Tax Procedure

Introduction

Tax procedure governs the administration and enforcement of the federal tax laws by the Internal Revenue Service (IRS). The IRS has broad authority to examine returns, assess deficiencies, collect taxes, and impose penalties. Taxpayers have the right to challenge IRS determinations in administrative proceedings and in court. The procedural framework balances the government’s need for efficient tax collection with taxpayer rights to due process and judicial review.

IRS Audits

The IRS may examine (audit) a taxpayer’s return to determine the correctness of the reported tax liability. Audits may be conducted by correspondence, at an IRS office, or at the taxpayer’s place of business. The IRS generally has three years from the date the return was filed to assess additional tax (the statute of limitations), extended to six years for substantial omissions of income.

During an audit, the taxpayer has the right to representation and may challenge the IRS’s information requests. The IRS agent issues a Revenue Agent’s Report (RAR) proposing adjustments. If the taxpayer agrees, they sign a waiver form and pay the additional tax. If the taxpayer disagrees, they may request a conference with the IRS Office of Appeals.

Deficiency Procedures

If the IRS determines a deficiency —the amount of tax understated —it sends a statutory notice of deficiency (a 90-day letter). The taxpayer has 90 days (150 days if the notice is addressed outside the United States) to petition the Tax Court for redetermination of the deficiency. If the taxpayer does not petition the Tax Court, the IRS may assess the deficiency and begin collection.

The deficiency procedure gives the taxpayer the opportunity to obtain judicial review before paying the disputed tax. The taxpayer may pay the assessed tax and sue for a refund in federal district court or the Court of Federal Claims instead of petitioning the Tax Court, but the Tax Court option is the most commonly used.

The Tax Court

The United States Tax Court is a federal trial court that specializes in tax disputes. The Tax Court has jurisdiction to redetermine deficiencies before the taxpayer pays the tax. The court’s judges are appointed under Article I of the Constitution, and the court has jurisdiction over most federal tax disputes, including deficiencies, collection due process hearings, and certain declaratory judgment actions.

Tax Court proceedings are generally less formal than district court proceedings. The court follows the small tax case procedure for disputes involving $50,000 or less, with simplified procedures and no appeal. Regular Tax Court decisions are appealable to the federal courts of appeals.

Collection

The IRS has powerful collection tools, including liens, levies, and seizure of property. The Notice of Federal Tax Lien arises automatically when a tax is assessed and the taxpayer fails to pay after notice and demand. The lien attaches to all property and rights to property of the taxpayer. Levy is the legal seizure of property to satisfy a tax debt.

The IRS must follow specific procedures before imposing collection actions, including sending notices and providing an opportunity for a Collection Due Process (CDP) hearing. The CDP hearing is conducted by the IRS Office of Appeals, and the taxpayer may raise collection alternatives, including installment agreements and offers in compromise.

Penalties and Interest

The IRC authorizes numerous penalties for noncompliance, including: failure to file ($ 6651(a)(1)), failure to pay ($ 6651(a)(2)), accuracy-related penalties for negligence or substantial understatement ($ 6662), and fraud penalties ($ 6663). The fraud penalty is 75% of the underpayment attributable to fraud.

The IRS also charges interest on unpaid taxes from the due date of the return until payment. The interest rate is the federal short-term rate plus 3% (generally), compounded daily.

Conclusion

Tax procedure provides the framework for the relationship between taxpayers and the IRS. The audit process, deficiency procedures, Tax Court jurisdiction, collection mechanisms, and penalties define the procedural landscape. Understanding tax procedure is essential for tax practitioners and for taxpayers who face IRS examination or collection action.