Handling a Notice from the IRS
by James Chenoweth This month, we are going to discuss the procedure the Internal Revenue Service ("IRS") follows when it collects unpaid taxes. Those of you who never get audited will, luckily, never have to know this information, but for the rest of you, these are themes you should familiar yourself with.
You will likely first hear about your tax liability through what is called a 30-day letter. This letter from the IRS will let you know you have a deficiency, meaning you owe taxes. There are four ways to handle a 30-day letter. The reasons for each are discussed very generally . . . and, as always, consult a lawyer when confronting an issue with the IRS.
Administratively work with IRS - The IRS has the authority to settle all of its cases. Negotiating with the IRS may enable you to lower the amount you will have to pay without going to litigation, which can be expensive. The department of the IRS called "Appeals" is even allowed to take into account the costs and risks of litigation to the IRS when it settles cases. You may contact the local IRS office, or the agent listed on the 30-day letter, to learn about how you may administratively handle your deficiency.
Waive assessment restrictions - The IRS must wait 90 days after sending a notice of deficiency, which it cannot send until after the 30-day period following the 30-day letter. It is not until after this 90-day period that it can assess and collect the taxes (through levies, garnishment of wages, etc.). You can waive this assessment restriction by filing a Form 870. Doing so, will allow the IRS to immediately assess the tax, which you will then pay. Thereafter, you may sue in the local Federal District Court, or in the Federal Court of Claims for a refund.
Do nothing and wait for a 90-day letter - If you do not report back to the IRS after receiving the 30-day letter, they will follow with a 90-day letter. This brings the issue to the brink of litigation, so if one wants to avoid litigation, working with the IRS will probably be best done before the 90-day letter is sent. This is so, because after the 90-day period is up, the IRS will assess and attempt collection. Starting this timeline by waiting for a 90-day letter limits options. However, if one wants to go to court, particularly if one wants to contest the action in the Tax Court, this method may be chosen. During the 90-day period, one may petition the Tax Court to handle the dispute without having to pay the tax ex ante, unlike the refund courts. Keep in mind, interest may still run against you.
Pay the tax - Paying the tax will stop the running of interest against you and start running interest in your favor. You may still sue for a refund. Unlike the Form 870 (listed above), simply paying the tax might cause a few days less interest. ----------------------
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