested and the statutory notice of deficiency defaults, or the taxpayer executes an agreement to waive the restrictions on assessment of a deficiency (by signing a waiver), the IRS will assess the FTF and FTP penalties.

    Note:

    Most excise and most employment tax returns do not follow statutory notice of deficiency procedures.

  3. In order to assert the FTP penalty on a SFR deficiency, the case file must include a IRC 6020(b) certification package. This certification package includes:

    • Form 13496, IRC § 6020(b) Certification.

    • Form 4549, Income Tax Examination Changes or equivalent.

    • Form 886-A, Explanation of Items, appropriate issue lead sheet or similar form.

  4. Form 13496 must be signed by the examiner and must be dated on or after the date of the 30 day letter.

  5. If the reviewer makes any changes to the examination report (RAR), a new Form 13496 and attachments must be prepared and signed by the reviewer.

  6. A separate Form 13496 with attachments must be prepared for each year for which a deficiency is being asserted.

4.8.9.16.2.5.1  (07-09-2013)
Estimated Tax Penalty

  1. Under IRC 6654, Failure by Individual to Pay Estimated Income Tax, payment of tax, either through withholding or by making estimated quarterly payments, must equal the lesser of 90 percent of total liability for the current year or 100 percent of the taxpayer's tax liability for the prior year ("i.e. the required percentage" ). If the payments or withholding amounts do not add up to the required percentage, the addition to tax under IRC 6654 is automatic, unless the petitioner shows that one of the statutory exceptions apply.

    Note:

    For certain high income taxpayers, the "required percentage" is greater than 100% of the prior year tax. See IRM Exhibit 20.1.3-3, Required Annual Payment, and IRM 20.1.3.2.1.1, Determining the Required Annual Payment.

  2. The statutory exceptions under IRC 6654(e)(1) and (2) are as follows:

    1. The tax shown on the return (or if no return was filed, the tax), reduced by credit allowed under IRC 31, Tax Withheld on Wages, is less than $1,000; or

    2. The individual did not have any tax liability for the preceding year if the preceding year was a taxable year of 12 months and the individual was a citizen or resident of the United States throughout the proceeding taxable year.

  3. IRC 7491(c), Burden of Proof, imposes the burden of production in any court proceeding on the Commissioner with respect to the liability of any individual for penalties and additions to tax. As part of the burden of production, the case file needs to contain evidence that the taxpayer's tax liability for the prior year was greater than zero.

  4. In non-filer cases, without evidence concerning the prior year, the possibility remains that the IRC 6654(e)(2) exception applies and the IRS cannot satisfy IRC 7491(c) with resect to the estimated tax penalty for the subsequent year (initial year of the SFR examination). Consequently, counsel will not be able to sustain the estimated tax penalty in the initial year of an SFR examination without evidence that the taxpayer had a tax liability for the prior year.

  5. For non-filer cases, internal research (IDRS) must be completed for the prior year to determine if the taxpayer filed a return. The IDRS research should include IMFOLT, IMFOLI, IMFOLV and IRPTR.

  6. If a return was filed for the prior year, the prior year's tax liability should be input in the appropriate line on the RGS penalty input screen.

  7. If no return was filed, the reviewer should determine if the taxpayer was required to file using IDRS research and information contained in the case file.

  8. If the reviewer cannot definitively determine that the taxpayer was required to file a tax return for the prior year and the prior year was not examined by the IRS, then the prior year's tax liability is determined to be zero ($0.00) for purposes of the estimated tax penalty input screen in RGS. The taxpayer will have met one of the exceptions to the penalty and therefore, will not be subject to the penalty for the first year of the SFR examination.

    Reminder:

    Similar to the failure to pay penalty, at the examination level, the estimated tax penalty is applicable to originally filed delinquent returns and SFR years only.

4.8.9.16.2.6  (07-09-2013)
Delinquent Return Filed During Examination

  1. When a taxpayer files a delinquent return with Examination (either the field group examiner or the reviewer), the statute of limitations begins to run for both the tax shown on the return and for any applicable penalties attributable to that tax. Therefore, it is in the government's best interest to ensure both the tax and the applicable penalties are assessed as soon as possible after the delinquent return is filed.

  2. IRM 4.4.9, Delinquent and Substitute for Return Processing, provides details regarding how to process these delinquent returns, whether they are filed before a TC 150 from an SFR has posted or after a TC 150 from an SFR has posted.

