At the conclusion of an audit where the IRS determines that additional tax is due and owing, the IRS provides the taxpayer with a Notice of Deficiency,[1] also known as a 90-day letter, wherein the IRS sets forth the additional amount of tax and forth the grounds for which the IRS has determined that additional tax is due and owing. The letter gives the taxpayer 90 days to file a petition with Tax Court, thus the nickname “90-day letter.”
However, if the taxpayer appeals the tax assessment to federal Tax Court, the IRS is not bound by the amount of the additional assessment and legal grounds it asserts in the Notice of Deficiency. The Fifth Circuit Court of Appeals recently affirmed this principle, when it stated, “[a]fter issuing a Notice of Deficiency … the IRS may later assert in the tax court new legal theories and allege additional deficiencies.”[2] The ruling was in response to a taxpayer’s argument that the Notice of Deficiency was not valid because the Notice had not mentioned a particular theory of tax liability asserted by the IRS, which the IRS later argued, successfully, in Tax Court.[3] This holding comports with IRC § 6214(a) which states:
[T]he Tax Court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.
Practice point: In determining whether the taxpayer wishes to appeal a tax assessment to Tax Court, the taxpayer should determine whether the IRS could assert additional tax upon further appeal for issues that the IRS has not yet discovered.
If you have received a Notice of Deficiency and need to decide whether to appeal the Notice to Tax Court, please contact Jared Le Fevre to discuss your appeal options.
Jared M. Le Fevre is a tax attorney and partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1] IRC § 6212(a).
[2] Full-Circle Staffing, L.L.C. v. Comm’r of Internal Revenue, No. 18-60814, 2020 WL 6266170, at *3 (5th Cir. Oct. 23, 2020).
[3] Id.