ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE STARCHER CASE – FAILURE TO FILE AN INCOME TAX RETURN MAY LEAD TO HARSH CONSEQUENCES
By Robert S. Schriebman
In the closing days of 2021, the US Tax Court issued its decision in the case of A. Asterino Starcher v. Commissioner, TC memo 2021-144, TCM (Dec. 30, 2021). The case involved the failure to file an income tax return and its consequences in a Collection Due Process (CDP) proceeding. Here is the story.
Ms. Starcher failed to file her 2014 federal income tax return. When the taxpayer fails to file, the IRS can prepare its own version of the return under the provisions of IRC sec. 6020(b). The IRS does this in the form of Notice of Deficiency. The Notice requires the taxpayer to file a petition in the US Tax Court within 90 days if the taxpayer wants to challenge the proposed assessment. Ms. Starcher ignored the Notice, and the proposed assessment became final and subject to collection. This means that the taxpayer, in order to challenge the now final assessment in court, must fully pay the deficiency and go through the refund process. This process has been explained in other articles on this website.
The CDP Process
Before having to pay the now final assessment in full, a taxpayer has the right to a CDP hearing with an independent Settlement Officer (SO) in an attempt to work out a collection alternative, such as an installment payment arrangement. While the CDP hearing is pending, the IRS cannot collect any money. Ms. Starcher was afforded the opportunity for a CDP hearing and she took advantage of it. However, she did not cooperate by providing the SO the required financial statement and supporting documentation. Instead, she prepared her 2014 return and demanded that it be filed by the SO. The SO refused and the matter went before the Tax Court.
The Tax Court Decision
The Court ruled that the SO was correct. Because Ms. Starcher failed to timely file the petition when she got her proposed assessment, the matter became final and it was too late for her to file her own version of the 2014 return. The proposed assessment was now chiseled in stone and must be paid as far as the Court was concerned.
The Audit-Reconsideration Process
Is there any avenue available to a taxpayer in Ms. Starcher’s situation? An audit-reconsideration is a privilege granted by the IRS to take a fresh look at a taxpayer’s situation even though that taxpayer did not file a timely petition. In the ‘old days’ an IRS agent or collector would come to meet with the taxpayer on a one-to-one basis and review the taxpayer’s records. Very often this process would result in a substantial reduction of the initial proposed assessment. These days required records are sent to a central IRS reviewing unit and there is no one-on-one interchange. However, the process should still be availed because the results could be very favorable.
Both the IRS and the FTB are allowed to make estimated assessments when a taxpayer fails or refuses to file a return. It is never a good idea to wait until the government issues its own version of what you may owe.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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