Why not to ignore them, what they mean and how to respond

All correspondence from the Internal Revenue Service should be taken seriously; however, some letters and notices have more legal consequences than others.

These propose to assess tax against you personally.

This article identifies the three most important letters you might ever receive from the IRS - what they mean and how to respond.

Statutory Notice of Deficiency

Sent by Certified Mail to your Last Known Address - This letter is a final determination of your tax liability for a given year in which a deficiency in income tax has been determined, together with any penalty and related interest. Generally, it is issued after an IRS examination, via your correspondence with an IRS Campus (Service Center) or from your personal contact with an IRS revenue agent or an office auditor based upon your filed returns. However, it can also be issued where a taxpayer has not filed returns. The notice of deficiency increases your tax liability by either including additional items of income or by disallowing certain deductions (expenses) or other credits you have taken on the filed returns.

The statutory notice of deficiency is commonly known as a “90 day letter” or a “deficiency notice” and is authorized in the Internal Revenue Code (IRC) by Section 6212.

The deficiency notice allows you 90 days to file a Petition in the United States Tax Court to dispute the changes reflected in the deficiency notice. If you fail to file a Petition during the 90 day period, the determined deficiency in tax, together with any related penalty and interest, will be assessed against you. Thereafter, collection by the IRS can and will begin. However, if you file a timely Petition with the Tax Court, no assessment of any tax, penalty or interest can be made until the decision of the Tax Court becomes final. IRC, Section 6213. Generally, upon filing a Petition, the Government will file an Answer and then refer your case to the IRS Appeals Office for settlement consideration. Over 90% of the “petitioned” cases to the Tax Court are settled with the IRS Appeals Office.  The rules for filing a Petition with the Tax Court can be found at the website for the United States Tax Court – www.ustaxcourt.gov. These rules are fairly simple and straightforward.  If your accountant, CPA or attorney has not been involved in the IRS audit, you should converse with them upon your receipt of any statutory notice of deficiency.   

Final Notice of Intent to Levy, IRS Letter 1058 

Generally sent by Certified Mail to your Last Known Address - The IRS is required under the provisions of IRC, Section 6330, to send you a Final Notice of Intent to Levy (Letter 1058) with respect to any assessed and unpaid income tax liability before starting collection by levy or seizure of your property. Generally, the IRS has already sent you two or three notices prior to sending the Final Notice of Intent to Levy.

This Final Notice gives you 30 days to file an administrative appeal with the IRS on Form 12153 “Request for a Collection Due Process or Equivalent Hearing.”

This appeal is important for the following reasons: (1) While the appeal is pending, the IRS is prevented from further levying or seizing any of your properties, including your bank accounts, salary and/or wages; otherwise, if you fail to file a timely appeal, the levy will become effective immediately; (2) The appeal effectively transfers the case from IRS Collection to the IRS Appeals Office where you will have an opportunity to meet with a Settlement Officer and negotiate what is known as a “collection alternative” to the levy for your unpaid taxes; and (3) If you cannot negotiate a satisfactory collection alternative with the Settlement Officer, you have the right to file a Petition in Tax Court to dispute the proposed levy. All of this is commonly referred to as “Collection Due Process” and it is instituted by you filing the Form 12153 with the IRS from the Final Notice of Intent to Levy within the 30-day time period. Similar to Statutory Notice of Deficiency referred to above, the IRS Appeals Office will send you a Written Notice of Determination at the conclusion of your appeal from which you also have 30 days to file a Petition in Tax Court assuming you are not in agreement with the Written Notice of Determination. Further information concerning this procedure can be found at the IRS website www.irs.gov with respect to Form 12153 as well as IRS Publication 594 entitled “The IRS Collection Process.”

Trust Fund Recovery Penalty, IRS Letter 1153 

Generally sent by Certified Mail to your Last Known Address - If you are an owner, officer, check-signer or decision-maker at a business that is behind on 941 taxes (employment taxes), you are at risk of being personally assessed as a “responsible person” with a penalty called the “Trust Fund Recovery Penalty” which is equal to the amount withheld from the employees’ paychecks that has not been remitted to the IRS.  See IRC, Section 6672. A second element under Section 6672 is that the responsible person’s conduct must be “willful” which is interpreted broadly for purposes of the statute.

For example, if a responsible person intended to pay the trust fund taxes to the IRS, but paid other creditors first in order to continue business, this is very likely to satisfy the “willfulness” requirement of the statute.

The IRS, however, cannot make an assessment of unpaid employee withholding taxes(income and FICA) against a “responsible person” until he or she is first provided with notice and opportunity to file an appeal.  This is done through the issuance of a Letter 1153 (identified as such in the lower right-hand corner on page 1), together with Form 2751, which is sent by the Revenue Officer who generally conducted the employment tax examination of the business. Form 2751 will tell you how much the “Trust Fund” portion is as the amount allegedly owed is reflected in the bottom right corner of said Form under the column entitled “Penalty.”  If you receive this letter and believe that you are not a responsible person and/or did not engage in conduct deemed willful, it is imperative that you appeal and protest this letter within the 60-day time frame outlined in Letter 1153. If possible, it is best to engage competent counsel to prepare your protest and argue your appeal before the IRS Appeals Office. If you fail to file an appeal within the 60-day time period, an assessment of the Trust Fund Recovery Penalty will be made against you and collection action will begin by the IRS.    

The Statutory Notice of Deficiency, Final Notice of Intent to Levy (Letter 1058) and Trust Fund Recovery Penalty (Letter 1153) all involve proposed assessment actions by the IRS against you personally. Failure to timely and properly respond to these letters will have immediate and far-reaching consequences. Please seek competent advice from a professional if you receive any of the aforementioned letters.