  3. In either case, the reviewer must ensure that when the delinquent return was processed, the applicable delinquency penalties (FTF, FFTF (with area counsel approval prior to assessment), FTP, and failure to pay estimated income tax) were assessed as warranted.

  4. A notice of deficiency issued for a delinquently filed return should not include any penalty amounts attributable to the tax shown on the return as filed. As noted earlier, the portion of the penalties attributable to the tax shown on the return as filed are not subject to deficiency procedures.

  5. The reviewer must carefully review the IMFOLT/BMFOLT to ensure the appropriate penalties have been assessed when the delinquent return was processed.

  6. If FTF, FFTF, FTP, and estimated tax penalties are applicable to the original tax shown on the delinquently filed return but these penalties were not assessed, the reviewer must take steps to have the penalties assessed prior to issuing the notice of deficiency. The reviewer will need to prepare a partial assessment that will consist solely of the penalty amounts:

    1. Print an examination report that will reflect no adjustments to taxable income and no additional tax liability, but reflects the applicable penalties based on the tax originally reflected on the return and the date filed.

    2. Print a Form 5344, Examination Closing Record, that reflects only penalty transaction codes in Item 12. Use the applicable disposal code.

    3. Fax the first two pages of the delinquent return, the examination report (with penalty schedules), and the Form 5344 to the appropriate FORT Unit for a partial assessment. Note on the fax cover sheet that the partial assessment is for purposes of assessing penalties that should have been assessed when the delinquent return was originally processed.

  7. Once the partial assessment for the applicable penalties has been posted, prepare the notice of deficiency as usual. The reviewer must enter the previously assessed penalties to ensure proper computation of penalties on the additional deficiency.

    Note:

    At the examination level, the failure to pay estimated income tax under IRC 6654 or IRC 6655, Failure by Corporation to Pay Estimated Income Tax, and the failure to pay penalty under IRC 6651(a)(2) only apply to the tax shown on an originally filed return or to the tax shown on an SFR. Neither the estimated tax penalty nor the failure to pay penalty are asserted on an examination report for an additional deficiency. Refer to IRM 20.1.2, Failure to File/Failure to Pay Penalties, and IRM 20.1.3, Estimated Tax Penalties, for further details.

4.8.9.16.3  (07-09-2013)
Open Criminal Cases

  1. If the case is an active criminal case, there are less than 210 days remaining on the statute, and a consent needs to be obtained or a notice of deficiency needs to be issued to protect the statute, follow the procedures in IRM 25.1.4.3.7, Statute Protection, to submit Form 10498-B, Joint Investigations Intent to Solicit Consent to Extend Statute, to the appropriate special agent in charge (SAC).

    1. If the decision is made to issue the notice of deficiency, use Letter 531-C, Notice of Deficiency for Open Criminal Case, and Form 4089-A, Notice of Deficiency Statement, for the letter and substitute for the waiver in the statutory notice.

    2. No waiver or other form permitting the taxpayer to agree to a deficiency will be prepared.

    3. Area counsel's written approval of the notice of deficiency is required prior to issuance.

    4. Once issued, a copy of the notice of deficiency should be provided to the appropriate special agent in charge (SAC).

  2. If only one spouse is liable for the fraud penalty, separate notices of deficiency are issued. The fraud penalty will be included on the notice for the culpable spouse only.

4.8.9.16.4  (07-09-2013)
Civil Fraud Penalty (IRC 6663)

  1. If the taxpayer is convicted (after trial or upon guilty plea) of a violation under IRC 7201, Attempt to Evade or Defeat Tax, the taxpayer is collaterally estopped from denying liability for a civil fraud penalty. Thus, the civil fraud penalty is automatic and cannot be conceded by Examination.

  2. The doctrine of collateral estoppel does not apply if the taxpayer was convicted of a violation of IRC 7203, Willful Failure to File Return, Supply Information or Pay Tax, or IRC 7206(1), Declaration Under Penalties of Perjury. Thus, in these circumstances, the civil fraud penalty is not automatic.

  3. The delinquency and fraud penalties can be asserted concurrently. If asserting the IRC 6651(f), Fraudulent Failure to File Penalty, and the IRC 6663, Fraud Penalty, on the same tax period of the taxpayer, see IRM 20.1.5.14.2, Penalty Assertion.

