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Part 8. Appeals

Chapter 17. Settlement Computations and Statutory Notices of Deficiency

Section 4. Notices of Deficiency (Cont. 1)

8.17.4  Notices of Deficiency (Cont. 1)

8.17.4.12 
Tentative Allowances and Other Carryback Claims in Notice of Deficiency Statement

8.17.4.12.2  (11-09-2007)
Tentative Allowance When Both Carryback and Loss/Unused Credit Year in Appeals

  1. If the notice of deficiency is being issued and both the tentative allowance year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

  2. Adjust the year with the tentative allowance (the carryback year) based on adjustments made to the loss/unused credit year.

  3. If adjustments to the loss/unused credit year do not result in a deficiency, then -

    1. Do not include the loss/unused credit year in the notice letter.

    2. Include the loss/unused credit year on the waiver (Form 870 or Form 4089), and Form 4089-A (if prepared).

    3. Include the loss year on the Form 5278 with the carryback year.

  4. Follow specific procedures if the adjustments to the loss/unused credit year result in an overassessment. See IRM 8.17.4.14.

  5. Include explanations of adjustments for all adjustments to the loss/unused credit year as well as the carryback year.

8.17.4.12.3  (11-09-2007)
Claim for Credit or Refund When Loss/Unused Credit Year is Not in Appeals

  1. This section discusses cases where a notice of deficiency is being prepared and a claim for credit or refund has been filed to carryback a loss/unused credit to one or more of the years included in the notice of deficiency. The claim is filed on an amended return Form 1040X (individual) or a Form 1120X (corporation).

  2. An amended return is identified by the presence of a TC 291 or 299 on the account module.

  3. If a notice of deficiency is being issued and the examination of the year of the loss/unused credit is not completed or if it cannot be determined if the year is under examination, do not ignore the prior allowance in the notice. Discuss the case with the Appeals Officer since the case may have to be returned to Compliance to examine the loss/unused credit year.

  4. If it can be determined that there is no examination activity on the year giving rise to the carrybacks, and the statute of limitations has expired on that year, include the previously allowed claim amount in the notice.

    1. Although Appeals adjustments may increase taxable income and tax liability in the carryback year, limit the carryback claim to the amount originally allowed on Form 1040X/1120X.

    2. Increasing the amount of a carryback claim may result in a duplicate allowance to the taxpayer. An additional amount should only be allowed when it can be determined that the allowance does not result in duplication.

  5. If it is determined that examination of the loss/unused credit year has been completed, include the carryback claim in the notice. Include the amount determined to be allowable based on the examination adjustments made to the loss/unused credit year.

8.17.4.12.4  (11-09-2007)
Claim for Credit or Refund When Loss/Unused Credit Year Is in Appeals

  1. If the notice of deficiency is being issued and both the carryback claim year and the loss/unused credit year are under consideration in Appeals, include both years in the notice of deficiency.

  2. The year with the carryback claim (the carryback year) should be adjusted based on adjustments made to the loss/unused credit year.

  3. If adjustments to the loss/unused credit year do not result in a deficiency, then see below:

    1. Do not include the loss/unused credit year in the notice letter.

    2. Include the loss/unused credit year on the waiver (Form 870 or Form 4089), and Form 4089-A (if prepared).

    3. Include the loss year on the Form 5278 with the carryback year.

  4. Include explanations of adjustments in the notice for all adjustments to the loss/unused credit year as well as the carryback year.

8.17.4.13  (11-09-2007)
Years with Adjustments Resulting in No Deficiency

  1. Generally, do not include years that have adjustments that result in no deficiency (commonly called a "no change with adjustments" or a "change/no change" year) in a notice letter, waiver, or Form 4089-A (if prepared).

  2. If any adjustment in the year with no deficiency affects the tax liability in the deficiency year, it is determined to be a related year.

  3. If the no change with adjustments year is related to a deficiency year, follow the procedures below:

    1. Do not include the year in which the adjustments result in no deficiency in the notice letter, but include that year on the waiver (Form 870, Form 890, or Form 4089) and Form 4089-A (if prepared).

    2. Include a computation of tax for the no change with adjustments year in the notice as part of the Form 5278.

    3. Include explanations of adjustments for the no change with adjustments year.

  4. A year is also considered related when the years containing a loss/unused credit are under consideration in Appeals along with the years related carryback or carryover years that have deficiencies. If the year in which the adjustments result in zero tax is a loss (or unused credit) year, and both the loss/unused credit year and the carryback or carryover year are under consideration in Appeals, then see below for procedures:

    1. Do not include the year in which the adjustments result in zero tax (loss/unused credit year) on the notice letter, but do include it on the waiver (Form 870 or Form 4089) and Form 4089-A (if prepared).

