Is Sending A Form Taxpayer Self-Assessment?

 

There are times we need to remember that we are working with law.

Words in law can have very specific meanings.

Let’s look at three Code sections.

Code § 6201 - Assessment authority

(a) Authority of Secretary 

 

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. Such authority shall extend to and include the following:

(1)  Taxes shown on return

The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists (or payments under section 6225(c)(2)(B)(i) are made under this title.

Code § 6211 - Definition of a deficiency

(a) In general

For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of—

(1) the sum of

(A) 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

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made.

Code § 6213 - Restrictions applicable to deficiencies; petition to Tax Court

(a) Time for filing petition and restriction on assessment

Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed  (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 7421(a), the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered by such court of any amount collected within the period during which the Secretary is prohibited from collecting by levy or through a proceeding in court under the provisions of this subsection. The Tax Court shall have no jurisdiction to enjoin any action or proceeding or order any refund under this subsection unless a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of such petition. Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.

Let’s talk about Ken and Juli Walker.

They filed a joint tax return for 2018.They reported adjusted gross income of approximately $110 grand, requesting a federal refund of approximately $2,100.

They left something out, however: Marketplace insurance for which they had received advance premium payments of $20,904.

COMMENT: The Marketplace refers to the Affordable Care Act, also known as Obamacare. One guesstimates his/her income for the upcoming year, and - if income is low enough - one is entitled to a subsidy. The subsidy can be handled one of two ways: first, as a monthly reduction of any premium otherwise due; second, as additional tax paid-in when filing the return next year. The advantage to the first is immediate reduction of premiums due now. The advantage to the second is dry powder in case one is over-subsidized. I do not immediately recall a client electing the second option.   

There is a potential problem, though. The subsidy is based on your income, and you are guessing at your income when you request the subsidy. Eventually you have to settle-up this guess by attaching a reconciliation to your tax return - Form 8962 – calculating what your subsidy should have been had you used the actual, final numbers on your tax return. If actual income is lower, you probably have a refund coming. If actual income is higher, you are probably writing a check to the IRS.

In September 2019 the IRS sent a notice requesting Form 8962.

In December 2019 the Walkers sent the 8962.

The IRS processed the form and in March 2020 sent a notice of assessment for $20,904, fully attributable to the ACA subsidy.

By October 2021 interest and penalties had swelled the balance to $27,297. The IRS issued a Notice of Intent to Levy.

The Walkers requested a Collection Due Process hearing.

COMMENT: The Notice of Intent to Levy starts a 30-day calendar on the taxpayer’s ability to stop the lien, which the Walkers did by requesting a CDP hearing.  Mind you, a CDP hearing is not an end-all. For example, one generally cannot contest the existence of the liability itself in a CDP. One would have gone through numerous notices to get to this point, and the IRS would have lost patience. If the taxpayer wants to contest the liability, he/she will have to consider alternatives such as audit reconsideration or an offer in compromise. The IRS wants a payment program as the product of a CDP hearing.

The Walkers requested an installment agreement. The reason they gave was as follows:

Taxpayers do not believe that they agreed to this assessment and do not understand it. If the assessment is correct, taxpayers dispute the penalties because of the IRS’s inactivity on the matter during the pandemic. If there is a liability, taxpayers request an installment agreement.”

There was back and forth, and in January 2024 the (IRS) Settlement Officer decided that the Walkers owed the tax. She did allude to the need for the taxpayers to do something more if they wanted to contest the tax liability itself:

Beside your general statement, you did not submit an amended return or a substantive reconsideration request.”

The taxpayers – surprisingly – withdrew their request for an installment agreement.

At this point, I would normally lose hope for the Walkers. I do not see an immediate way to avoid repaying the excess subsidy, but I nonetheless would have pressed for a payment plan. I would also have requested penalty abatement, as you won’t receive one without asking.

But there is a major technical issue here: had the IRS checked all the boxes to be able to collect the tax?

Let’s go back to the Code sections at the beginning of this post.

Section 6201 addresses what happens when you send in a return showing a tax liability: the system self-assesses. The IRS will ride piggyback on that assessment. Easy. Makes sense.

That is not what happened with the Walkers. The return as originally filed showed a refund, not a liability. The Walkers never filed a return that showed a liability. The Walkers sent a Form (8962) to the IRS, which the IRS processed and somehow generated a liability.

Question: did sending that 8962 create a liability that could be assessed?

We need to be careful with words here. No question the 8962 created a number that – when combined with other numbers on the return – resulted in a liability. What it did not do is show a liability on its own power. Somebody had to do math.

