Chapter One: Assessment
The Assessment
The assessment is the cornerstone of tax procedure. The concept of assessment includes:
- The descriptive definition,
- The methods of making an assessment, and
- The legal effect of an assessment.
Definition of Assessment
For federal taxes, an assessment is the entry of a determined tax liability on the books of the Internal Revenue Service. If the entry is not made, then an assessment of federal taxes has not occurred. IRC §6201(a) authorizes and requires the Secretary of the Treasury to make assessments of all taxes, including interest and penalties.
IRC §6201(a)(1) directs the Secretary of the Treasury to assess all taxes:
- determined by the taxpayer on a return or list, or
- determined by the Secretary of Treasury on a return or list.
Reg §301.6201-1 authorizes the district directors and the directors of the regional service centers to make the assessments of all taxes, and directs them to assess all taxes determined by the taxpayer, the district directors, or the directors of the regional service centers on any return or list.
Method of Making an Assessment
IRC §6203 states that the assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary.
Reg. §301.6203-1 states:
- The district director and the director of the regional service center shall appoint one or more assessment officers.
- The assessment shall be made by an assessment officer signing the summary record of assessment.
- The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment.
- The amount of the assessment shall, in the case of tax shown on a return by the taxpayer, be the amount so shown, and in all other cases the amount of the assessment shall be the amount shown on the supporting list or record.
- The date of the assessment is the date the summary record is signed by an assessment officer.
- If the taxpayer requests a copy of the record of assessment, he shall be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.
The IRS uses a Form 23-C, the "summary record of assessment", to make assessment. Thus, the assessment date of a federal tax is often referred to as the "23-C date". The supporting documents normally include the Certificate of Assessments and Payments (Form 4340) and the Form TY 53 (Account Card).
A signature is required by an authorized individual on a Form 23-C for the assessment to be valid. See Brafman v. United States, 384 F.2d 863(1967). However, if the validity of the assessment is challenged, the IRS can establish the validity of the assessment at issue by producing the Form 4340 in lieu of the Form 23-C. If the Form 4340 is produced by the IRS in lieu of the Form 23-C, as usually is the case, the Form 4340 must contain the requisite information and signatures. See Geiselman, et. al. v. U.S., 92-1 USTC ¶50,200.
Prerequisites to Making an Assessment
Before the IRS can make an assessment, there must be a determination of the tax liability. A determination of the tax liability must be made before the tax liability can be recorded on a Form 23-C. The determination of a tax liability can be made by the taxpayer by filing a tax return setting forth the tax liability. A determination of a federal tax liability based on a filed tax return is often referred to as a "self-assessment" but is more precisely characterized as a "self-determination" because the IRS must record the tax liability on a properly executed Form 23-C to make the assessment. A "self-determination" matures when the return is filed.
For most federal income, estate, and gift taxes, the Commissioner of Internal Revenue can make a determination of additional tax liability by issuance of a notice of deficiency. For most federal income, estate, and gift taxes, an assessment cannot be made until after the determination of tax liability has reached administrative maturity. A determination of tax due required to be made by the issuance of a notice of deficiency does not mature until after the passage of the applicable time period.
The applicable time period is ninety-days if the taxpayer does not file a petition in the United States Tax Court challenging the determination. If the taxpayer files a timely petition, then the applicable time period is ninety-days after the Tax Court decision becomes final.
Some taxes, such as the 100% penalty under IRC §6672 for unpaid trust fund employment taxes, are not subject to the notice of deficiency procedures. However, in all situations the federal tax assessment does not occur until after an appropriate IRS official has signed the Form 23-C setting forth the tax liability.
Legal Effect of an Assessment
An assessment properly made by the IRS is presumed correct and the taxpayer against whom the assessment occurs has the burden of proving otherwise. Additionally, for most federal income, estate, and gift taxes, an assessment eliminates the pre-payment remedies for challenging the determination of tax liability.
As stated above, a tax liability cannot be collected by the IRS until after an assessment has been made. For federal income, estate, and gift taxes, the no-collection-until-after-assessment rule is consistent with the rule that an assessment cannot be made until after the taxpayer's pre-payment procedural rights have terminated, except in the case of termination and jeopardy assessments or mathematical errors.
The Federal Assessment Lien
For federal tax purposes, a lien arises on all of the taxpayer's real and personal property, and rights to such property, after the assessment has been made and proper notice has been mailed. The federal tax assessment lien is sometimes referred to as the "secret lien" because only the IRS and the taxpayer are aware of its existence, but the assessment lien is nevertheless effective against all others with the exception of those specifically identified in the Internal Revenue Code.
The assessment lien should not be confused with a filing of a Notice of Federal Tax Lien, which is nothing more than a public proclamation of the existence of the assessment lien. An understanding of the assessment and collection process is essential to any discussion about administrative or judicial tax proceedings.