    2. Include a computation of tax for the loss/unused credit year in the notice as part of the Form 5278.

    3. Adjust the carryback year based on adjustments made to the loss/unused credit year.

    4. Include explanations of adjustments for all adjustments to the loss/unused credit year as well as the carryback year.

8.17.4.14  (11-09-2007)
Overassessment Years in the Case

  1. Multiple year examinations can result in a proposed deficiency for one or more years and a proposed overassessment for other years. When this occurs, the overassessments will not be included in the notice of deficiency.

    1. The overassessment year is not included on the letter, waiver, Form 4089/4089-A or tax computation form.

  2. Generally, because the adjustments are related, the Service will not process the overassessment until the deficiency can be assessed. However, if the issue 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.

  3. If adjustments which result in an overassessment are related to deficiency adjustments, computations of any overassessment years plus explanations of adjustment may be included in the notice as a separate exhibit.

8.17.4.14.1  (11-09-2007)
Preparing a Claim Invitation Letter

  1. Although 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.

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

  3. The combination of (1) and (2) 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, if the taxpayer has not filed protective claim(s), at the Appeals Officer’s option a claim invitation letter may be prepared by the Tax Computation Specialist and issued along with the notice.

    1. The claim invitation letter should be mailed separately and ordinarily should not be "certified" or "registered."

    2. A pattern letter is set out in an exhibit. See Exhibit 8.17.4-3.

8.17.4.15  (11-09-2007)
Including Penalties/Additions to Tax in the Notice of Deficiency

  1. The type and amount of each addition to the tax or penalty, and the applicable code section must be shown separately for each year.

  2. Each addition to tax or penalty should be distinguished. For example, the failure to file penalty should be designated as IRC 6651(a)(1).

  3. A computation of the penalty/addition to tax must be included in any notice imposing a penalty or addition to tax that is issued after December 31, 2000, per IRC 6751. IRC 6751 also requires that the notice include the name of the penalty and the section under which the penalty is imposed.

  4. Penalties should have explanatory paragraphs included in the notice of deficiency.

  5. Generally, the provisions of the code sections in effect for the loss year generating the carryback govern penalties applicable to carryback years. For example, if a carryback from 1991 to 1988 is recaptured and negligence applies, the 20 percent IRC 6662(a) rate is used rather than the 5 percent IRC 6653(a)(1) rate for the 1988 deficiency.

  6. Discussion of "substitute for return" cases and the assertion of the IRC 6651(a)(2) addition to tax is subsequently discussed. See IRM 8.17.4.15.3.1.

  7. For procedures concerning repealed IRC 6653 penalties, refer to the historical IRM 8.17.4 archived on the Publishing web site.

8.17.4.15.1  (11-09-2007)
IRC 6662 Alternative to IRC 6663

  1. It is recommended that the IRC 6662 accuracy-related penalty should be included in the explanation of adjustments as an alternative penalty to the civil fraud penalty under IRC 6663 except in the following situations:

    • A criminal conviction under 26 U.S.C. 7201 collaterally estops the taxpayer from denying fraud, or

    • The statute of limitation has expired in the absence of a finding of fraud.

  2. Remember that IRC 6663 and IRC 6662 cannot be asserted if the taxpayer did not file a return.

  3. Consult with the Appeals Officer if the fraud penalty is asserted to see if the IRC 6662 penalty should be included in the notice of deficiency as an alternative issue.

  4. If the Appeals Officer instructs that the IRC 6662 penalty should be included in the notice of deficiency as an alternative issue to the IRC 6663 civil fraud penalty, then an explanation for the IRC 6662 penalty must be included in the notice following the explanation of the civil fraud penalty. See below for a sample format:

    "Alternatively, to the extent that it is determined that fraud does not apply to any portion of the underpayment, you are liable for an accuracy-related penalty under section 6662(a) of the Internal Revenue Code for any portion of the underpayment which is relieved from liability for fraud because there was (1) a substantial understatement of income tax, (2) a valuation misstatement(s), or (3) you were negligent (or disregarded rules or regulations)."

  5. The alternative penalty is not shown on the letter, the waiver, the summary of tax and penalty liability included on Form 4089/4089-A, or on Form 5278. The alternative issue is only shown in a paragraph that will immediately follow the explanation of the civil fraud penalty.

