Your client calls you in a panic because they have just received a letter from the IRS and it says they owe money and talks about having to go to Tax Court! For most of us this is an everyday occurrence, however, for the client, it can be panic inducing. At the other extreme is the client who just ignores the letters until the certified letter comes talking about liens and levies, but that’s another blog post entirely.
The IRS even has a Tax Tip titled: Eight Tips for Taxpayers Who Receive an IRS Notice. Tip #1 is Don’t panic! Of course, none of the other tips include the advice to consult a tax professional, but that’s what we’re here for.
Once your client receives a Statutory Notice of Deficiency (SNOD) the clock is running and you need to put on your running shoes as well. We will review the very strict time lines involved in appealing a SNOD, filing a Tax Court petition, and how exams and collections integrate in the process.
We will start out with some definitions that will help you throughout this blog post:
Statutory Notice of Deficiency (SNOD): Official IRS notification that they plan on making an assessment of tax liability.
Substitute For Return (SFR): The IRS files a return for the client when they have failed to file after requests. They used income documents received from third parties (W2, 1099, etc) to determine liability. The apply the least beneficial filing status, one exemption, no credits or deductions, and assess a “worst case scenario” tax liability.
Judicial Review: The application of an appeal to the U.S. Tax Court or other court systems.
Lien: A claim on the value of a piece of property for the satisfaction of a debt. A lien does not actually take the taxpayer’s property.
Levy: A legal taking of property held by third parties (i.e. bank accounts, brokerage, wage garnishments, etc) in satisfaction of a debt. This normally occurs after a lien, but not in jeopardy situations.
Seizure: The legal taking of a taxpayers property that is in his control in satisfaction of a debt.
ASED: Assessment Statute Expiration Date, the last date a tax assessment can be made against a taxpayer.
CSED: Collections Statute Expiration Date, the last date collections action can be taken on a debt owed by the taxpayer.
Collections Due Process (CDP): A hearing the taxpayer may request during collections procedures.
Collection Appeals Program (CAP): A separate appeal process available to the taxpayer during enforced collections.
Theoretically, the IRS filing/examination/collection process should go in a specific order. Sometimes that’s what happens and sometimes it isn’t. You can receive letters out of “order” or skip steps altogether and jump straight to another level. The Revenue Officer or Revenue Agent has a lot of latitude in the direction he takes the case depending on the clients attitude, history and expectations of cooperation or not. In a perfect world, the process goes:
1. Return is filed (or not)
2. Return is selected for review or audit, either randomly or due to items on the return
3. Client receives a letter requesting information or indicating the problem with the return
4. The client responds (or not)
5. The situation is cleared up (or not)
6. A SNOD is issued and tax/P&I assessed
7. Client responds to the SNOD (or not)
8. Payment demand is made (now we are in collections and out of exams)
9. Payment is made (or not)
10. Lien/levy procedures are implemented
As you can see, by the time the SNOD is issued, normally, there has been extensive contact by the IRS to try and resolve the situation. If the client has involved us prior to the issuance of the SNOD we may have been part of that process and thrown in some appeals or reconsideration requests along the way. More on those options later.