4.8.9.16.5  (07-09-2013)
Alternative to Civil Fraud Penalty

  1. The accuracy-related penalty (IRC 6662) should be included in the explanation of adjustments as an alternative penalty to the civil fraud penalty except in the following situations.

    1. A criminal conviction under IRC 7201, Attempt to Evade or Defeat Tax, collaterally estops the taxpayer from denying fraud, or

    2. The statute of limitations has expired in the absence of a finding of fraud.

  2. The following alternative penalty explanation for the accuracy-related penalty may be used following the explanation of the civil fraud penalty.

    In the alternative, if it is determined that the underpayment of tax in the amount of $----- for the taxable year ended ----- is not due to fraud, then it is determined that the underpayment of tax in the amount of $----- is due to negligence or disregard of rules or regulations under section 6662(b)(1) of the Internal Revenue Code or the underpayment constitutes a substantial understatement of income tax under the provision of IRC 6662(b)(2).

  3. Refer to IRM 4.8.9.16.2.4 (5), Penalty Explanations, for the alternative penalty explanation for the failure to file penalty following the explanation of the fraudulent failure to file penalty.

4.8.9.16.6  (07-09-2013)
Tax Required to Be Withheld at Source

  1. A notice of deficiency with a deficiency from income tax required to be withheld at source under Chapter 3 of the Internal Revenue Code will include the following opening paragraph in Letter 902 (DO):

    "In accordance with the provisions of existing internal revenue laws, notice is given that the determination of your liability for withholding of income tax at source for the taxable year ended ----- discloses a deficiency of $-----. The attached statement shows the computation of the deficiency."

4.8.9.16.7  (07-09-2013)
Tip Income and FICA Tax Informational Notice

  1. An informational notice should be sent to the taxpayer with the notice of deficiency when tip income is adjusted and FICA tax and penalties are assessed. The notice informs the taxpayer that a separate notification will be (or has been) sent from the campus for the FICA tax and penalties. The notice will lessen the confusion regarding the receipt of two separate bills for income tax and FICA tax and penalties.

  2. The informational notice is not actually part of the notice of deficiency. Therefore, the following actions must be taken when the notice is sent with the notice of deficiency:

    1. The informational notice must be labeled "For Informational Purposes Only."

    2. The informational notice must be on a separate page apart from any of the actual parts of the notice of deficiency.

    3. The specific language shown in Exhibit 4.8.9-5, FICA Tax Disclosure Statement, must be used for the informational notice.

4.8.9.16.8  (07-09-2013)
Notices With Prepayment Credit Adjustments

  1. When there is an understatement of prepayment credits, a statement must be included with the notice of deficiency after the computation statement. Exhibit 4.8.9-6, Prepayment Credit Adjustment, contains the statement that should be used to set forth the adjustment to prepayment credits. This statement does not apply to adjustments listed in IRC 6411(b)(4), Tentative Carryback and Refund Adjustments, such as earned income tax credit (EITC) and fuel tax credits.

  2. The notice of deficiency waiver will show the full statutory deficiency before adjustments to the prepayment credits.

  3. In no case will the informational statement accompanying the notice of deficiency reflect an adjustment decreasing the prepayment credits claimed by the taxpayer. Under IRC 6201(a)(3), Assessment Authority, assessments based on such adjustments are not subject to deficiency procedures.

    1. Any adjustment decreasing prepayment credits claimed by the taxpayer will be corrected prior to the issuance of the notice of deficiency by Technical Services.

    2. Technical Services will fax the examination report, Form 5344, Examination Closing Record, and Form 3198, Special Handling Notice for Examination Case Processing, to the appropriate CCP site to decrease the prepayment credits prior to issuance of the notice of deficiency. After the partial adjustment is completed, CCP will stamp the Form 5344"Request Completed" and fax a copy to Technical Services for association with the original case file to show the adjustment was completed.

    3. The reviewer must act to ensure the prepayment credit adjustments are assessed before the statute expires and the notice of deficiency resulting from other issues is issued timely.

4.8.9.16.9  (07-09-2013)
Earned Income Credit and Fuel Tax Credits

  1. Adjustments to earned income tax credit (EITC), fuel tax credits and other credits listed in IRC 6411 (b)(4), are included in the deficiency amount for tax computation purposes. However, separate assessments are made for EITC, fuel tax credits and other deficiency amounts due when assessed.

  2. The special handling notice should indicate which credit is includible in the deficiency amount and on the waiver form.


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