8.17.4.15.2  (11-09-2007)
Alternative to IRC 6651(f)

  1. Consult with the Appeals Officer if the fraudulent failure to file penalty under IRC 6651(f) is asserted to see if the IRC 6651(a)(1) failure to file penalty should be included in the notice of deficiency as an alternative issue.

  2. If the Appeals Officer instructs that the failure to file penalty should be included in the notice of deficiency as an alternative issue to the fraudulent failure to file penalty, then an explanation for the failure to file penalty must be included in the notice following the explanation of the fraudulent failure to file penalty. See below for a sample format:

    "In the event the fraudulent failure to file penalty under Internal Revenue Code section 6651(f) is not sustained, in the alternative it is determined that because your income tax return for the taxable year ended ___was not filed within the time period required by law; and you have not shown that such failure to timely file your return was due to reasonable cause, ___percent of the tax is added as provided by section 6651(a)(1) of the Internal Revenue Code for the taxable year ended ___."

  3. The alternative penalty is not shown on the letter, the waiver, the summary of tax and penalty liability included on Form 4089/4089-A, or on Form 5278. The alternative issue is only shown in a paragraph that will immediately follow the explanation of the fraudulent failure to file penalty. (See IRM 8.17.4.5.3, paragraph (7)).

8.17.4.15.3  (11-09-2007)
IRCs 6651(a)(1) and 6651(a)(2) when Return Filed

  1. If a return is not timely filed, IRC 6651(a)(1) provides for a penalty of 5% if the failure is for not more than one month, with an additional 5% for each month or fraction thereof during which the failure continues, but not in excess of 25%. This penalty is computed on the net amount due as defined in IRM 8.17.7.3, Failure to File, IRC 6651(a)(1).

  2. If the taxpayer files a return, only the IRC 6651(a)(1) failure to file penalty can be asserted in the notice of deficiency.

  3. The IRC 6651(a)(2) failure to pay penalty cannot be asserted in a notice of deficiency when the taxpayer has filed a return, because this penalty applies only to tax shown on a filed return, not to a deficiency.

    Note:

    The IRC 6651(a)(2) failure to pay penalty does not apply to a deficiency unless the taxpayer is a nonfiler and substitute for return procedures apply.

  4. If IRC 6651(a)(2) was assessed by the Campus when the return was filed, the amount of the penalty imposed under IRC 6651(a)(1) must be reduced by the amount of the IRC 6651(a)(2) penalty assessed for any month or part of a month during which both penalties apply.

    1. See IRM Exhibit 8.17.7-1 for a sample computation.

8.17.4.15.3.1  (11-09-2007)
Nonfilers: Substitute for Return Procedures in Notices

  1. If a taxpayer does not file a return, then the IRS can assert IRC 6651(a)(2) on the deficiency if a valid "substitute for return" (SFR) under IRC 6020(b) has been prepared, but only for returns due after July 30, 1996.

  2. A valid SFR must have been prepared under IRC 6020(b) in order to assert IRC 6651(a)(2) on a nonfiler.

    1. The requirements of a valid IRC 6020(b) return are discussed in Treas. Reg. section 301.6020-1T.

    2. See IRM 8.17.7.4.1, Nonfilers: Substitute for Return (SFR) and IRC 6651(g), for detailed discussion of SFR returns and IRC 6651.

  3. For returns due after July 30, 1996, a notice of deficiency issued on a valid substitute for return as described in IRC 6020(b) will include both a failure to file (FTF) penalty under IRC 6651(a)(1), and a failure to pay (FTP) penalty under IRC 6651(a)(2).

  4. On these cases, both the IRC 6651(a)(1) and IRC 6651(a)(2) penalties are shown on the letter, the waiver (Forms 870, 890, and 4089), Form 4089-A (if prepared) and the tax computation form.

  5. The IRC 6651(a)(1) FTF penalty will be computed at 4.5 percent per month, not to exceed a total of 22.5 percent.

    Note:

    The penalty rate for IRC 6651(a)(1) is 5 percent per month. However, since the IRC 6651(a)(1) and IRC 6651(a)(2) penalties are asserted concurrently on substitute for returns, a special computation is necessary. The 5 percent per month IRC 6651(a)(1) penalty must be reduced to 4.5 percent per month for the months when both penalties are asserted.

  6. The IRC 6651(a)(2) FTP penalty is computed at 0.5 percent a month (or fraction thereof), not to exceed a total of 25 percent. This penalty is imposed from the original due date of the return and may accrue for a period of up to 50 months.

    1. If the notice of deficiency is issued after this 50 month period, or if the taxpayer has paid the deficiency in full, it will be possible to determine the full amount of the IRC 6651(a)(2) penalty. This amount should be computed and included in the notice of deficiency.