The Internal Revenue Service must assess a tax before it can proceed to collect the tax. The time in which the service can assess a tax is controlled by statute.
Statute of Limitations on Assessment
Generally, the IRS has three years to assess a tax determined to be due. IRC §6501. This rule provides that the three years begin to run from the latter of:
- Due date of return; or
- Date return is filed.
A timely mailed return is treated as filed on the due date of the return even if it is received by the IRS after the due date. IRC §7502. Amended returns do not extend the original 3-year period. See Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934).
There are several exceptions to the three-year rule. The first exception to the rule exists if the taxpayer voluntarily agrees to extend the three year period. IRC §6501(c)(4). The consent must be in writing, and must be signed by taxpayer (or authorized representative) and the IRS before expiration of the original three years, or prior timely consent to extend. However, the statute of limitations on assessment of estate tax cannot be extended by agreement. IRC §6501(c)(4).
Additionally, following the IRS Restructuring and Reform Act of 1998, the IRS is required to advise taxpayers of their right to refuse to extend the statute of limitations on assessment or in the alternative to limit an extension on the assessment statute to particular issues or for specific periods of time each time a request to extend the limitation period is made.
The Taxpayer Bill of Rights 2 makes it clear that failure to voluntarily extend the statute of limitations for assessment cannot be taken into account by a court when awarding attorney’s fees. Generally, to qualify for an award of attorney's fees, the taxpayer must have exhausted the administrative remedies available within the IRS. In the past, the IRS has taken the position in regulations that attorney's fees cannot be awarded if the taxpayer has not agreed to extend the statute of limitations.
In Minahan v. Commissioner, 88 T. C. 492 (1987), the Tax Court held that regulation invalid insofar as it provides that a taxpayer's refusal to consent to extend the statute of limitations is to be taken into account in determining whether the taxpayer has exhausted administrative remedies available to the taxpayer. The new law provides that any failure to agree to an extension of the statute of limitations cannot be taken into account for purposes of determining whether a taxpayer has exhausted the administrative remedies for purposes of determining eligibility for an award of attorney's fees. The provision applies to proceedings commenced after the date of enactment. (TPBR2 §703. IRC §7430(b)).
Several occurrences can suspend the three-year statute of limitations. They are as follows:
- Timely issuance of proper and valid notice of deficiency. IRC §6503(a)(1).
- Application for Taxpayer Assistance Order. IRC §7811(d).
- Bankruptcy petition. IRC §6503(h).
- Receivership. IRC §6036 and §6872.
- Summons issued by IRS to third-party where the taxpayer makes a motion to quash the summons. IRC §7609(a), §7609(e)(1), and §7609(f).
- Designated summons issued by IRS to corporate taxpayer. IRC §6501(k). (Pursuant to the Taxpayer Bill of Rights 2, after 1996, this is limited to corporate taxpayer’s being examined as part of the Coordinated Examination Program (CEP)).
Another exception to the three-year rule is the six-year exception contained in IRC §6501(e). A six-year statute of limitations applies if the taxpayer underreports more than 25% of the gross income stated on the original income tax return. For estate tax the statute is extended if the estate underreports more than 25% of the gross estate. For gift tax the statute is extended if the taxpayer underreports more than 25% of gifts for the taxable period.
Filing of correct amended return does not shorten the six-year rule if it applied to original return. See Houston v. Commissioner, 38 T.C. 486 (1962). Additionally, if the return is a joint return and the omitted gross income is attributable to only one spouse, the statue of limitations is still extended as to both spouses. See Benjamin v. Commissioner, 66 T.C. 1084 (1976) aff’d, 592 F.2d 1259 (5th Cir. 1979).
The final exception to the three-year rule is the fraud exception. The three-year rule does not apply to the assessment of taxes (and associated interest and penalties) attributable to a false or fraudulent return filed with the intent to evade the payment of taxes. IRC §6501(c)(2). See Levitt v. Commissioner, T.C. Memo 1995-464 (1995). The filing of a non-fraudulent amended return does not eliminate the fraud exception to three-year rule. See Badaracco v. Commissioner, 464 U.S. 386 (1984).
The IRS has the burden of proving fraud before the fraud exception to three-year rule can be applied. Additionally, similar to the law regarding joint liability under the six year rule, once the IRS proves fraud on the part of one taxpayer spouse, the statute of limitations as to the other spouse is open for purposes of tax, penalties, and interest. However, if the IRS asserts the fraud penalty as to each spouse, the IRS must prove fraud on the part of each spouse individually. In either case, the statute of limitations or the fraud penalty; the IRS has the burden of proving fraud by clear and convincing evidence.
Lastly, the IRS cannot assess a tax after the statute of limitations on assessment has expired even if the taxpayer agrees to the assessment.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