Here is an example: what if the taxpayer had inadvertently omitted estimated tax payments exceeding the subsidy recapture shown on Form 8962? There would be no additional tax, and there would be an additional refund instead.

Here is the Court:

However, we reject respondent’s additional contention that petitioners’ completion of Form 8962 reflects additional tax due which may be assessed under section 6201.”

If this is not an assessment under Section 6201, what is it?

It is a deficiency under Section 6211.

So what?

Look at the italicized portion of Section 6213 above.

… no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer,….

A deficiency presumes that the IRS is matching, changing, moving, eliminating numbers. The IRS is doing math.

And the Code wants a notice mailed to the taxpayer alerting him/her of what the IRS is doing.

There are procedures for enforcing a deficiency, and one is key. We have called it many names over the years - a statutory notice of deficiency, a NOD, a SNOD, a 90-day letter. These are all terms for the following notice:

Code section 6213 requires the IRS to issue a SNOD before it can enforce a deficiency.

What did the IRS fail to do with the Walkers?

Yep, it failed to send a SNOD.

Here is the Court:

With respect to the proposed levy action before us - and having determined the IRS failed to issue a Notice of Deficiency despite … being legally required to do so - we hold that the IRS may not proceed with the collection of the Assessment.”

Howaboutthat?

The Walkers won their case on an especially narrow technical point. Still, a win is a win.

Our case this time was Walker v Commissioner, T.C. Memo 2026-4.

Repaying The Health Care Subsidy

Twice in a couple of weeks I have heard:

“They should check on the Exchange.”

The Exchange refers to the health insurance marketplace.

In both cases we were discussing someone who is between jobs.         

The idea, of course, is to get the subsidy … as someone is unemployed and can use it.

There might also be a tax trap here.

When you apply for Obamacare, you provide an estimate of your income for the coverage year. The answer is intuitive if you are applying for 2020 (as we are not in 2020 yet), but it could also happen if you go in during the coverage year. Say you are laid-off in July. You know your income through July, and you are guessing what it might be for the rest of the year.

So what?

There is a big what.

Receive a subsidy and you have to pay it back – every penny of it – if your income exceeds 400% of the poverty line for your state.

Accountants refer to this as a “cliff.” Get to that last dollar of income and your marginal tax rate goes stratospheric.

Four times the poverty rate for a single person in Kentucky is approximately $50 grand.  Have your income come in at $50 grand and a dollar and you have to repay the entire subsidy.

It can hurt.

How much latitude does a tax preparer have?

Not much. I suppose if we are close we might talk about making a deductible IRA contribution, or selling stock at a loss, or ….

There may be more latitude if one is self-employed. Perhaps one could double-down on the depreciation, or recount the inventory, or ….

Massoud and Ziba Fanaieyan got themselves into this predicament.

The Fanaieyans lived in California. He was retired and owned several rental properties. She worked as a hairstylist.

They received over $15,000 in subsidies for their 2015 tax year.

Four times the California poverty line was $97,000.

They reported adjusted gross income of $100,767.

And there was (what I consider) a fatal preparation mistake. They failed to include Form 8962, which is the tax form that reconciles the subsidy received to the subsidy to which one was actually entitled based on income reported on the tax return.

The IRS sent a letter asking for the Form 8962.

The Fanaieyans realized their mistake.

Folks, for the most part tax planning is not a retroactive exercise. Their hands were tied.

Except ….

Mr. Fanaieyan remembered that book he was writing. All right, it was his sister’s book, but he was involved too. He had paid some expenses in 2012 and 2013. Oh, and he had advanced his sister $1,500 in 2015.

He had given up the dream of publishing in 2015. Surely, he could now write-off those expenses. No point carrying them any longer. The dream was gone.

They amended their 2015 tax return for a book publishing loss.

The IRS looked at them like they had three eyes each.

To Court they went.

There were technical issues that we will not dive into. For example, as a cash-basis taxpayer, didn’t they have to deduct those expenses back in 2012 and 2013? And was it really a business, or did they have a (dreaded) hobby loss? Was it even a loss, or were they making a gift to his sister?

The Court bounced the deduction. They had several grounds to do so, and so they did.

The Fanaieyans had income over four times the poverty level.

They had to repay the advance subsidies.

I cannot help but wonder how this would have turned out if they had claimed the same loss on their originally-filed return AND included a properly-completed Form 8962.  

Failing to include the 8962 meant that someone was going to look at the file.

Amending the return also meant that someone was going to look at the file.

Too many looks.