    2. If the amount of the IRC 6651(a)(2) penalty has not accrued for the full 50 month period and the deficiency remains unpaid, then the notice of deficiency should not include a dollar amount for the IRC 6651(a)(2) penalty. Instead, the amount of the penalty should be shown in the notice letter as an asterisk (*), with an explanatory paragraph. See the following for an example of the format to use on the notice of deficiency letter:

      Department of the Treasury
      Internal Revenue Service      		 Letter Number: 894(cg)-c

      Appeals Office
      (Address)       		Person to Contact:
      Appeals Officer’s name
      Employee ID
      Tel: (XXX) XXX-XXXX
      Fax: (XXX) XXX-XXXX

      Date:       		Refer Reply to:
      AP:XX:XX:XX
        In Re:
      Income Tax
      JOHN Q. TAXPAYER
      200 MAIN STREET
      ANYTOWN, CA 90000-1111       		Form Number:
      1040
        SSN/EIN Number:
      XXX-XX-XXXX
        Last Day to File a Petition with the United States Tax Court:
       
       
      Certified Mail
      Notice of Deficiency
      Tax Year(s) Ended Tax Penalties or Additions to Tax
          IRC 6651(a)(1) IRC 6651(a)(2)  
      December 31, 2004 $5,000.00 $1,125.00 *  
      * The IRC 6651(a)(2) addition to the tax is a penalty of 0.5 percent of the unpaid tax liability that will be added to the tax for each month, or fraction thereof, of nonpayment, up to a maximum of 25 percent, based upon the liability shown on the section 6020(b) return, or the final determined liability, if less.
               

  7. An asterisk should also be used instead of a penalty amount on the waiver, Form 4089-A and the tax computation form. A very brief explanation should be given, such as "IRC 6651(a)(2) amount to be determined" .

  8. Explanations of the IRC 6651 penalty should also be included in the notice of deficiency:

    1. Paragraphs to use if the IRC 6651(a)(2) penalty can be computed and included in the notice of deficiency:

      "Since you did not file your return for the tax year ended ___within the time prescribed by law, and you did not show that such failure was due to reasonable cause and not due to willful neglect, an IRC 6651(a)(1) failure to file penalty of 4.5 percent of the net amount due is added to the tax for each month or part of a month for which your return was late. This penalty cannot exceed 22.5 percent.

      In addition, since you did not pay the amount shown as tax on the return on or before the date prescribed by law and you did not show that such failure was due to reasonable cause and not due to willful neglect, an IRC 6651(a)(2) failure to pay penalty of 0.5 percent of the net amount due is added to the tax for each month or part of a month for which such failure continues. This penalty cannot exceed 25 percent."

    2. If the IRC 6651(a)(2) penalty is still accruing, an amount will not be computed for the penalty and included in the notice. Use the following paragraphs:

      "Since you did not file your return for the tax year ended ___within the time prescribed by law, and you did not show that such failure was due to reasonable cause and not due to willful neglect, an IRC 6651(a)(1) failure to file penalty of 4.5 percent of the net amount due is added to the tax for each month or part of a month for which your return was late. This penalty cannot exceed 22.5 percent.

      In addition, since you did not pay the amount shown as tax on the return on or before the date prescribed by law and you did not show that such failure was due to reasonable cause and not due to willful neglect, an IRC 6651(a)(2) failure to pay penalty of 0.5 percent of the net amount due will be charged at a later date for each month or part of a month for which such failure continues. This penalty cannot exceed 25 percent."

8.17.4.16  (11-09-2007)
Interest Computations in Notices of Deficiency

  1. An interest computation will not be sent to the taxpayer with the notice of deficiency.

  2. Neither IRC 7522 nor IRC 6631 require that an interest computation must be included with the notice of deficiency.

  3. Chief Counsel has determined that IRC 7522 does not require that an interest computation be included with Notices of Deficiency.

    1. Per Counsel's IRM 33.1.2.8.10.1, "A notice of deficiency is not required to inform the taxpayer that statutory interest at the legal rate will apply to any deficiency determined (or redetermined) by the Commissioner or the Tax Court. The reason is that a notice of deficiency relates exclusively to deficiencies. Generally, interest is not subject to deficiency procedures. (IRC 6601(e)(1).) The Service, however, includes a statement regarding the accrual of interest in each notice of deficiency."

      Note:

      See IRM 8.17.4.9.7. This is the required interest statement to include on Form 4089/4089-A.

