An assessment is the IRS’s formal recording of a tax liability on a taxpayer’s account. Once a liability has been assessed, the IRS is authorized to begin collection efforts, such as sending bills, filing liens, and issuing levies. Tax and penalty assessments can arise in a number of ways. Perhaps a taxpayer never filed a return, so the IRS filed a Substitute For Return for them. Perhaps the IRS assessed late filing penalties after a return was filed late. Maybe the IRS made an adjustment to the taxpayer’s return after a clerical or mathematical error. There are plenty of collection options available to taxpayers in paying their liabilities to the IRS, such as streamlined installment agreements and Offers in Compromise. But what options are available to taxpayers who disagree that they owe a tax or penalties that has already been assessed by the IRS?
Most taxpayers are unfamiliar with the various administrative channels that can be utilized in disputing the validity of a tax or penalty assessed by the IRS. In this article, we’ll discuss a few of possible avenues and some important procedural considerations. The focus of this article is specifically disputing taxes and penalties post-assessment.
Audit Reconsideration
One of the most common post-assessment remedies is audit reconsideration. Taxpayers may request an audit reconsideration when they have new information to show the IRS about an audit, they disagree with the tax the IRS calculated, or they never appeared for an audit appointment. This allows taxpayers to present new information that was not previously considered during an examination. However, it’s important to note that there are some situations when an audit reconsideration is not available. You can’t request an audit reconsideration when you have already paid the full amount owed, you previously entered into an agreement with the IRS to pay the tax, or the issue was already litigated in court.
You can initiate an audit reconsideration by sending your request to the last IRS office that last corresponded to you about the matter. Its typically helpful to complete Form 12661 Disputed Issues Verification, to explain each issue with which you disagree. Along with your request, you should submit a copy of the Form 4549 Income Tax Examination Changes that you received from the IRS.
Offer in Compromise Doubt as to Liability
When people think of Offers in Compromise, they usually think about those radio advertisements that promise to help taxpayers settle their tax debts for “pennies on the dollar.” You can initiate that type of Offer in Compromise by filing Form 433-A (OIC) and Form 656. However, there is another form that is helpful to taxpayers who genuinely dispute that the tax assessed is correct. To pursue this type of offer, taxpayers must file Form 656-L Offer in Compromise Doubt as to Liability. When submitting Form 656-L, it’s important to include a comprehensive argument that explains when the tax assessed is incorrect and includes evidence to support the position.
One of the most important aspects of submitting an Offer in Compromise is that it will prevent the IRS from taking any further collection action while the offer is pending, including levies. However, note that submitting an Offer in Compromise won’t prevent the IRS from filing a lien.
Collection Due Process Hearing
Before levying a taxpayer’s bank account, the IRS must provide the taxpayer with an opportunity to request a Collection Due Process (“CDP”) hearing to discuss their balance due with an Appeals Officer from the Independent Office of Appeals. Taxpayer’s have the right to request a CDP after receiving an IRS Letter 1058 or LT11 notice. To request the CDP hearing, send in Form 12153 to the office that sent you the latest correspondence. During the CDP hearing, taxpayers can discuss a number of issues, including the validity of the amount due, collection alternatives, penalty abatement, and innocent spouse relief. However, there is an important caveat to understand: taxpayers can only discuss the validity of the underlying tax liability at a CDP hearing when they have not already had an opportunity to dispute the tax liability. This means that if a taxpayer had another opportunity to dispute the liability, such as by filing a Tax Court petition after receipt of a Notice of Deficiency, taxpayers cannot challenge the underlying liability during a CDP hearing. However, taxpayers who previously had an opportunity to challenge the underlying liability may still request a CDP hearing to discuss other topics, such as payment options, noncollectible status, and Offers in Compromise.
Taxpayers have 30 days to request a CDP hearing after receiving an LT11 notice or a Letter 1058. While the taxpayer has a pending CDP hearing, the IRS cannot levy the taxpayer’s bank account. If you miss the deadline to request the CDP hearing, you may still be able to request an Equivalent Hearing. This type of hearing won’t delay further collection action by the IRS but will give you the opportunity to speak to an Appeals Officer from the Independent Office of Appeals.
Filing an Original or Amended Return
Lastly, and perhaps most obviously, taxpayers may file an original or amended return if they disagree with their tax assessment. For example, if the IRS filed a Substitute For Return for a taxpayer who never filed their return and the taxpayer disagrees with the IRS’s calculation of the tax, they should strongly consider filing an original return to replace the return prepared the IRS. Alternatively, if a taxpayer left off credits or deductions from their original return, they should consider filing an amended return to lower their tax liability.
Conclusion
If you disagree with taxes or penalties that have been assessed against you, it’s important to know that you have options. One of the key strategies is to act quickly. Don’t ignore an IRS notice, especially if it’s an LT11 notice or Letter 1058. Finally, taxpayers should consider seeking professional guidance, as navigating the various forms and administrative channels can be complex.
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