The IRS sends out a lot of mail. Any letter from the IRS should be taken seriously, but some have more legal ramifications than others. Here are three of the most important IRS letters – what they mean, and how to respond:
1. Notice of Deficiency. The IRS sends this letter out as the final notification they are going to make changes to your tax return. It is usually sent out to conclude an audit, but can also be used to create a liability for you if you have not filed a tax return. The notice of deficiency will list the changes the IRS proposes to make to your taxes – for example, disallowing your home office deduction, or business use of your car, or increasing your income from a retirement distribution that you overlooked – and calculate a new tax due, along with interest and penalties.
The notice of deficiency is also known as a “90 day letter” or ” statutory notice of deficiency,” and is authorized in Internal Revenue Code section 6212.
The notice of deficiency gives you 90 days to file a complaint to U.S. Tax Court to dispute the proposed changes to your tax return. Focus on the use of the word “proposed” – nothing is final until the notice of deficiency is sent and you are notified of your Tax Court rights. In Tax Court, you will be like a Plaintiff, and the dispute will be over the IRS auditor’s findings. You will have an opportunity to go before a Federal judge, bring witnesses, and state your case that the IRS audit is wrong. If you did not have the opportunity for IRS appeals to review the audit, you will have that opportunity to settle the case with the IRS appeals before trial.
If you do not file a complaint to Tax Court in 90 days, the audit becomes final, and the IRS will send you a bill and start collection efforts. Before the 90th day, the audit is proposed; after the 90th day, the audit becomes legally binding if a Tax Court petition is not filed.
2. Final Notice of Intent to Levy. The IRS is required by law to send a notification to anyone who owes a tax debt before starting enforcement by levy or seizure. This letter is called a Final Notice of Intent to Levy, and is authorized by Internal Revenue Code section 6330.
The Final Notice of Intent to Levy gives you 30 days to file an administrative appeal with the IRS, disputing the IRS’s intent to start collecting the taxes from you. This appeal is important: First, while the appeal is pending, the IRS is prevented from taking its intended enforcement action – no levies, no seizures in most every case. Second, the appeal moves the case file from the IRS Collection Division to the IRS Office of Appeals. The Office of Appeals will give you an opportunity to meet with a settlement officer to negotiate a solution to the unpaid taxes. And third, if you cannot work it out with appeals, you have the right to dispute the proposed enforcement in Tax Court.
The process to appeal, stop, and dispute intended IRS enforcement before it occurs is commonly referred to as a Collection Due Process Appeal.
The right to take IRS collections to Tax Court creates a notice that is a first cousin to the Notice of Deficiency – you will receive a Notice of Determination at the conclusion of your collection appeal. If you disagree with IRS Appeals, you have 30 days to file a complaint to Tax Court for a review of the intended collection action.
3. Trust Fund Recovery Penalty – IRS Letter 1153. The IRS cannot make an assessment against business owners for unpaid employee withholding taxes unless prior notice and appeal rights are first provided. This is called a trust fund recovery penalty, and an IRS Revenue Officer will issue Letter 1153 to any person with decision making authority over the payment of the employee withholding. (It is called a trust fund recovery penalty because the decision-makers had a caretaking (trust) responsibility to pay the employees’ withholding to the IRS; failing that trust can result in the business owners being held responsible for repayment of the employment taxes.) This is authorized by Internal Revenue Code section 6672.
The IRS Letter 1153 is sent by an IRS Revenue Officer after an investigation into finding the decision-makers. Many times, the IRS targets for the trust fund penalty were not decision-makers and should not be held responsible for the failures of the business. If the IRS target disputes the liability, there is a 60 day window of time to file an appeal. The appeal prevents an assessment being made against the target, and provides independent review of the Revenue Officer’s findings.
The Notice of Deficiency, Final Notice of Intent to Levy and Trust Fund Recovery Penalty Letter 1153 all involve proposed actions by the IRS, and rights to review before those actions can be implemented. The tax code has restrictions on the IRS acting unilaterally to finalize an audit, levy on property or conclude an investigation into personal responsibility for trust fund taxes. When dealing with the IRS, itt is essential to know these rights, what they mean, and how to respond.