    2. Also see IRM 33.1.2.8.10, Compliance with Section 7522 Notices to Taxpayers, for further discussion.

  4. IRC 6631 does not require the IRS to include interest on notices of deficiency it issues to taxpayers.

    1. Rather, IRC 6631 merely provides that if the IRS includes interest on any notice sent to the taxpayer, then it must also show how that interest was computed.

    2. Therefore, since the notice of deficiency should not include an interest amount, there is no requirement under IRC 6631 that an interest computation be included.

8.17.4.16.1  (11-09-2007)
Addressing Interest on Substantial Underpayment (Tax Motivated Transactions)

  1. IRC 6621(c), pertaining to substantial underpayments attributable to tax motivated transactions (TMT), was repealed for returns with due date (determined without regard to extensions) is after December 31, 1989. However, some TMT cases are still active, and/or still in collection status and TMT rates continue to apply to those balances. For detailed information on IRC 6621(c), refer to the historical IRM 8.17.2 archived on the Publishing web site.

8.17.4.16.2  (11-09-2007)
Notices of Deficiency with Interest on Large Corporate Underpayments

  1. IRC 6621(c) provides for a two-percent increased interest rate on the underpayment of a tax by a "C" corporation if the underpayment exceeds $100,000. For a complete discussion of large corporate underpayments, see IRM 8.17.6.6, Increased Interest Rate for Large Net Corporate Underpayments, IRC 6621(c).

  2. If the requirements of IRC 6621(c) are met, interest accrues at the higher rate for all tax periods after December 31, 1990.

  3. If the taxpayer is subject to the increased rate of interest under this section, the notice of deficiency letter should include a paragraph similar to the following:

    "If you are a C corporation, under Internal Revenue Code section 6621(c), large corporate underpayments may be subject to a higher rate of interest than the normal rate of interest for underpayments."

    1. The Letter 901(cg) available on APGolf includes this language.

    2. Since some letters (such as the Letter 3424(cg)) may not include this language , check the notice letters carefully to make sure this paragraph is included if IRC 6621(c) interest is applicable.

  4. A paragraph concerning this section should be shown on Form 4089, Form 4089-A, or on a continuation sheet attached to these forms. Recommended language is as follows:

    "It is determined that the deficiency for the taxable year(s) ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year(s) ended ___."

  5. The paragraph shown in (4) should be modified if there are carrybacks allowed in the notice of deficiency.

    1. The paragraph must be modified to inform the taxpayer that the deficiency subject to the increased rate of interest is computed without regard to loss and credit carrybacks.

    2. This is especially important if the deficiency in the notice of deficiency is less than $100,000. The increased corporate interest under IRC 6621(c) could still apply if the deficiency before any carrybacks is more than $100,000.

    3. See modification of paragraph, below:

      "It is determined that the deficiency for the taxable year ___is a large corporate underpayment under section 6621(c) of the Internal Revenue Code. Accordingly, the annual rate of interest payable on your income tax shall be 2 percentage points higher than the underpayment rate established under section 6621(a) of the Internal Revenue Code for the tax year ended ___. The amount of the large corporate underpayment is computed without regard to any net operating loss carryback, capital loss carryback or credit carryback, pursuant to IRC 6601(d)."

  6. Form 5403 Instructions to APS Spreadsheet:

    1. The Tax Computation Specialist will enter the "Notice Date" on the Form 5403 Instructions to APS spreadsheet date. The "Notice Date" is the date of the letter/notice that activates the large corporate underpayment rate.

    2. The Form 5403 Instructions to APS spreadsheet is available on the Appeals Tax Computation Specialist web site at http://appeals.web.irs.gov/taxcomput/Default.htm. After the spreadsheet is completed, it should be attached to the inside left side of the administrative file folder.

    3. See IRM 8.17.5.2, Information to include on the Form 5403 Instructions to APS Spreadsheet, for more information.

8.17.4.17  (11-09-2007)
Prepayment (Refundable) Credits

  1. The deficiency to be shown in the notice is the statutory deficiency before considering prepayment credit adjustments that the Tax Court has no jurisdiction over, such as withholding credits. (Prepayment credits are also referred to as "refundable credits." )

    1. The notice of deficiency letter will show only the statutory deficiency, and will not include any adjustment to prepayment credits that the Tax Court does not have jurisdiction over.

    2. See IRM 8.17.4.9.4. This subsection covers procedures on how to include adjustments to these credits on the notice of deficiency face sheet.

    3. See IRM 8.17.4.27. This subsection covers agreement forms in notices of deficiency. It includes procedures on how to include adjustments to these credits on the waiver forms.

