Relying on Filing Deadline in IRS Notice of Deficiency

Those outside of the tax world often assume that the IRS approaches taxpayers fairly and aims to reach equitable outcomes based on a strict reading of the tax code.

This often is not the case. The IRS frequently takes an overly adversarial stance leaning in the government’s favor. This can include adopting positions and interpretations against taxpayers that seem unreasonable or questionable to outside observers.

While undoubtedly many IRS auditors and litigators aim to apply tax laws justly, the agency structure and protocols promote aggressive posturing that typically gives the government the benefit of the doubt in ambiguities. This hardness towards taxpayers contrasts with how an ordinary citizen may expect a good-faith tax administration to operate. The result is often taxpayer frustration and tax disputes that are highly divisive–and unnecessarily so.

This brings us to the Dodson v. Commissioner, 162 T.C. No. 1, case. In Dodson, the IRS argued that the taxpayers could not rely on a filing deadline the IRS provided in its notice of deficiency.

Facts & Procedural History

The taxpayers are a husband and wife. The IRS audited the taxpayers’ income tax returns. After the audit, the IRS sent the taxpayers each a notice of deficiency identifying the proposed increase in tax and identifying the date on which a tax court petition had to be filed to challenge the increase. The taxpayers filed a petition with the tax court by the due date set out in the IRS notice.

The next day after the IRS had mailed the first notice to the taxpayers, the IRS sent a second notice of deficiency along with a letter saying that the date on the first notice was incorrect. It provided a shorter period for filing a petition with the tax court to challenge the increase.

The IRS filed a motion to dismiss the tax court case given that the petition was not filed by the due date set out in the second notice mailed by the IRS. The court opinion notes that the parties provided the USPS tracking information for the notices. The USPS tracking information showed that the first notices were delivered to the taxpayers, but the second notices were not.

The Statutory Notice of Deficiency

The tax court often asserts that it is a court of limited jurisdiction. This is because the court is not a court in some respects; it is an administrative agency in some respects. Its grant of authority over what types of cases it can hear is found in the statutes written by Congress, for example.

The process for starting a case with the tax court involves the IRS issuing a notice and the taxpayer filing a petition. For income tax cases where the IRS proposes to increase the tax due, the IRS typically issues a notice of deficiency. To ensure that this closing process is handled correctly, the IRS auditor will close the audit case out to a processing group that handles nothing but case closings. This group then tracks the tax court filings and deadlines.

While the IRS tracks the tax court filings and deadlines, the new IRS employee responsible for the case does not track the status of the notice in the mail. This is because the tax law just says the IRS has to mail the notice. It does not require the IRS to show that the notice was delivered. This is true even though the IRS exclusively uses the U.S. Postal Service to mail these notices, which is not only slow but also frequently loses mail.

Timely Filing by Date in the Notice

That brings us back to this court case. In this case, the IRS attorney argued that the taxpayer could not rely on the IRS’s first notice. It argued that the IRS complied with its obligation by mailing a second notice, even though the evidence suggested that the second notice was never delivered.

The tax court started with the applicable statute. It says that the taxpayer’s petition has to be filed within 90 days of the mailing of the notice of deficiency. However, the statute goes on to say that “Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.”

The court also considered the rules for rescinding a notice of deficiency. These rules, and the guidance the IRS has issued for this process, require the taxpayer to consent to the rescinding of the notice. The court noted that the taxpayers did not consent to rescind the first notice in this case (Rev. Proc. 98-54, §5.07, 1998-2 C.B. 529, 530, states that a “properly executed Form 8626 (or a document as provided in section 5.06 of this revenue procedure) is the only way that a notice of deficiency may be rescinded.”).

Given the language of these statutes, the court rejected the IRS’s arguments. The court noted that the IRS’s position “attempts to create uncertainty about the meaning of the last sentence of section 6213(a) where there is none.” It held that the petition was timely filed based on the first IRS notice.

Disputes Over IRS Notices

Disputes involving the timing and processing of notices of deficiency are common. This is particularly true when it comes to TEFRA partnerships and BBA partnerships under the BBA rules and the confusion that those rules produce. Even outside of those more complex rules, disputes are still frequent. There are some ways that this process might be improved.

For example, the law could require the IRS to demonstrate actual delivery of notices before they become binding if there is a known processing error. This might not be as difficult as it sounds. Rather than relying on dated mail procedures, Congress could mandate the IRS use mail services that include delivery confirmation when there is a known processing error. The USPS offers a delivery confirmation service. This would prevent situations where taxpayers don’t receive updated notices yet deadlines are shortened.

Another idea is for notice rescission rules to be codified in the statute, not just IRS procedural guidance. This would give them more permanence and force of law. The statute could import the IRS rule mandating taxpayer consent before a validly issued notice can be withdrawn by the IRS.

Additionally, Congress could provide a statutory remedy for taxpayers like a reasonable cause exception to late filing if they reasonably rely on an incorrect deadline date provided in an initial notice. This would add flexibility even if later corrected notices make the technical deadline pass.

Finally, the law could impose oversight, internal controls or reporting requirements when the IRS makes mistakes on deficiency notice dates that mislead taxpayers. This transparency could deter carelessness and hold the IRS appropriately accountable through congressional supervision.

The Takeaway

Taxpayers should carefully consider their options in cases where there are disputes involving the notice of deficiency or whether it is valid, as disputes in this area are frequent and the IRS often makes questionable arguments in these cases. The Douglas case is an example. The IRS caught its error a day after the first notice was mailed. It could have contacted the taxpayers and provided them with the IRS form to rescind the first notice and the second notice. This would have required more effort by the IRS and, as this case shows, is what is required of the IRS. The law allows the IRS to simply mail deficiency notices without tracking their receipt, so when errors happen and are known by the IRS, the IRS should take steps to correct the errors.