Every year the IRS sends millions of letters and notices to taxpayers for a variety of reasons. Many of these letters and notices are for informational purposes only and do not need a taxpayer response. Many more of these letters and notices are benign and can be dealt with simply, without having to call or visit an IRS office. Some letters and notices portend adverse action by the IRS in the event of an inadequate response by the taxpayer. It is unwise for a taxpayer to ignore any of the foregoing letters and notices, but ignoring them will not necessarily cause permanent impairment of the taxpayer’s legal rights.
However, a handful of the letters and notices cannot be ignored without serious adverse legal consequences for the taxpayer, and this article identifies those letters and notices and describes those adverse legal consequences. These are the IRS letters and notices a taxpayer must not ignore. We will discuss in three parts:
- Statutory Notice of Deficiency (Ninety Day Letter)
- Final Partnership Administrative Adjustment (FPAA) under TEFRA
- The IRS Summons (including an IRS caused Grand Jury Subpoena)
- The Final Notice Before Levy
- Statutory Notice of Denial of a Claim for Refund
- Notice of Computational Adjustment under TEFRA
This article addresses the first two of the Notices referenced above. Mr. Robbins will soon post additional articles regarding the remaining Notices referenced above.
1. Statutory Notice of Deficiency (Ninety Day Letter)
The statutory notice of deficiency is a common IRS letter, issued at the end of an income, estate or gift tax examination, where the IRS and the taxpayer cannot agree to the results of the IRS examination. The form is generally referred to as a 90-day letter because the taxpayer is given the opportunity either to agree within ninety days to pay the tax or, in the alternative, to petition the U.S. Tax Court for a redetermination of the IRS’s notice of deficiency. The 90-day letter is also referenced as the taxpayer’s ticket to Tax Court where the taxpayer can litigate his claim without first paying the tax deficiency. If the taxpayer wishes the Tax Court to hear his case, the taxpayer or counsel must prepare and file with the Tax Court a petition for redetermination within the ninety-day period. If the taxpayer defaults on the 90-day letter, the taxpayer is forever barred from filing a Tax Court petition to litigate the merits of his case.
The reason the taxpayer does not want to ignore the 90-day letter is that, if the taxpayer does not petition the Tax Court within this 90-day period, upon the expiration of the ninetieth day, the IRS will assess and bill the taxpayer for the deficiency (plus applicable penalties and interest), since the adjustment is now final and no longer merely a proposed adjustment. If the taxpayer is unable to pay the assessed deficiency, the matter will be forwarded to the IRS collection apparatus for forced collection activity.[i]
The taxpayer will receive the statutory notice of deficiency by certified mail. A taxpayer can recognize a statutory notice of deficiency by reading the first page. The notice will be clearly identified as a “Notice of Deficiency” in multiple places. It will identify the tax year, type of tax, and amount of tax deficiency. It will contain an abbreviated discussion of the taxpayer’s rights to petition the Tax Court. When the taxpayer gets her hands on a statutory notice of deficiency, the next move is imperative-get it to her tax professional without delay. Do this, even if the taxpayer thinks the tax professional is receiving copies of everything from the IRS. If the taxpayer doesn’t have a tax professional, get one.
2. Final Partnership Administrative Adjustment (FPAA) under TEFRA[ii]
The FPAA is the statutory notice of adjustments (as distinguished from a statutory notice of deficiency) in a partnership proceeding that is subject to judicial review in the Tax Court, the Court of Federal Claims, or the district court where the partnership’s principal place of business is located. The FPAA is the notice required to be sent to the partnership’s Tax Matters Partner, notice partners and representatives of notice groups at the completion of a partnership’s tax examination.[iii] It reflects the IRS’s final determination of the correct treatment of partnership items; however, it is not a tax deficiency notice. Only partnership adjustments are properly identified in an FPAA. For partnership tax years ending after August 5, 1997, an FPAA may also include penalty issues that are determined at the partnership level.
Within ninety days after the mailing of the FPAA, the Tax Matters Partner may file a petition for readjustment of partnership items in the Tax Court, the district court in which the partnership’s principal place of business is located, or the Court of Federal Claims. During such ninety-day period, no other partner may file a petition for judicial review. If the Tax Matters Partner does not file a petition during the ninety days period, any notice partner or 5% partner group may, within sixty days following the close of such ninety-day period, file a petition with any of the courts in which the TMP could have filed a petition. If all partners default on the FPAA, the adjustments in the FPAA are conclusively determined for all time, and the IRS will assess and bill the taxpayer for the deficiency (plus and applicable penalties and interest) on the taxpayer’s return resulting from the adjustments in the FPAA. If the taxpayer is unable to pay the assessed deficiency, the matter will be forwarded to the IRS collection apparatus for forced collection activity.
