Notice of Deficiency
Over the years, I have observed there is only one thing that a taxpayer fears more than being notified by the IRS that their income tax return for a particular taxable year has been selected for audit, and that is being notified that the IRS has determined the taxpayer owes additional tax,[i] plus interest[ii] and penalties,[iii] for such year.
A taxpayer who has received a timely[iv] notice of deficiency[v] is generally presented with three basic options:
- agree with the IRS’s adjustments and pay the additional tax plus interest;[vi]
- pay the amount shown on the notice, file a timely claim for refund and, if that claim is denied or is not acted upon within six months, file a suit for refund in the appropriate U.S. District Court or the U.S. Court of Federal Claims;[vii] or
- dispute the IRS’s determination without payment of the amounts asserted as owing in the notice of deficiency[viii] and, within ninety days from the date of the notice, file a petition with the U.S. Tax Court for a redetermination of the asserted tax deficiency.[ix]
In general, the IRS may not assess an income tax deficiency against a taxpayer, nor may it commence any collection action for such tax, until (a) a notice of deficiency has been sent to the taxpayer, (b) the above-referenced 90-day period has expired and, (c) if the taxpayer has filed a petition with the Tax Court, the decision of the Tax Court becomes final.[x]
Once the Tax Court’s decision becomes final, the IRS may assess and collect the amount of the deficiency as determined by the Court.[xi]
In light of the foregoing, one would expect that a taxpayer who wants to challenge the tax deficiency asserted by the IRS will do so by filing a petition with the Tax Court. After all, why pay an additional amount of income tax to the government and then try to recover it a refund action when you genuinely and reasonably believe you do not owe it?[xii]
As stated earlier, however, the taxpayer has ninety calendar days from the date of the notice of deficiency to petition the Tax Court.[xiii] If a taxpayer misses this deadline – a not insignificant number do – the Tax Court will not have jurisdiction to redetermine the deficiency asserted against the taxpayer by the IRS.
At times, this rule will produce seemingly harsh results, as one taxpayer recently experienced when the Court found they had submitted their petition one day late.[xiv]
Lack of Jurisdiction
On June 26, 2023, the IRS sent a notice of deficiency to Taxpayer’s last known address by certified mail. The IRS was able to establish the foregoing, and Taxpayer did not dispute it.
Because the notice of deficiency was mailed to Taxpayer’s last known address on June 26, 2023, the last date to file a petition with the Tax Court was September 25, 2023 (the deadline), as stated in the notice.[xv]
Taxpayer electronically filed their petition to commence the case on September 26, 2023 – the day after the deadline.
Motion to Dismiss
On November 7, 2023, by Motion to Dismiss for Lack of Jurisdiction, the IRS moved that the case be dismissed on the ground that Taxpayer’s petition was not filed within the period prescribed by the Code.
Taxpayer opposed the Motion but, rather than dispute any of the jurisdictional allegations set forth in the Motion, Taxpayer’s arguments were directed to the underlying merits of the case; that is, whether the IRS’s determinations in the notice of deficiency were correct. Those merits were not before the Court – the only issue before the Court was whether the Court had jurisdiction to hear Taxpayer’s case.
It’s Jurisdictional
The Court explained that it is a court of limited jurisdiction, and may exercise jurisdiction only to the extent expressly provided by statute. Where the Court’s jurisdiction is duly challenged, the Court continued, its jurisdiction must be affirmatively shown by the party seeking to invoke that jurisdiction. To meet this burden, the party “must establish affirmatively all facts giving rise to our jurisdiction.”
According to the Court, in deficiency cases, its jurisdiction depends upon the issuance of a valid notice of deficiency and the timely filing of a petition. In general, a notice of deficiency will be deemed valid for this purpose if it is sent to the taxpayer’s last known address by certified or registered mail. In order to be timely, the Court stated, a petition generally must be filed within ninety days of the date on which the IRS mailed a valid notice of deficiency. The Court added that it has no authority to extend this ninety-day period.
Because the notice of deficiency was mailed to Taxpayer’s last known address on June 26, 2023, the last date to file a petition with the Court was to that notice was September 25, 2023. Because Taxpayer’s petition to commence the case electronically filed on September 26, 2023, it was not filed within the period prescribed by the Code.
No Equitable Tolling
The Court stated it was sympathetic to Taxpayer’s circumstances, but again stated that Congress limited its jurisdiction in the deficiency context to those cases in which a petition is timely filed.
Moreover, the Court added, it had no authority to extend the deadline regardless of the equities of a particular case and regardless of the cause for the petition’s not being filed within the requisite period.[xvi]
The Court granted the IRS’s Motion and dismissed Taxpayer’s for lack of jurisdiction.
Is A Timely Petition Jurisdictional?
Significantly, the Court observed that it will continue treating the deficiency deadline for the filing of a petition as jurisdictional in cases that are appealable to jurisdictions outside the Third Circuit Court of Appeals.[xvii]
Why treat the Third Circuit differently? Because, under the long-established “Golsen rule”[xviii] the Tax Court will follow the precedent of the Circuit Court to which the Tax Court’s decision is appealable.
