Incredible as it may sound, tax law is written so that most of the time no court has authority to correct an erroneous income tax assessment by the IRS. In legal speak we say no court has jurisdiction to adjudicate the tax liability. This inability to petition a court to fix an erroneous IRS income tax assessment is the most unfair thing about tax law.
Actually, let’s correct that statement. The most unfair thing about tax law is the convergence of two facts: First, the IRS can assess an income tax against you for any or no reason. Second, most of the time no court has the authority to correct an erroneous assessment by the IRS. Either of these condition is outrageous on its own, but taken together they constitute the one-two punch that ruins many taxpayers. Let’s take them one at a time, and then look what happens when they are combined.
The IRS can assess a tax for any or no reason. There is no standard of care imposed on the IRS when it issues income tax assessments. The IRS is given carte blanche power to assess. See, for example, 26 U.S.C. § 6020(b). The IRS does not have to assess the correct tax, or event attempt to assess the correct tax. Further, if the IRS assesses a tax that is wrong, there are no consequences to the IRS regardless whether the erroneous tax assessment was accidental or intentional.
Now the IRS and its apologists will tell you that the IRS attempts to assess taxes correctly, that it doesn’t abuse its authority, that they are the good guys. Baloney. The IRS routinely issues tax assessments it clearly knows are incorrect, and it does so intentionally to punish taxpayers.
For example, if a taxpayer is a subcontractor who does roofing for 1099 income but does not file income tax returns, guess what happens when the IRS finds out? The IRS files tax returns for the roofer (SFRs—substitute for returns) based on 1099 data in its files. A tax is then assessed against the taxpayer. You can be sure that the SFRs by the IRS will contain only 1099 income and no deductions. So the SFRs and the ensuing tax will be erroneous by a wide margin. The IRS will make no attempt to estimate deductions on account the taxpayer’s cost of materials, salary for employees, or any of the other expenses that are part of operating a roofing company. So the roofer’s tax bill will be greatly inflated by virtue of reflecting only income and no expenses. (By the way, this is a great argument why you should be filing returns.)
I have seen more than once where day traders have had IRS tax assessments in excess of a million dollars when they actually lost money on their stock trading. This is the kind of system your Congress has created.
But the legal situation is actually quite worse than what the examples above imply. Quite literally, the IRS is legally free to make up stuff and use it for tax assessments. There is no legal consequence to the IRS when it does this. (And there are cases where the IRS does make up stuff.) There are no legal obligations on the IRS to be accurate or to use any standard of care when it issues these income tax assessments against taxpayers. The obligations imposed by the law on the IRS regarding income tax assessments relate only to the process of how these assessments are performed, i.e., notices, timing, etc. So long as the IRS correctly follows these procedures, it is free to make the tax assessment as erroneous as it desires.
Most of the time no court has jurisdiction to correct the IRS erroneous income tax assessments. This is a concept that lay people get, but most lawyers have a very hard time believing. This is the Alice-in-Wonderland stuff, something right of the Twilight Zone. George Orwell would be proud of Congress’s handiwork.
There are only two routes to court if you want to contest an IRS tax assessment. The first and most preferred route is Tax Court. When the IRS proposes a tax assessment, it issues a Notice of Deficiency, commonly know as a Stat. Notice (for statutory notice) or the Ninety-Day Letter. This letter triggers a ninety-day window during which the taxpayer may petition Tax Court to dispute the tax liability.
The vast majority of taxpayers have no clue of the significance of this letter. They have been through an exam or audit. They have been getting a slew of mail from the IRS. It all merges together, the legally insignificant pap with the important stuff. No one has told them about the significance of the ninety-day notice in terms they understand. Or, the taxpayer may not even open the IRS letters because of fear or apathy. Or better yet, the IRS is not technically required to send the notice to the taxpayer. The IRS is only required to send the ninety-day letter to the last known address of the taxpayer—a term of art that does not mean what you might think it means. So the taxpayer never gets the letter, and it’s all quite legal.
So the ninety-day window lapses and the taxpayer, months or years later, finds himself dealing with the collection department of the IRS. Let’s say something about the collection department of the IRS. You can have the most air-tight defense to the tax liability and the people in the IRS collection department will be absolutely deaf to it. They are highly trained bill collectors, and that’s all they do. They have no patience for the fact that you may not owe part or all of that tax. It’s not their job to determine the tax liability. That has already been done for them.
So how do you get your tax defense in front of a judge so you can get rid of these government bill collectors? You petition the United States Federal District Court or the United States Claims Court, the only two courts that have jurisdiction to hear your defense. This is easy. First you pay the tax, the interest, and penalties attributable to the tax (which together may double the tax) and then you file a claim for refund. After your refund is denied by the IRS, you file a lawsuit in court.
That’s right. You have to pay to play. And if you can’t afford to pay all those erroneous taxes, penalties, and interest, well you are stuck in tax hell, because Congress has made sure that no court is going to hear your defense. From the time of tax assessment to the date of payment there is no court that has the authority to hear your defense to the alleged income tax liability. That is to say, most of the time taxpayers cannot have their income tax disputes aired in court no matter how erroneous the income tax assessment might be.
Now, let’s bring up that roofer or day trader again. He has this large, bogus tax debt because he did not file his returns and the IRS had no reason not to inflate his tax bill. Guess what? By the time the collection department of the IRS gets serious and starts to levy bank accounts, the penalties and interest have doubled the already bogus tax bill.
This roofer or day trader has no redress in court because the cost to pay the taxes, interest, and penalties is more money that he has ever seen in his life. He may not owe 90% of the tax assessment but he can’t get into court to prove it because U.S. District Court has no jurisdiction until he first pays the outrageous tax he doesn’t owe. In fact, if he lost money he may owe no taxes at all, yet he can’t get this fact in front of a court.
First you give the IRS the right to assess a tax for any or no reason. Then, restrict avenues to the courts so that most of the time people with a tax problem can’t get to a court. Then stand back and rake in the revenue. Congress has made Kafka proud. All perfectly legal.
Now for the fine print. It is possible to get a tax defense in front of a court—maybe. File bankruptcy. If your assets are going to be sprinkled among various creditors for pennies on the dollar and one of those creditors has a debt claim that is bogus, trouble can follow. Sometimes the bankruptcy courts don’t take kindly to the IRS essentially ripping off the other creditors with bogus, inflated tax debts. But you have to admit filing bankruptcy to fix an IRS error is pretty hard medicine.
Also, there are administrative procedures within the IRS to address the kind of problem outlined here, offers in compromise based on doubt as to liability, filing correcting tax returns, etc. But court access is definitely restricted, and IRS administrative procedures are poor substitutes for judicial adjudication.
Sometimes what’s most wrong with this country is what is perfectly legal. If you think the tax laws are fixed in favor of the government, you’re right. But it’s not the fault of the IRS. They don’t make the laws. Congress does. Congress has decided to give the IRS the authority to assess taxes against you for any or no reason, and then restrict court access when you seek to rectify the bogus IRS assessment.
Write a letter to your congressional representative and point them to this website. The law is unfair. The IRS should have some duty of care when it assess taxes and taxpayers should have access to Tax Court all the time, not some truncated time period when it’s convenient for the government.