The LITP Newsletter
November 2002
Robert B. Nadler Editor
Issue 4
The objective of the Low Income Taxpayer Practice Newsletter is to provide low
income tax practitioners useful information about basic tax procedure and current tax practice
issues.
The Most Important Document
The notice of deficiency is arguably the most important document in the tax
controversy process.1 In most cases, Tax Court jurisdiction depends on two matters: a valid
notice of deficiency and a timely Tax Court petition.2 The notice of deficiency accomplishes
the following important functions: a) it notifies the taxpayer of the Commissioner’s
determination of a deficiency and the basis of that determination; b) it prohibits the IRS from
making an assessment or pursuing collection action for at least 90 days or if a petition is filed
until the decision of the Tax Court is final; and c) it provides the taxpayer an opportunity to
petition the Tax Court for a redetermination of the deficiency prior to paying the tax. I.R.C.
§ 6213(a).
The notice of deficiency is a defining moment in a tax controversy.3 Upon receipt of
the notice of deficiency, a taxpayer must decide whether to contest the deficiency
determination or pay the tax. If a decision is made to contest the Commissioner’s
determination in court, then the taxpayer must decide in which forum to challenge the
determination. Understanding the requirements of a notice of deficiency will improve your
ability to counsel low-income taxpayers.
A. The Statutory Requirement. In income, estate, and gift tax cases, the IRS is required
by statute to mail a notice of deficiency to the taxpayer before assessing and collecting the
tax. I.R.C. § 6212. Other documents received during the audit are not required by statute
and do not confer the right to petition the Tax Court.4
Historically, the notice of deficiency has been referred to as the jurisdictional “ticket to the Tax Court”. As a
result of legislative changes in the last fifteen years, taxpayers can now seek review of certain matters without
receiving a notice of deficiency. For example, a taxpayer can seek review in the Tax Court of a Collection Due
Process determination letter, the disallowance of a request for innocent spouse relief and a worker classification
issue. I.R.C. § § 6320, 6015 and 7436.
2 Monge v. Commissioner, 93 T.C. 22, 27 (1989).
3 A Tax Court trial is a de novo trial, which requires the taxpayer to prove the merits of his or her case at trial.
It is well established that the Tax Court will generally not look behind the notice and review the record
established at the administrative level (audit and Appeals). Greenberg’s Express, Inc. v. Commissioner, 62 T.C.
324 (1974).
4 For example, a 30-day letter, which notifies the taxpayer of the proposed deficiency and offers the right to an
Appeals Conference, is not required by statute and there is no right to petition the Tax Court.
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B. Requirements. A valid notice of deficiency must meet the following requirements:
1) The notice must describe the taxable years, the amount of any tax due, and the
additions to tax and assessable penalties. I.R.C. § 7522(a);
2) The notice must describe the basis for the adjustments. I.R.C. § 7522(a)5;
3) The notice must notify the taxpayer of his or her right to contact a local office of
the taxpayer advocate. I.R.C. § 6212(a)6;
4) The notice must include the last date for filing a petition in the Tax Court7; and
5) The notice must be mailed to the taxpayer’s last known address by registered or
certified mail. I.R.C. § 6212 (a) & (b).
Although a few cases have held that a notice of deficiency issued with incorrect
information is invalid, in the majority of cases the Tax Court has upheld notices that contain
errors. In the taxpayer received notice, the Tax Court seems disposed to give both parties
their day in court.8
C. Choices. Upon receipt of the notice of deficiency, the representative must advise the
taxpayer of his or her legal options. The options include:
a) Agree with the IRS. The taxpayer can agree with the proposed deficiency and
pay the tax. This can be accomplished by signing the Form 5564, Notice of Deficiency –
Waiver.
b) Take No Action. The taxpayer can let the 90-day period for filing a petition in
the Tax Court pass without doing anything. After the ninetieth day, the restrictions on
assessment expire and the IRS can assess and collect the tax.
c) Pay the Tax and File A Claim for Refund. The taxpayer can pay the amount of
the deficiency and file a claim for refund. If the claim is disallowed, the taxpayer can file a
refund suit in federal district court or in the Federal Court of Claims.
d) Petition the Tax Court. If the taxpayer disagrees with the Commissioner’s
adjustments to his or her return, the taxpayer can file a petition in Tax Court for the
redetermination of the deficiency. It is not necessary to pay any part of the proposed
5
Shea v. Commissioner, 112 T.C. 183 (1999)
This is a curious requirement, because the Taxpayer Advocates Office does not have statutory authority to
resolve the merits of the issues raised in a notice of deficiency. If the taxpayer disagrees with the
Commissioner’s determination, the Tax Court is authorized to hear the matter and redetermine the deficiency.
7 IRS Restructuring and Reform Act, Pub. L. No. 105-206, § 3463. See Rochelle v. Commissioner, 116 T.C.
356 (2001), aff’d 297 F.3d 740 (5th Cir. 2002).
8 See Rochelle v. Commissioner, 116 T.C. 356 (2001), aff’d 297 F.3d 740 (5th Cir. 2002).
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deficiency prior to the final determination by the Tax Court. This makes filing a petition in
Tax Court especially attractive to low-income taxpayers who must otherwise pay the
proposed deficiency and pursue a claim for refund and a refund action.
e) Request the Notice of Deficiency be Rescinded. If certain conditions are met the
taxpayer can request that the notice of deficiency be rescinded. 9
D. Five Things You Should Know If You Petition the Tax Court.
1. Ninety Days - Period.10 The ninety-day period for filing a petition is
jurisdictional and cannot be extended by the Tax Court or by the IRS.11
2. Exclusive Jurisdiction. If a taxpayer files a petition, the tax court acquires
exclusive jurisdiction to determine the correct amount of any deficiency for the taxable year,
including an increased deficiency greater than set out in the notice of deficiency. I.R.C. §
6214(a).12 The Tax Court has authority to determine if the taxpayer has made an
overpayment of tax. I.R.C. § 6512(b). 13 Accordingly, once a petition is filed, all issues in
the notice of deficiency and all new issues, raised by either the taxpayer or the IRS, should be
pleaded in the Tax Court.
