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Tax Procedure
University of Kansas School of Law
Mazza, Stephen W.

Tax Procedure Spring 2016 Mazza

Overview—Tax Compliance

IRS Introduction

= part of Treasury Dept.; is administrative agency of US gov’t responsible for administering IRC and collecting federal taxes

Issues forms on which TPs file returns; Selects returns for audits
Attempts to resolve tax controversies administratively; Collects taxes
Handles high % of litigated tax cases docketed in Tax Court.

Other gov’t entities involved in tax controversy process:


Writes tax law

Joint Committee on Taxation

Approve all refunds exceeding $2mm

Treasury Dept

Promulgates regulations to effectuate laws

Dept of Justice

Litigates federal criminal tax cases & all federal civil tax cases in every court except US Tax Court.

Structure of the IRS (see p.3 chart)

Agency headed by Commissioner of Internal Revenue, appointed by Prez and confirmed by Senate.§7802.
Mission: “provide America’s TPs top quality service by helping them understand and meet tax responsibilities and by applying tax law w/ integrity and fairness to all”
IRS Reform Act (1998) = new/revised procedures that changed tax administration process.

Reorganization of operating structure.IRS Reform Act §1001.
Regional structure replaced w/ structure based on units that serve groups w/ similar needs:

1. Wage and Investment Division (W&I) = Individual TPs (largest)
2. Small Business Self-Employed Division (SB/SE) = Small businesses
3. Large and Mid-Size Business Division (LMSB) = Large businesses
4. Tax Exempt and Governmental Entities Division (TE/GE) Tax-exempt sector (ee plans, exempt orgs, state/local gov’ts)

Nationwide functional units to address specific issues:

Criminal Investigation Division = potential criminal violations of tax laws and related financial crimes
Appeals unit = independent administrative forum for dispute resolution w/ authority to settle deficiency, refund, collection cases
Communication and Liaison office = disseminates info to Congress, professional orgs and general public about IRS programs and policies.
Research, Analysis, and Statistics office = gathers/disseminates statistical data on TP compliance that IRS uses to create enforcement programs.
Taxpayer Advocate Service Division = TP probs are resolved quickly and fairly; coordinates w/ operating divisions to ID potential administrative probs and implement solutions

Nine-member IRS Oversight Board=§7802=Treasury Secretary, Commissioner, federal ee representative, and 6 members of private sector.

1. Approves annual and long-range strategic plans for IRS
2. Reviews operational functions of IRS (training and education)
3. Reviews IRS ops to ensure proper treatment of TPs

Rulemaking Authority of Treasury Dept and IRS

Sec. of Treasury has authority to “prescribe all needful rules and regulations” for enforcement of IRC.§7805(a).

Initial drafter of regs = Office of the Chief Counsel

IRS publishes guidance in Revenue Rulings, Revenue Procedures

Revenue Rulings = set of facts, statement of issue, and IRS’s conclusion about legal result.TPs may rely on these if facts are substantially the same.Proc. Reg. §601-601(e).
Revenue Procedures = provide guidance and instructions for procedural issues.

IRS provides private guidance to TPs in letter rulings, determination letters

Responses to particular TP, and have no precedential value for other TPs.
Determination letters = most relate to qualification of org for tax-exempt status or retirement plan.

Overview of Federal Tax Controversy Process (see p.9 chart)

TP whose gross income exceeds a specified amount must file an income tax return each year.§6012.
IRS must first assess the tax to use administrative procedures.

IRS cannot assess tax deficiency w/o first sending TP a written notice of deficiency.
Notice must be sent w/in statute of limitations on assessment = usually three years from date return was filed.§6501.

Audit process:

Each yr, IRS audits small % of all returns to enforce tax laws and encourage voluntary compliance.
If IRS revenue agent determines deficiency and TP disagrees, revenue agent prepares Revenue Agent’s Report (RAR).

IRS sends TP RAR w/ cover letter and settlement agreement (Form 870) for TP to sign if wishes to waive restrictions on assessment.
Cover letter = 30-day letter (preliminary notice of deficiency) b/c informs TP of right to request a conference w/ IRS Appeals Division w/in 30 days.30-day letter is not required by law.Once TP receives 30-day letter, has 4 options:

(1) TP agrees and signs settlement agreement (signs Form 870)
(2) TP can pay w/ expectation that can file refund claim.Here, TP pays deficiency amount asserted in the notice, the files a refund claim (prepays).
(3) TP can request a conference w/ Appeals = “nondocketed” basis—protest basis in response to 30-day letter; need to file a protest letter.If there is no agreement in Appeals Division, then IRS will issue 90-day letter.
(4) TP can ignore the 30-day letter, where IRS will send TP a notice of deficiency, or 90-day letter (statutory requirement).§6212.Options to respond to NOD:

TP can ignore notice of deficiency, and IRS can make an assessment, which becomes debt of TP to gov’t.IRS must issue in timely manner a NOD before can assess a tax.If TP can establish that IRS didn’t follow process => easiest way to win.

(1) TP can pay and drop the matter
(2) TP can pay and claim refund = file formal claim for refund w/in specified period => will go to Appeals division (if TP isn’t entitled, then will get Notice of Disallowance) = results in filing in refund court.
(3) TP can petition Tax Court (deficiency jurisdiction) to contest claimed deficiency, w/in 90 days of date notice was mailed.Payment in advance is not required.T.C. has standing pretrial order = if TP hasn’t been to Appeals Division, will go to Appeals = “docketed” basis.