As it so happens, last year the Third Circuit[xix] decided that the ninety-day period prescribed by the Code for the filing of a petition with the Tax Court for the redetermination of a deficiency was not jurisdictional[xx] and, as such, was presumptively subject to equitable tolling – meaning that the running of the statute of limitations (in this case, the ninety-day period) is paused when “a litigant has pursured his rights diligently but some extraordinary circumstance prevents him from bringing a timely action.”
With that, the Court of Appeals reversed the Tax Court’s dismissal of the case for lack of jurisdiction and remanded it for the Tax Court to determine whether the taxpayer was entitled to equitable tolling.
Where Are We?
About four months later, the Tax Court rejected the Third Circuit’s decision and reaffirmed – in a case involving a taxpayer who filed their petition with the Tax Court two days late – that it will continue to treat the ninety-day deficiency deadline as jurisdictional in cases appealable outside the Third Circuit.[xxi]
Then, in March of this year, the IRS petitioned the U.S. Supreme Court for a writ of certiorari. The taxpayer’s brief in opposition to the government’s petition is due May 20, 2024.[xxii]
If the Supreme Court agrees to review the appellate court’s opinion, it is likely that it will overturn it. However, if the Court does not grant cert, it may be on the grounds that it is up to Congress to clarify whether it intended the deadline to be jurisdictional.
Stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] An income tax deficiency is generally defined as the amount by which the income tax imposed on a taxpayer under the Code exceeds the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus the amounts previously assessed (or collected without assessment) as a deficiency. IRC Sec. 6211.
[ii] IRC Sec. 6601.
[iii] Generally, for late payment of the additional tax shown as owing on the notice of deficiency. IRC Sec. 6651(a)(3).
[iv] Before the running of the statute of limitations on the assessment of additional tax; in general, three years from when the return was filed. IRC Sec. 6501.
[v] IRC Sec. 6212. Among other things, the notice must be sent to the taxpayer’s last known address by registered or certified mail. The fact the taxpayer does not receive the notice is irrelevant; the 90-day period for petitioning the Tax Court will run from the date of the notice.
[vi] Most taxpayers in these circumstances will try to have the penalties abated. In order to do so, a taxpayer must establish that their failure to pay the correct amount of income tax was due to reasonable cause and not due to willful neglect. IRC Sec. 6651.
[vii] IRC Sec. 6402, 6511, 7422.
[viii] If any payment is made before the mailing of a notice of deficiency, the IRS is not prohibited by the Code from assessing such amount. If such amount is assessed, the assessment is taken into account in determining whether or not there is a deficiency for which a notice of deficiency must be issued. Thus, if such a payment satisfies the taxpayer’s tax liability, no notice of deficiency will be mailed and the Tax Court will have no jurisdiction over the matter. Reg. Sec. 301.6213-1(b)(3).
In any case where such amount is paid after the mailing of a notice of deficiency, such payment shall not deprive the Tax Court of jurisdiction over such deficiency. IRC Sec. 6213(b)(4).
Alternatively, a taxpayer may make a cash deposit with the IRS to suspend the running of interest on the asserted tax deficiency from the date of the deposit. IRC Sec. 6603.
[ix] IRC Sec. 6212 and Sec. 6213(a).
[x] IRC Sec. 6213(a).
[xi] IRC Sec. 6215.
[xii] There are other factors to consider.
[xiii] The last day to file a petition is stated in the notice.
[xiv] Leleux v. Commissioner, T.C., No. 15331-23S, 4/17/24.
[xv] The 90th day after the date of mailing was Sunday, September 24, 2023; however, IRC Sec. 6213(a) provides that Saturdays, Sundays, and legal holidays in the District of Columbia are not counted as the last day of the 90-day period. Thus, the last date to file a petition as to the notice of deficiency in Taxpayer’s case was September 25, 2023.
[xvi] Nevertheless, the Court noted that the dismissal of this case did not preclude Taxpayer from pursuing administrative resolution of the tax liability directly with the IRS. Another remedy potentially available to Taxpayer, “if feasible,” the Court added, was to pay the determined amounts and thereafter file a claim for refund with the IRS. If that claim is denied (or not acted upon after six months), Taxpayer may file a suit for refund in the appropriate U.S. District Court or the U.S. Court of Federal Claims.
[xvii] The U.S. Courts of Appeals (other than the Court of Appeals for the Federal Circuit) have exclusive jurisdiction to review the decisions of the Tax Court. In the case of an individual taxpayer seeking redetermination of its tax liability, the Tax Court’s decision may be reviewed by the Circuit Court in which the legal residence of the taxpayer is located; in the case of a corporation, the principal place of business or principal office of the corporation. IRC Sec. 7482.
[xviii] Golsen v. Comm’r, 54 T.C. 742 (1970).
[xix] Culp v. Comm’r, 75 F.4th 196 (3d Cir. 2023).
[xx] If a jurisdictional requirement is not satisfied, the court lacks the power to hear the case.
[xxi] Sanders v. Comm’r, 161 T.C. No. 8 (Nov. 2, 2023).
[xxii] https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/23-1037.html .