  2. Since the earned income credit (EIC), additional child tax credit (ACTC), and credit for federal tax paid on fuels are included in the definition of a statutory deficiency (per IRC 6211), any adjustments to these credits would be included in the statutory deficiency shown in the notice. Tax Court has jurisdiction over adjustments to these credits.

    1. The notice of deficiency letter will show the deficiency after consideration of any adjustment to EIC, ACTC, or credit for federal tax paid on fuels.

    2. See IRM 8.17.4.19. This covers procedures for Notices of Deficiency if the EIC is adjusted.

    3. See IRM 8.17.4.20. This covers procedures for Notices of Deficiency if the ACTC is adjusted.

    4. See IRM 8.17.4.21. This covers procedures for Notices of Deficiency if the credit for federal tax paid on fuels is adjusted.

8.17.4.18  (11-09-2007)
Notice of Deficiency on Jeopardy Assessment Case

  1. Generally, the area Examination function is responsible for issuing the notice of deficiency in jeopardy assessment cases. The taxpayer may protest the notice of deficiency to Appeals.

  2. On occasion, Appeals receives the case prior to issuance of the notice of deficiency. In these instances, IRC 6861(b) states the notice of deficiency must be issued within 60 days after the jeopardy assessment is made or the jeopardy assessment is not valid. The notice of deficiency, however, remains valid.

  3. If Appeals issues the notice of deficiency, a copy of the notice is sent to the appropriate Examination function.

  4. The office having jurisdiction of the case must establish strict controls to ensure there is sufficient time for associate area Counsel to review the notice before issuance.

  5. Generally, the Tax Computation Specialist will verify tax computations when a jeopardy assessment is necessary on cases pending in Appeals.

  6. Compliance function uses Letter 895(DO) or Letter 896(DO) for notices in jeopardy cases. Generally, Appeals will use the Letter 901(cg) for notices in jeopardy assessment cases, with the exceptions noted below:

    1. Letter 894(cg) may be used for a jeopardy assessment made to an individual income tax case as long as the following sentence is added to the opening paragraph:
       
      "We have assessed the deficiency under the Internal Revenue laws that apply to jeopardy assessments."
       

    2. Letter 3424(cg) will be used for jeopardy assessment notices involving transferee liability. See IRM 8.7.5, Transferee and Transferor Liabilities, for discussion of Letter 3424(cg) and instructions on opening paragraphs to use.

    3. These letters are available in APGolf.

  7. Letter 901(cg) on APGolf:

    1. APGolf should be used to generate the Letter 901(cg).

    2. The APGolf letter has a two opening paragraph options; one for affiliated companies, and one for all other cases such as corporate, estate, gift, excise and withholding of tax at the source. Select the appropriate opening paragraph option on the input screen, and APGolf will generate the correct opening paragraph.

    3. Besides the selections for the opening paragraph, there is also an option to indicate there is a jeopardy assessment. Select this option, and the jeopardy assessment language will be added to the letter generated by ACDS.

  8. If the amount of the jeopardy assessment equals the amount of the deficiency, follow the procedures discussed below:

    1. Use Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg), if applicable) with an appropriate opening paragraph.

    2. No agreement forms are enclosed with the jeopardy assessment notice.

    3. Letter 895 and Letter 896 used by Compliance contain no waiver language. Therefore, since no agreement forms are enclosed with the notice, the language in the notice letters discussing the taxpayer signing and returning the waiver form must be deleted. Delete the language shown below from Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg), if applicable):
       
      "If you decide not to file a petition with the Tax Court, please sign the enclosed waiver form and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest. The enclosed envelope is for your convenience.
       
      If you decide not to sign and return the waiver, and you don’t file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter (150 days if this letter is addressed to you outside the United States)."

      Note:

      In a transferee notice, Letter 3424(cg) contains the word "liability" instead of the word "deficiency" in the above paragraphs.

    4. Since no agreement forms are enclosed with the notice, Form 4089-A should be used as the summary page. On Form 4089-A, following the summary of tax liability, the following sentence is inserted:
       
      "Assessment of this deficiency has been made against you under the provisions of Internal Revenue laws applicable to jeopardy assessments."

      Note:

      In a transferee notice of liability, replace the word "deficiency" with the word "liability" in the above paragraph.

  9. If the amount of the jeopardy assessment is less than the amount of the deficiency (or transferee liability) asserted in the notice, follow the procedures discussed below:

    1. Use Letter 901(cg) (or Letter 894(cg) or Letter 3424(cg) if applicable) with an appropriate opening paragraph.

    2. Include a waiver form with the notice.

    3. Form 4089-A should be used as the summary page. It is recommended that a summary of assessments be shown on Form 4089-A, following the summary of tax liability. See the following example.
       
