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.

A Surprise Tax From Life Insurance Loans

 

For some reason, the taxability of life insurance seems to be an old reliable in tax controversy.

Granted, there are areas involving life insurance that are not intuitive. The taxation of a split-dollar life insurance policy to an employee can be a bit puzzling until you have studied it one or ten times. There is also the tax history of “janitors insurance,” which resulted in yet another tax acronym (“EOLI”), the creation of Form 8925, and the recurring question “what is the purpose of this form” from young tax accountants ever since.

 

No, what we are talking about is the income taxation of vanilla-ice cream-on-a-regular-cone life insurance. Life insurance is normally nontaxable. You can change that answer by not ordering vanilla.

David and Cindy Fugler bought permanent (that is, cash value) life insurance on their two children in 1987. There was the initial year payment, plus additional yearly premiums, some of which were paid by borrowing against the policies. After many years, they cashed-in the policies. The life insurance company sent Forms 1099, which the Fuglers did not report on their joint tax return.

COMMENT: As we have discussed before, the IRS loves to trace Forms 1099 to tax returns, as the process can be computerized and requires no IRS manpower. You, on the other hand, have no such luck and will likely contact your tax preparer/advisor – and incur a fee - to make sense of the notice. There you have current tax administration in a nutshell: increasingly shift compliance to taxpayers by requiring almost everything to be reported on a 1099. It is a brilliant if not cynical way to increase taxes without – you know – actually increasing taxes.

Here is a recap of the relevant Fugler numbers:      

		Policy #1		Policy #2
Cumulative premiums paid		6,850		6,850
Accumulated cash value		22,878		23,428
Outstanding loan & interest		(19,845)		(20,699)
Settlement check		3,033		2,729

 

On first impression, it might seem odd that the Fuglers did not report the two distribution checks: the $3,033 and the $2,729. This is the amount they received upon policy cancelation – and after repaying policy loans and related interest and whatnot charges. Then again, one does not normally expect to have taxable income from life insurance. One should still report the 1099 amount (so the IRS computers have something to latch onto) and thereafter adjust the numbers to what one considers correct. Without that latch, these IRS matching notices are automatic.

So, what do you think:

·      Do the Fuglers have income?

·      If so, what is the income amount?

To reason through this, think of the life insurance policies as savings accounts. Granted, inefficient savings accounts, but the tax reasoning is similar. If you put in $6,850 and years later receive $22,878, the difference is likely (some type of) income. The same reasoning applies to the second policy.

So, you have income. Is there some way to not have income? Sure, if the cumulative premiums you paid exceed any cash value. In that case any refund would be a return of your own money.

But what is the income amount: is it the checks they received: $3,033 (for policy #1) and $2,729 (for policy #2)?

Normally, this would be correct, but the Fuglers borrowed against the polices. The loan did not create income at the time (because of the obligation to repay). That obligation has now been repaid with cash that would otherwise have been included in those distribution checks. You cannot avoid income by having a check go directly to your lender. Tax advisors would have a field day if only that were possible.

I would say that the income amount is the cash received plus the loan forgiven: $16,028 (policy #1) and $16,578 (policy #2).

Before thinking the result unfair, remember that the Fuglers did receive the underlying cash. The timing for the taxation of the loan was delayed, but even that result was pro-taxpayer. This is not phantom income that we sometimes see in other areas of the Code.

There is some chop in the numbers for the loan forgiven. As you can imagine, there are all kinds of fees and charges in there, as well as possibly accrued interest on the loan.  The Fuglers thought of that also, arguing that the accrued interest should not be taxable – or at least should be deductible.

The “should not be taxable” is a losing argument, as all income is taxable unless the Code says otherwise. It does not, in this case.

That leaves a possible interest deduction.

The problem here is that Congress limited the type of nonbusiness loans whose interest is deductible: loans on a principal residence; loans used to buy or carry investments, college loans; loans (starting in 2026) on a new car with final assembly in the United States. Any other nonbusiness loans are considered personal, meaning the interest thereon is also personal and thus nondeductible.

The Fuglers could not fit into any of those deductible categories. There was no subtraction for interest, no matter what the insurance company called it.

The Fuglers had taxable income. They reported none of it on their return. The IRS – as usual – wanted interest and penalties and whatever else they could get.

The Tax Court agreed.

Our case this time was Fugler v Commissioner, T.C. Summary Opinion 2025-10.