Low Income Taxpayer Clinic Guide: Procedural Basics

1. The taxpayer files a return.
2. The taxpayer receives a notice that their return is being audited by the IRS.
3. The IRS may send a “30-day letter”, giving the taxpayer notice that they have found the taxpayer’s return is deficient and what rights the taxpayer has to appeal. The taxpayer can either (a) agree with the IRS and pay the deficient amount, (b) request a Appeals Conference with an IRS Appeals Officer, or (c) do nothing. The taxpayer has 30 days from the date of the 30-day letter to request a conference with Appeals Office. If the taxpayer does nothing, the IRS will send them a “90-day letter.”
4. The law requires the IRS to send the taxpayer a Statutory Notice of Deficiency, or 90-day letter pursuant to I.R.C. § 6212. This gives the taxpayer 90 days to either (a) agree with the IRS and pay up, (b) file a petition with the Tax Court, or (c) do nothing.  
5. If a petition is filed, the matter continues until the Tax Court issues its final decision. Failing to file a petition will result in the deficiency being assessed, which allows the IRS to begin its collections efforts.  
6. Before beginning collections, the IRS is obligated by I.R.C. § 6303 to send the taxpayer a notice and demand for payment. If the tax is not paid after the assessment and notice and demand for payment, the collections process begins. The IRS must notify the taxpayer of the assessment within 60 days from the assessment date and the IRS has 10 years from the assessment date to collect the taxes due pursuant to I.R.C. § 6502(a)(1).

Enforcing Tax Actions

• In general, the IRS has three years to enforce a tax action from the date the taxpayer's return was filed, including extensions. I.R.C. § 6501.
  • The date the return is deemed filed is either (a) the date the return was filed, or (b) if the return was filed early, the date that the return was due. § 6501(b)(2).
• If the taxpayer's return is fraudulent, there is no statute of limitations, and the IRS can assess the tax at any time. § 6501(c)(1).
• If no return is filed, the statute of limitations does not begin.  § 6501(c)(3).
• The IRS and taxpayer can also agree to extend the statute of limitations. § 6501(c)(4).

Collecting Taxes

• Taxes must be collected through a levy or court proceeding within 10 years of the assessment date. § 6502.

Suspension of Statutes of Limitations

• The statute of limitations for enforcing an action is suspended for period of time from when the IRS has issued a Statutory Notice of Deficiency (90-day letter) (i.e. 90 days), plus any amount of time the matter is waiting on the final decision of the Tax Court, plus a period of 60 days after. § 6503.
• The statute of limitations for collecting taxes ( § 6502) is suspended for the same amount of time the IRS cannot collect the tax during a court proceeding plus a period of 60 days afterwards. § 6503.

Refund Claims

• A taxpayer who has paid a tax has three years from the time they filed the return or two years from the date that they paid the tax, whichever is later, to file for a credit or refund. § 6511.

When the IRS finds that a taxpayer’s return is deficient, they can collect more than the amount of the tax that is due. The IRS can also assess penalties for errors in accuracy, failure to file timely, failure to estimate tax payments, and fraud. Additionally, you should note that the tax starts accruing interest. These amounts will be shown and itemized in the 30-day and 90-day letters that the IRS sends the taxpayer.

• Failure to File or Pay: If the taxpayer does not file a tax return, the IRS can assess a 5% on the amount of tax due each month for a maximum penalty of 25%. I.R.C. § 6651(a)(1). If the taxpayer has filed but failed to pay the tax, the IRS can assess a penalty of  0.5% on the amount of tax due each month for a maximum penalty of 25%. § 6651(a)(2).
• Accuracy Related Penalties: If a taxpayer underpays the amount of tax due, the IRS can assess an 20% that amount due. § 6662.
• Fraud: If the IRS determines that the taxpayer’s underpayment of tax is due to fraud, the IRS can assess an additional 75% of the amount of the underpayment. § 6663.
• Interest: In general, interest on amounts due and penalties will also begin to accrue from the last date on which taxes are due until the taxpayer pays the tax. § 6601.

The options a taxpayer has for relief depends largely on where they are in the process. You can use this helpful flowchart found on the Philip C, Cook Low-Income Taxpayer website to get a general idea of what kind of options are available to a taxpayer at the different points in a tax controversy matter.

Pre-Assessment

It can be helpful to think about things in terms of whether a taxpayer has the option of going to Tax Court or not, as the IRS cannot assess the tax until they have issued the taxpayer a Statutory Notice of Deficiency and the taxpayer has either (a) ignored it or (b) lost in Tax Court. See I.R.C. §§ 6212-13. In this pre-assessment period, a taxpayer may contest the findings made by the IRS by requesting an Appeals Conference with IRS's Appeals Office. See I.R.S. Pub. No. 556, (September 2013), and I.R.S. Pub. No. 5 (April 2021).

Post-Assessment

The options for relief get a little more tricky after the tax is assessed, largely because the options available to the taxpayer are dictated by the IRS's administrative procedures. Just know that the I.R.S. is still required to give notice of their intent to collect the tax before they put liens and levies on the taxpayers assets by first sending a Notice and Demand for payment. I.R.C. § 6303. At this point, the taxpayer still has multiple options:

• If the taxpayer believes they are (a) not liable for the assessed tax, (b) unable to pay the tax, or (c) liable and able to pay but doing so would be a "hardship," the taxpayer can file an offer in compromise. § 7122.
• The taxpayer can also agree to pay certain amounts through an Installment Agreement. 
• In either case, the taxpayer is required to fill out Form 433, which provides the I.R.S. with information on the taxpayer's current assets and financial situation.

This is only a small portion of the options available to taxpayers. In tax controversy cases, another way you get your taxpayer relief is through mitigating the amount of penalties that they pay.  Some penalties can be waived if the taxpayer shows that the deficiency or failure to pay was due to a "reasonable cause." § 6651(a). Though, you likely find through secondary sources and case law that this a hard burden to prove. Taxpayers who are facing an issue for the first time may also qualify for first-time penalty abatement. See generally I.R.S. First Time Abate (FTA), IRM 20.1.1.3.3.2.1 (October 20, 2020). As you look for relief options, know that if the taxpayer is in collections, you will likely have to search for Revenue Procedures and the IRM to find out what you need to do.