With our tax system, taxpayers are generally required to file returns to tell the IRS how much tax is due.
This is no easy task. The tax reporting process can be confusing. Errors happen.
Congress has authorized the IRS to correct mathematical and clerical errors made on tax returns. This is one of the exceptions to the requirement that the IRS send the taxpayer a notice of deficiency before recording a tax liability as being due. The notice of deficiency is a fundamental concept in our Federal tax system. The concept is that a taxpayer should not be held accountable for a tax absent advance written notice and an opportunity to dispute the tax.
This is why the math error rules are so important. They allow the IRS to completely sidestep these procedural safeguards.
The IRS’s CCA 129453-17 memorandum provides an opportunity to consider the IRS’s math error powers.
About the IRS’s Math Error Powers
As noted above, our tax system is a self-assessment system. This means that taxpayers file tax returns to compute and report the amount of tax they owe.
The IRS often disagrees with the tax reported on tax returns. There are procedures for the IRS to change or challenge the amount of tax reported on tax returns. These procedures include a notice of deficiency.
The IRS typically has to send the taxpayer a notice of deficiency before it can record an additional tax liability on the taxpayer’s IRS account. This notice of deficiency allows the taxpayer to petition the U.S. Tax Court to have the court review the assessment before it becomes final.
Math errors are an exception to the notice of deficiency. Section 6213 allows the IRS to make an assessment without first issuing a notice of deficiency:
If the taxpayer is notified that, on account of a mathematical or clerical error appearing on the return, an amount of tax in excess of that shown on the return is due, and that an assessment of the tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical or clerical error, such notice shall not be considered as a notice of deficiency … and the taxpayer shall have no right to file a petition with the Tax Court based on such notice, nor shall such assessment or collection be prohibited by the provisions of subsection (a) of this section. Each notice under this paragraph shall set forth the error alleged and an explanation thereof.
The statute goes on to require the IRS to issue a 60 day notice to the taxpayer, allowing the taxpayer to request the IRS remove the assessment. After issuing the 60 day letter and receiving the response, the IRS can then assess a notice of deficiency and the taxpayer can petition the U.S. Tax Court.
This arrangement affords taxpayers and the IRS an easy out in the event of meth errors, as the IRS can go ahead and assess the tax. This is particularly helpful for the IRS if the taxpayer does not respond to the 60 day notice.
But the process does not necessarily work the way it is intended. What often happens is that the IRS makes a math error change and sends a notice to the taxpayer for the change. The notice may not notify the taxpayer of its right to challenge the assessment within 60 days or why this is important.
What is a Math Error?
Section 6213 provides a list, which Congress has expanded over time. The list includes:
- an error in addition, subtraction, multiplication, or division shown on any return.
- an incorrect use of any table provided by the Internal Revenue Service with respect to any return if such incorrect use is apparent from the existence of other information on the return.
- an entry on a return of an item which is inconsistent with another entry of the same or another item on such return.
The list goes on to provide for other math errors.
The IRS has exercised this power in a number of different contexts. For example, in Rev. Rul. 2005-51, the IRS addressed its math error powers when there is a different amount of income reported on a tax return than the amount reported on a Form W-2 filed by an employer.
The Time Limit for Making Math Error Changes
But can the IRS make a math error change for one of these errors at any time? Is this power limited to a specific period of time or can the IRS wait until year 10, 20, 30, etc. after the return is filed and make the change then? The IRS’s chief counsel memo addresses this.
The IRS’s memorandum notes that the IRS generally has three years from the date a tax return is filed to make changes to the tax return. There are exceptions, but this is the general rule. Given this rule, the IRS concludes that the IRS can only make math error assessments within the three year period.
What If The IRS already processed the Return?
But what if the IRS has already processed the tax return in question and issued a refund to the taxpayer based on the tax return? Can the IRS use its math error powers to go back and make a math error assessment before the three year statute is up? The IRS concludes that it can.
While not addressed in the IRS memo, the IRS may also have the power to bring suit to recoup the refund. The IRS generally has two years from the date of payment to recoup any erroneous refund paid to a taxpayer.