By: Royston Mendonza, Esq.
The IRS has a repository of hundreds of notices that it issues to Taxpayers for a variety of issues. In fact, a statement of IRS notice codes released in 2002 is 120 pages long. Many of these notices, if left unaddressed, carry little to no associated consequences. However, there are certain notices which serve as warnings. Failing to recognize, and be proactive about, such notices can result in action by the IRS which can be severely detrimental to a Taxpayer’s interests. Here is a quick summary of some of the more common, but nonetheless serious, notices a Taxpayer may encounter.
Once a Taxpayer incurs a tax debt – that is, a particular tax liability which is left unpaid, a series of notices are issued. Among these is a CP501, or a notice and demand for payment. If unanswered for 10 days or more, additional “reminder” notices may be issued. At some point, a Taxpayer may receive a CP504, otherwise known as a “Notice of Intent to Levy.” 26 U.S.C. §6331 authorizes the IRS to “levy” a Taxpayer’s property as a method to collect on a tax debt. This can result in seizures of a Taxpayer’s bank accounts and other assets, as well as wage garnishments. The CP504 should be construed as a warning the IRS is contemplating levy action.
Final Notice of Intent to Levy
Notwithstanding the threat imposed by the CP504, the IRS must take one more legal step before actually commencing any levy action. 26 U.S.C. §6330 requires the IRS send a “Final Notice of Intent to Levy.” Often, these notices will be identified with LT11, CP90 or CP91 codes. If a case has been referred to a local Revenue Officer for field-level collections, the Final Notice may be identified as a “1058” letter. Legally, this is the last warning a Taxpayer will receive before the IRS proceeds with collection. It will allow the Taxpayer 30 days to respond. Unless an appeal is properly perfected, levy action can proceed without further notice. At that point, the assets and income of a Taxpayer are at imminent risk for seizure.
This is a fairly new notice being used by the IRS. In 2015, Congress passed legislation codified in 26 U.S.C. §7345. This allows the Department of State to take action against a Taxpayer’s passport on the basis of delinquent tax debt. The CP508 notifies a Taxpayer that their tax debt has been certified as “seriously delinquent” to the Department of State. The State Department may then be able to freeze the Taxpayer’s application for a passport, an application to renew a passport or even revoke a passport altogether. “Seriously delinquent” has been defined as tax debt exceeding $50,000.00, including penalties and interest. Unless the debt is addressed in a manner that conforms to the Internal Revenue Code, a Taxpayer’s travel plans outside the United States will be in jeopardy.
In field-level collection cases, a Revenue Officer may issue a Summons to a Taxpayer. This typically happens when an investigating Officer requests certain financial information from a Taxpayer to aid in collection efforts, and the Taxpayer either drags their feet in complying, or simply just refuses to cooperate altogether. The Summons itself will usually ask that the Taxpayer provide certain information or testimony by a particular date, and at a particular place. If ignored, the Officer may seek enforcement of the Summons in Federal District Court. If the Court agrees with the Officer, it will issue an Order directing the Taxpayer to comply. If the Taxpayer still doesn’t answer, then the Court may hold the Taxpayer in contempt. Contempt of Court is a serious matter which may result in a Taxpayer’s arrest and subsequent criminal prosecution. If a Taxpayer receives a Summons, it is critical that it is dealt with properly, and professional help may be needed.
Income may be derived from various sources – whether it be W-2 wages, Form 1099, Schedule K-1, etc. Usually, a Taxpayer can expect to receive certain tax forms from their payers in the month of January following the year they received the income. Obviously, a Taxpayer must report all income received in a given year on their tax return. What some don’t realize, however, is that paying entities report their payments to the IRS, as well. What may result is that a Taxpayer misses a form, and then fails to report the associated income on their return. Once the IRS discovers this discrepancy, they will send the Taxpayer a CP2000 as a preliminary alert to what might be a “deficiency.”
Notice of Deficiency
Under section 6212 of the Internal Revenue Code, once the IRS determines there is a deficiency (i.e., underreporting or non-reporting) with respect to a tax due, then they are authorized to send a Taxpayer a “Notice of Deficiency” via registered or certified mail. Basically, the Notice will outline the alleged deficiency, and will allow 90 days for the Taxpayer to file a Petition with the United States Tax Court. Upon Petition, the Taxpayer is afforded an opportunity to challenge the proposed assessment in a Federal Court. There is a discovery process, and the Taxpayer can put forth documentary evidence and present witnesses. If the underlying dispute ultimately cannot be resolved amongst the parties, then the matter will proceed to trial. Many cases are settled in advance of trial, however.
Following a CP2000, a Notice of Deficiency is usually identified with a “CP3219” code. Or, at the conclusion of a formal audit, an auditor will issue correspondence conspicuously identified as a Notice of Deficiency. Notwithstanding the form, if the Taxpayer has grounds to challenge the IRS’ findings, it is imperative a Petition is properly filed with the Tax Court within the 90-day timeframe. If the Taxpayer fails to properly respond, the IRS will finalize the additional assessment, and may begin collection action thereon. The Taxpayer will then be forever precluded from challenging the assessment in the Tax Court forum. Depending on the magnitude of the proposed assessment, failing to properly respond to a Notice of Deficiency can be dire.
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