3. No Additional Notices. If the taxpayer files a petition in the Tax Court, the IRS is
generally prohibited from sending additional notices of deficiency for the same year.
I.R.C. § 6212(c)(1).14
4. No Amended Returns. If the taxpayer is entitled to additional deductions or
other matters not claimed on their original return, an amended return should not be filed.
Once a petition is filed, the additional deductions or new matters should be raised in
pleadings in the Tax Court proceeding. If amended returns are filed, the IRS may or may not
respond timely. It is the taxpayer’s responsibility to raise the new issue before the Tax Court.
The failure to timely raise these matters in the Tax Court proceeding may result in the
taxpayer not receiving credit for them.
5. No Nonsuit in Tax Court. The Tax Court has held that once a petition is filed, it
is not possible to file a nonsuit and later file a refund suit.15 I.R.C. § 6512(a). Once a
9
Care must be taken in pursuing a rescission of the notice of deficiency. See Rev. Proc. 88-17, 1988-1 C.B.
692. Unlike the statutory right to receive a notice of deficiency and petition the Tax Court, the taxpayer does
not possess an absolute right to have the IRS rescind the notice. Under section 6212(d), the IRS may rescind the
notice of deficiency. In addition, the IRS has historically not been receptive to rescinding notices of deficiency
where the taxpayer has not been cooperative during the audit. Finally, the 90 day period for filing a petition
cannot be extended. Therefore, if the notice is not rescinded by the 90th day, the taxpayer must either petition
the Tax Court or default this right.
10 Taxpayers outside the United States have 150 days. I.R.C. § 6213(a).
11 Estate of Cerrito v. Commissioner, 73 T.C. 896, 898 (1980)
12
Estate of Ming v. Commissioner, 62 T.C. 519 (1974).
13
An overpayment is equivalent to a refund, but is the correct term for a Tax Court proceeding.
14
The statute provides exceptions for fraud, mathematical and clerical errors, and jeopardy assessments.
15
Estate of Ming, v. Commissioner, 62 T.C. 519 (1974).
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petition is filed, the court must enter a decision on the merits. 16 I.R.C. § 7459(d). Indeed, if
the taxpayer files a refund suit and then receives a notice of deficiency, the taxpayer must
decide whether to litigate the matters in Federal District Court or in Tax Court. The taxpayer
cannot maintain both actions. I.R.C. § 7422(e).
Practice Idea. Defending Against New Issues. The notice of deficiency defines the
substantive issues for trial before the Tax Court. Under section 7522, the IRS must explain
in the notice the legal reasons for the adjustments to the taxpayer’s return. For example, an
IRS Service Center notice of deficiency might disallow a dependency exemption because the
taxpayer failed to prove that a nineteen-year old child was a full time student. Later at trial,
the IRS might raise an additional reason for disallowing the exemption, for example, that the
taxpayer did not provide over half the support for the child. Fortunately, the Tax Court does
not approve of trial by surprise. The IRS does not possess carte blanche authority to raise
new issues at any time after the notice of deficiency.17 It is entirely appropriate to resist IRS
attempts to raise new grounds for the disallowance of the exemption after the notice of
deficiency has defined the issues. A good understanding of the explanations stated in the
notice will protect your client from new issues raised by the IRS at trial.18
Breaking News- IRS Proposes User Fee on Offers in Compromise
On November 5, 2002, the IRS issued proposed regulations that would require a $150
user fee for many offers in compromise. IR-2002-118 The fee would be paid out of the
amount ultimately determined to be collectible. Importantly, the proposed regulations
provide that low-income taxpayers would not be subject to the fee. In addition, offers based
upon doubt as to liability, effective tax administration, and economic hardship ( and special
circumstances) would be excepted from payment of the fee. A public hearing is scheduled
for February 13, 2002. The proposed regulations can be found at 2002 TNT 215-7, which
also indicates that the proposed regulations may soon be found at www.irs.gov/regs.
We Could Use Your Help. We would like to prepare an edition of the newsletter that
highlights Tax Court cases in 2002, which impacted low-income taxpayers. If you came
across a significant case in your practice that was decided in 2002, please send us an email
with the name and cite.
The Low Income Tax Practice Newsletter is produced by Legal Aid of Middle Tennessee and the
Cumberlands and the Tennessee Taxpayer Project, Mary Gillum, Project Coordinator and Robert B.
Nadler, Attorney. The Tennessee Taxpayer Project is funded in part by the IRS LITC Grant Program.
We are interested in any subjects that Legal Aid lawyers would like discussed. Please direct questions or
comments to mgillum@lglaid.org or rnadler@lglaid.org . © 2002, Low Income Tax Practice Newsletter,
all rights reserved.
16
Estate of Ming v. Commissioner, 62 T.C. 519 (1974).
Seligman v. Commissioner, 84 T.C. 191, 198 (1985), aff’d 796 F2d 116 (5th Cir. 1986).
18
Resisting new issues can lead to different results. If the new issue is a surprise, which prejudices your ability
to prove your case, the Court may prohibit the IRS from raising the issue. If surprise is not involved, the Tax
Court might switch the burden of proof to the IRS. See Shea v. Commissioner, 112 T.C. 183 (1999)
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