IRS required to give notice and demand for payment to TP as soon as practical and w/in 60 days of making assessment.§6303(a).
Penalties and interest (accruing daily) can equal or exceed the tax liability.
If TP refuses or neglects to pay tax after notice and demand for payment, amount of tax liability becomes lien on all of TP’s real, personal property.§6321.
If TP still refuses to pay tax after receiving from IRS required pre-levy notices, IRS can collect the tax by levying upon TP’s property and selling it at auction.§6331(a).

Implications of Notice of Deficiency:

IRS is prohibited from assessing tax. If TP petitions T.C., “prohibited period” continues until TC’s decision is final. §6213(a).

If TP petitions T.C. and case has less than $50k in issue for each tax year involved, TP has additional option of filing “small tax case.”
If TP petitions T.C. w/o having previously had conference w/ Appeals Division, T.C. generally will send case to Appeals, where it will be considered on “docketed” basis

Statute of limitations is suspended + 60 days (IRS has grace period w/in which to assess tax). §6503(a).

Refund procedures:

Refund claims subject to SOL=generally gives TP longer of 3 yrs from time return was filed or 2 yrs from date tax was paid to file the claim.§6511.
After filing refund claim, TP may not file refund suit until either:

(1) 6 mos. have elapsed form time claim was filed; OR
(2) IRS has sent TP a notice of disallowance.§6532.

TP may not file suit later than 2 yrs from date IRS mails notice of disallowance.

Tax refund suits may be filed in either US district courts or Court of Federal Claims.

Appellate Courts:

If TP pursues T.C. option, resulting decision may be appealed to Court of Appeals for Circuit within which TP resided at time petition was filed.§7482(b).
If TP pursues refund suit, district court cases are appealable to Courts of Appeals.
If TP pursues refund suit, Court of Federal Claims cases are appealable to Court of Appeals for the Federal Circuit.
Appeal from any of Circuit Courts lies to SCOTUS (on certioriari).


US has high compliance rate = 83-84%

But still have $450b tax gap (what TP should pay vs. what TP do pay)
Bulk of non-compliance = unreported income, not overstated deductions.Rationale: to gain benefit of inflated deduction, TP needs to actually report it, while for unreported income, there’s no way for IRS to not know about.

Who is not reporting?

2/3 is Individual Income TPs.
Tend to be small business owners = less than 50% are compliant (likely b/c they’re not employers, who must withhold and report withholding to IRS).
Compliance for wage income = 98%.
Information reporting system = W-2 = TP and IRS gets info (Interest, Dividends, Rents, Royalties).

Not required for small business inco

t Chevron deference.

How does legislative history play out w/ analysis?

Some courts include legislative history to analyze step #1=FDA v. Brown & Williamson

IRS = wants courts to consider #2 (permissible); don’t want them to focus on #1.

What if reg is valid—how should it be interpreted?

Seminole Rock doctrine = agency’s interpretation is given respect as long as it’s reasonable
United Dominion = were not on-point regulations; majority ruled that TP’s approach was correct.
For questions of law, benefit of doubt goes to IRS
For questions of fact, BOP is on the TP to prove the IRS wrong.

What if after adverse decision, IRS issued Reg as “fighting reg”?

Banker’s Trust = Federal Circuit held that executive agency regulation cannot effectively construe a statute in manner different from prior definitive ruling of a court.
Brand X = “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”
Swallows Holding = 3d Cir concluded that, b/c no judicial opinion existed that unambiguously foreclosed Treasury’s authority to interpret the statute, it was not bound by previous judicial interpretations.
End result: IRS can issue fighting regs (going forward, they will apply); there needs to be ambiguity for IRS to issue fighting reg (gov’t agency determination of ambiguity).

IRS Authorities: procedural regulations, Revenue Rulings, Revenue Procedures.

(1) Procedural Regs = in IRS Statement of Procedural Rules, 26 CFR Part 601 = not subject to APA

Address internal IRS “housekeeping” matters
May provide source of info on matters relating to IRS organization and procedure

(2) Revenue Rulings = published first in Internal Revenue Bulletin, then compiled in Cumulative Bulletin

IRS’s official interpretation of Code as applies to particular set of facts.Rev. Proc. 2008-1.
Objectives = promote uniform application of tax laws and assist TPs in attaining maximum voluntary compliance.Proc. Reg. §601.601(d)(2)(iii).
Statement of Facts, Issue, Application, Conclusion
Carry some force and effect of law; IRS can supersede, terminate, amplify

Generally, Rev. Rul. may be applied retroactively.
§7805(b) permits IRS discretionary authority to revoke Rev. Rul. retroactively.§7805(b)(8).
, new ruling cannot be applied retroactively to extent revocation would have adverse tax consequences to TP. Rev. Proc. 89-14.

TP may rely on Rev. Ruling depending on substantial similarity b/t TP’s facts and those in the ruling.Proc. Reg. § 601.601(d)(2)(v)(e).
2 possible standards (not Chevron b/c there is no notice and comment procedure)

(1) no deference to Revenue Rulings

Tax Court’s position: “revenue rulings are nothing more than the legal contentions of a frequent litigant, undeserving of any more or less consideration than the conclusory statements in a party’s brief.”McLendon.

(2) Skidmore deference = generally courts use to apply to Revenue Rulings and Proc.

Gov’t agency’s interpretation is accorded respect befitting “the thoroughness evident in its consideration, the validity of its reasoning, its consistency w/ earlier and later pronouncements, and all facts which give it power to persuade, if lacking power to control.”Skidmore.
Intermediate deference; courts refer to it as “Skidmore respect”
Ninth Circuit and Sixth Circuit use.