This section discusses cases where a notice of deficiency is being prepared, and the taxpayer claimed a tentative allowance on Form 1045 (individual) or Form 1139 (corporation), or a carryback claim on a Form 1040X (individual) or a Form 1120X (corporation), for one or more of the years included in the notice of deficiency.

The procedures for Form 1045/1139 and Form 1040X/1120X differ slightly:

The following briefly describes Form 1045/1139:

The following briefly describes Form 1040X/1120X:

Prepare restricted interest Form 2285 when tentative allowances and other carryback claims are involved.

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).

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.

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

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:

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.

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.

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.

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

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

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.

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

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.

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.

For procedures concerning repealed IRC 6653 penalties, refer to the historical IRM 8.17.4 archived on the Publishing web site.

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

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

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

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

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." )

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.

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.

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.

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

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.

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

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:

Letter 901(cg) on APGolf:

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

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:

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.)

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 Account and Processing Support (APS). If all or any part of such excess has been paid, no refund should be made until the case is closed.

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.

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.

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

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

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.

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

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.

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.

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.

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.

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

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

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

Use Form 1120-S income as the starting point.

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

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

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.

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.

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.

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.

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.

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

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.)

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 Account and Processing Support (APS) 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.

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.

Procedures:

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.

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.

IRC 534(b) provides that the Service may notify taxpayers if a proposed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by IRC 531. Appeals offices are responsible for notifying the taxpayer, where necessary, in cases under their jurisdiction. See IRM 4.10.13-4 for a sample of the notification letter.

IRC 534(c) allows the taxpayer at least 30 days to submit a statement in response to the notification. Regulations require the taxpayer to submit the original and two copies of the statement. Upon receipt, attach the original to the return of the earliest years in which the issue was raised, place two copies in the administrative file. One copy remains in the administrative file and the other copy is for future association with Counsel's legal file.

See IRM 4.10.13, Examination of Returns, Certain Technical Issues, for additional information and procedural instructions for accumulated earnings tax cases.

Some cases have special procedures that apply because of the taxpayer involved. When preparing notices on cases involving these types of taxpayers, follow the normal procedures detailed above as well as the procedures found in the appropriate subsection below.

This subsection details the specialized procedures required for notices of deficiency on cases involving the following:

Form 4089 includes a preprinted agreement form and may be used as the agreement form for most cases. However, it cannot be used for estate and gift tax cases. Form 890 is used as the agreement form for estate and gift tax cases.

When Form 4089-A is used in the notice, prepare agreement Form 870 or Form 890, as appropriate, for inclusion with the notice.

If an adjustment of prepayment credits is involved, the amount to include on the agreement form 870 is the full statutory deficiency before any adjustments to the prepayment credits. Then, insert a statement on the agreement form showing net additional tax due or net overpayment resulting after a proposed deficiency is reduced by understatement of prepayment credits with an explanation on the form similar to the following:

In estate tax cases, incorporate any restrictions to the allowance of the State death tax credit on Form 890.

Counsel's review is needed prior to issuing the notice on the following cases:

If the AO determines Counsel will review the proposed notice of deficiency, he/she will send the administrative file to APS, who will send it to Counsel. The AO should ensure the administrative file that will be sent to Counsel contains the following:

APS will retain any remaining copies of Form 5402 for distribution or mailing when Counsel returns the file.

APS will enter action code SNDC and the current date (date case sent to Counsel) on the update case screen in ACDS.

On a monthly basis, run the SNDC follow-up list to determine whether Counsel has returned the administrative file.

APS usually mails notices of deficiency and maintains the mailing files. However, in some offices, a centralized or consolidated mail room may perform these functions. Mailing records and files must be retained until 5 years after the issuance date.

APS issues the notice of deficiency on cases received with both an approved Form 5402 and a signed notice of deficiency letter.

If the notice of deficiency is for a separate individual return, a window envelope may be used. However, use the right sized envelope to avoid disclosing any information other than the name and address.

If the notice of deficiency is for a joint return, each spouse must receive a notice in an envelope addressed only to them.

Make sure there are a sufficient number of copies of the notice of deficiency and identify them for distribution to the persons designated to receive them.

Verify that the letter, the audit statement, and any agreement form all have the same:

Date the notice of deficiency and all copies. The notice of deficiency MUST be mailed on this date.

Enter the date for the "Last Day to Petition Tax Court" :

Generally, the taxpayer gets the original letter (certified/registered mail) and the representative gets a copy (regular mail). Follow the mailing instructions on the power of attorney form (if there are any). This may include:

The original notice must be mailed by certified or registered mail.

Insert the following in the envelope containing the original notice of deficiency:

Enter the taxpayer’s name, mailing address as it appears on the envelope (in care of representative, if appropriate), and mailing date in the mailing record.

Distribute the remaining copies of the notice of deficiency package as follows:

See IRM 8.2.2 for information on handling a case where the notice of deficiency was mailed to an invalid address.

The statute in the case is the normal or extended statute that existed before the notice of deficiency was issued. Take the following steps depending on whether the statute is open or not:

Once a notice of deficiency is issued, update ACDS.

An entry is required in SNTYPE on all cases where a notice of deficiency or a determination letter has been issued, including docketed cases received in from Compliance or the Campus. Select from the following:

Make an entry in SNDATE = Date Letter mailed.

The expiration date is computer generated.

On the update returns screen enter SND = Y, for each tax period covered by the notice of deficiency.

Under IRC 6603 and Rev. Proc. 2005-18, a remittance made in response to a proposed liability, or after the issuance of a notice of deficiency, will be posted as a payment of tax, unless specifically designated as a deposit by the taxpayer.

Post-statutory notice of deficiency remittances will not deprive the Tax Court of jurisdiction. Remittances made prior to the notice, may deprive the Tax Court of jurisdiction. (See section 4.02 of Rev. Proc. 2005-18). In order to preserve the right to petition the Tax Court a pre-notice remittance must be posted as an "advance payment" . Interest will continue to accrue on accrued interest. In order to stop the running of any further interest, a taxpayer must make a remittance sufficient to cover all accrued interest as of the date of remittance as well as the entire amount of the underlying tax.

If a taxpayer proposes to make an advance payment of the entire deficiency in a pre-90-day income, certain excise tax, estate or gift tax case after the Service proposes a liability, advise the taxpayer that assessment prior to issuance of a notice of deficiency precludes the notice and Tax Court jurisdiction. If the Service receives a full payment remittance and has not received an explanation of the foregoing, promptly contact the taxpayer to explain the impact upon the statutory notice.

When an advance payment is received after agreement is tentatively reached, but before review and approval of the determination, a new agreement form reflecting receipt of the payment is not necessary. If Form 5402, Appeals Transmittal and Settlement Memorandum, is prepared before receipt of the payment, revise it to reflect the receipt and process the remittance. See IRM 8.20.6.2.3, Procedure for Assessing Advance Remittances.

In 90-day cases, do not assess liability for advance payments made after the issuance of the notice of deficiency unless specifically requested. An assessment will not deprive the taxpayer who files a petition of Tax Court jurisdiction. The assessment is usually not made until the case is closed, unless there is a large deficiency.

There are several actions that can occur once a notice of deficiency is issued. The following is a list of the potential actions and the IRM citations where additional information on each can be found:

Disposition of a notice of deficiency occurs in one of the following ways:

Notice of deficiency procedures are generally not used in TEFRA cases. Applicable TEFRA procedures are contained in IRM 8.19, the Appeals Flow-through Entity Handbook.