      Summary of Jeopardy Assessments
       
      Summary of assessments made under the provisions of the Internal Revenue laws applicable to jeopardy assessments made on __(date) for tax years 1995 and 1996.

    Period Tax Penalties
    01/01/95 – 12/31/95 $141,901.00 $93,135.00
    01/01/96 – 12/31/96 $920,065.00 $734,563.00

  10. When computing the deficiency on any case in which a jeopardy assessment has been made, do not take the jeopardy assessment into account. This means that the amount of deficiency shown on the letter, Form 4089-A, and Form 5278 is not reduced by the jeopardy assessment. (When determining the tax liability per return or as previously adjusted on Form 5278, jeopardy assessments should not be considered.)

  11. If it is determined before the notice is issued that the deficiency for any year is either greater or less than the corresponding jeopardy assessment, the notice should reflect such determined deficiency. If any part of the jeopardy assessment is determined to be in excess of the statutory deficiency, Form 5403, Appeals Closing Record, reflecting the overassessment to be abated should be processed by Appeals Processing Services. If all or any part of such excess has been paid, no refund should be made until the case is closed.

8.17.4.19  (11-09-2007)
Earned Income Credit Adjustments

  1. Prior to November 11, 1988, Earned Income Credit (EIC) adjustments were not subject to deficiency procedures. Instead, EIC adjustments were treated in the same manner as an adjustment of a prepayment credit. In the case of a deficiency, as defined in IRC 6211, EIC adjustments were assessed before issuance of a notice of deficiency.

  2. For deficiencies determined after November 10, 1988, the EIC is part of the deficiency as defined in IRC 6211. Notices of deficiency will include EIC adjustments. No assessment of unagreed EIC adjustments will be made without a notice of deficiency.

  3. See IRM 8.17.5.18, Earned Income Credit, for a more detailed discussion of the EIC.

  4. Explanations should be provided for the earned income credit adjustment. Include these paragraphs with the other explanatory paragraphs written for the notice.

8.17.4.20  (11-09-2007)
Refundable Additional Child Tax Credit

  1. The refundable additional child tax credit is part of the deficiency as defined in IRC 6211. Notices of Deficiency will include refundable additional child tax credit adjustments. No assessment of unagreed refundable additional child tax credit adjustments will be made without a notice of deficiency.

  2. See IRM 8.17.5.19, Additional Child Tax Credit, for a more detailed discussion of the refundable additional child tax credit.

  3. Explanations should be provided for any adjustments made to the refundable additional child tax credit. Include these paragraphs with the other explanatory paragraphs written for the notice.

8.17.4.21  (11-09-2007)
Credit for Federal Tax Paid on Fuels

  1. The credit for federal tax paid on fuels is part of the deficiency as defined in IRC 6211. Notices of Deficiency will include adjustments to the credit for federal tax paid on fuels. No assessment of unagreed credit for federal tax paid on fuels adjustments will be made without a notice of deficiency.

  2. See IRM 8.17.5.20, Credit for Federal Tax Paid on Fuels, for a more detailed discussion of the credit for federal tax paid on fuels.

  3. Explanations should be provided for any adjustments made to the credit for federal tax paid on fuels. Include these paragraphs with the other explanatory paragraphs written for the notice.

8.17.4.22  (11-09-2007)
Notices of Deficiency Involving Conversion of Form 1120-S to Form 1120

  1. Issue the notice of deficiency letter for total liability less liability assessed on Form 1120-S return.

  2. Show this deficiency on Form 4089 or Form 4089-A, waiver Form 870 (if prepared), and the tax computation page.

  3. Explain on Form 4089, Form 4089-A, or the continuation page the reason for the non-recognition of the Form 1120-S.

  4. Use Form 1120-S income as the starting point.

  5. Explain the adjustments and prepare the supporting schedules in the usual manner.

8.17.4.23  (11-09-2007)
Notice of Deficiency Involving Termination Assessment under IRC 6851 (Termination of Taxable Period)

  1. A notice of deficiency for a termination assessment case must be issued within 60 calendar days after the later of:

    1. The due date of the return (including extensions), or

    2. The date the taxpayer filed the return.

  2. If the notice of deficiency is not issued within the 60 calendar day period the termination assessment is invalid, but the notice of deficiency remains valid.

  3. A termination assessment is made when the taxable year of a taxpayer has not ended, or when the taxable year has ended but the due date for filing the return, or the due date as extended, has not arrived ( IRC 6851). Termination assessments may only be made for income tax liabilities. Such assessments may not be made once the date for filing a full year return has passed.