There are additional adverse consequences for a taxpayer defaulting on an FPAA that are significantly worse than the negative consequences of defaulting on a 90-day letter. In particular, in a non-TEFRA audit, the taxpayer, if he chooses, can ignore all or any part of the IRS audit, default on the statutory notice of deficiency, pay the tax, and ultimately obtain full administrative and judicial consideration of the taxpayer ’s claim in a refund suit. This traditional refund route is unavailable under TEFRA. After the enactment of TEFRA, one partnership audit, notice and any TEFRA judicial proceeding conclusively binds all partners for all partnership items. The IRS determination in a TEFRA audit is conclusive and, except for a TEFRA judicial proceeding, cannot be challenged in any court, except for computational issues. A taxpayer wishing to challenge the IRS TEFRA determination must make that challenge under the TEFRA regime. The elimination of the refund route for taxpayers under TEFRA significantly limits the taxpayer’s maneuvering room in challenging the IRS in a TEFRA case.
It is very important to understand that the TEFRA statute of limitations has been held to be a partnership item.[iv] As a result, the IRS has taken the position that in order for taxpayers to challenge the timeliness of an FPAA[v], the partnership must raise the issue in a TEFRA proceeding, otherwise the statute of limitations defense is waived and the FPAA is deemed timely for all intents and purposes. Whether or not the IRS’s position is ultimately upheld, taxpayers do not want to ignore a late FPAA in the mistaken belief that the FPAA is ineffective. If the IRS is correct, defaulting on a late FPAA is no different than defaulting on a timely FPAA, that is, all partnership item adjustments in the FPAA will be conclusively determined by the terms of the FPAA.
The taxpayer can recognize an FPAA by reading the first three pages. The FPAA will be clearly identified as a “Notice of Final Partnership Administrative Adjustment” in multiple places. It will identify the partnership and tax year. It will contain an abbreviated discussion of the partners’ rights to petition the FPAA. The taxpayer should not assume that some other partner will be responding to the FPAA. When the taxpayer gets his hands on an FPAA, the next move is imperative-get it to his tax professional without delay. Do this, even if the taxpayer thinks the tax professional is receiving copies of everything from the IRS. If the taxpayer doesn’t have a tax professional, get one.
For more information regarding this topic please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com .
[i] After the taxpayer pays the proposed tax the taxpayer can file a claim for refund and contest the deficiency in district court or U.S. Court of Federal Claims. There may be sound reasons for a taxpayer to intentionally agree to pay the tax and file a claim for a refund at a later time within the period provided by statute.
[ii] Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), any IRS examination and resulting adjustment in the treatment of partnership items appearing on individual and corporate taxpayer returns were determined by individual audits and notices of deficiency which included both partnership and non-partnership items. With TEFRA Congress provided that adjustments to partnership items, whether resulting in deficiencies, refunds, or changes having no tax effect, are determined in a single proceeding at the partnership level rather than at the partner level. Limited Liability Companies (LLCs) that file a Form 1065, U.S. Return of Partnership Income, and their respective members are also subject to TEFRA administrative and judicial procedures and treated in a manner similar to TEFRA partnerships and their partners.
[iii] Typically the IRS sends an original FPAA by certified mail, although the TEFRA statute does not require certified mail, unlike the statute for the 90-day letter.
[iv] See, e.g., Weiner v. United States, 389 F.3d 152, 155–59 (5th Cir. 2004), cert. denied, 544 U.S. 1050 (2005); himblo v. Comm’r, 177 F.3d 119, 125 (2d Cir. 1999); Kaplan v. United States, 133 F.3d 469, 473 (7th Cir. 1998); Barnes v. United States, 80 A.F.T.R.2d 6145 (M.D. Fla. 1997), aff ’d by unpublished op., 158 F.3d 587 (11th Cir. 1998); Slovacek v. United States, 36 Fed. Cl. 250, 255 (1996).
[v] Section 6229(a) provides that in general the limitations period for the assessment of tax attributable to any partnership item or affected item shall not expire before three years after the partnership return is filed. The three-year period runs from the later of (1) the date on which the partnership return was filed, or (2) the last day for filing such return (determined without regard to extensions). The FPAA must be issued within the limitations period for the assessment of tax attributable to any partnership item.