    1. At the end of the full tax year, the taxpayer is required to file a full year return.

  4. When a taxpayer subject to a termination assessment files the full year return, the return will be examined and the correct tax liability determined by the Compliance function.

    1. When the tax reflected on the full year’s return filed by the taxpayer equals the termination assessment, and an examination of the full year’s return results in no additional tax or overassessment, a notice of deficiency will not be issued.

    2. If the amount determined to be the correct liability is greater than the amount shown on the return, a notice of deficiency will be issued in an amount reflecting the difference between the amount shown on the return and the amount determined to be the correct liability.

  5. If the taxpayer does not file a full year return on or before the proper due date, the Compliance function will follow "substitute for return" procedures and a notice of deficiency will be issued. The starting point for adjustments will be zero. Since no return was filed by the taxpayer, the notice of deficiency will be issued in an amount determined to be the correct tax liability for the year.

  6. The taxpayer may protest the notice to Appeals. In some cases, it is possible for Appeals to receive the case prior to issuance of the notice of deficiency. In these cases, Appeals will issue the notice of deficiency.

  7. The letter and forms to use for a notice of deficiency when there has been a termination assessment are shown below:

    1. Letter 894(cg) or Letter 901(cg) is used. No special language is required on the letter to indicate that there has been a termination assessment.

    2. Form 4089 is prepared, or Form 4089-A and waiver Form 870.

    3. Include language on a continuation page to Form 4089 or Form 4089-A notifying the taxpayer of the termination assessment and the amount. See suggested language to use below:
       
      Pursuant to section 6851 of the Internal Revenue Code, your taxable year of ___was terminated on ___, and an assessment was made against you for the income tax considered to be due from you for the taxable period beginning __and ending ___, in the amount of ______.
       
      The termination of your taxable year and the assessment made against you on ____are not taken into consideration in determining the deficiency for the taxable year ended ____,as shown above. Rather, the income tax liability shown by you on the return filed by you for the full taxable year ending ___, is taken into consideration in arriving at the statutory deficiency in income tax shown in this notice, as detailed on the accompanying schedules.
       
      Any portion of the amount collected at the time of termination of your taxable year which is reflected as a credit balance on your Federal income tax account for the taxable year ended ___will be taken into consideration in arriving at the net amount of tax due after final determination of your income tax liability pursuant to this notice of deficiency.

  8. The deficiency is computed without taking the termination assessment into account. This means that the amount of deficiency shown on the letter, Form 4089-A, and Form 5278 is not reduced by the termination assessment. (When determining the tax liability per return or as previously adjusted on Form 5278, termination assessments should not be considered.)

  9. The statutory deficiency may be an amount greater or less than the termination assessment. If any part of the termination assessment is determined to be in excess of the statutory deficiency, then a Form 5403 reflecting the overassessment to be abated will be processed by Appeals Processing Services when the case is closed. If all or any part of such excess has been paid, no refund should be made until the case is closed.

8.17.4.24  (11-09-2007)
Tip Income Cases, and FICA Tax Informational Notice

  1. The Tax Court does not have jurisdiction over FICA taxes on tip income and the 50 percent addition to the tax ("penalty" ) under IRC 6652(b). Therefore, should it be necessary to issue a notice of deficiency, the additional FICA taxes on unreported tip income and the applicable IRC 6652 penalty must be assessed before issuing the notice.

  2. Procedures:

    1. The income tax due on unreported tip income is computed by including the unreported tip income as an adjustment to taxable income in the notice of deficiency on Form 5278.

    2. Prepare Form 885-T to compute the FICA taxes due on the unreported tip income and the penalty under IRC 6652(b).

    3. Instruct the Appeals Officer that the FICA taxes and IRC 6652(b) penalty on the unreported tip income shown on Form 885-T must be assessed before the notice of deficiency is issued.

  3. A tip income and FICA tax informational notice may be sent to the taxpayer with the notice of deficiency when the taxpayer's tip income is adjusted and FICA taxes and penalties are assessed. The informational notice informs the taxpayer that a separate notification will be (or has been) sent from the Campus for the FICA tax and penalty assessments. The informational notice should reduce the taxpayer's confusion about receiving two separate bills, one for the income taxes and another for the FICA taxes and penalty.

  4. The informational notice is not part of the notice of deficiency. Therefore, the following actions must be taken when an informational 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. It should not be attached to any part of the notice of deficiency.

    3. Use the specific language shown in the exhibit to prepare the informational notice. See Ex