The Notice of Deficiency

 

      The IRS can issue a notice of deficiency to individuals who do not file returns and it can also issue a notice of deficiency to individuals who have filed and add an additional assessment.  The courts have ruled that an unsigned notice of deficiency is valid.  In Tavano, 986 F2d 1389, 93-1 USTC 50,205, 71 AFTR2d 93-1271 (11th Cir. 1993), the court ruled that a notice of deficiency sent to the taxpayer by the IRS does not need to be signed in order to be valid.  The Code does not expressly require a notice of deficiency to be signed.  It does not prescribe any form at all for a deficiency notice.  The Internal Revenue Manual does specify the manner in which delegates of the Commissioner who are authorized to issue notices of deficiency should sign notices.  The Manual does not, however purport to condition the validity of a deficiency notice on a proper signature so a signature is not required.  In Urban, 964 F2d 888, 92-1 USTC 50,264, 69 AFTR2d 92-1304 (9th Cir. 1992), the court ruled that a notice of deficiency was valid even though it was not signed as required by the Internal Revenue Manual because the Code does not require a notice of deficiency to be signed. 

      The court has ruled that deficiency notice was invalid for not stating precisely how much tax was due.  In Scar, 814 F2d 1363, 87-1 USTC 9277, 59 AFTR2d 87-950 (9th Cir. 1987), the circuit court reversed the Tax Court when the IRS sent a notice of deficiency to the individual that did not state an additional amount of tax owed.

      The court has also ruled that a deficiency notice is valid even though the attached pages related to another taxpayer.  See Campbell, 90 TC 110 (1988).  In the case of Brohn, 64 TCM 1350, RIA TC Memo 92,670 (1992), the court ruled that an erroneous explanation of the adjustment to tax did not make the statutory notice invalid.

       In Bunyan IRS, 62 TCM, 394, RIA TC Memo 91,371 (1991), the court ruled that an inconsequential error in the caption does not invalidate the notice.  In Caldwell, 59 TCM 581, 90,236 P-H Memo. TC (1990), the court ruled that a deficiency notice was valid even though it attributed the taxpayer's loss to the wrong partnership.  In Armstrong, 15 F3d 970, 94-1 USTC: 50,083, 73 AFTR2d 94-1127 (10th Cir. 1994), the court ruled that the last-known address as determined from an earlier tax return was valid.  In Balkisson, 995 F2d 525, 93-1 USTC, 50,347,  72 AFTR2d 93-5183 (4th Cir. 1993), the court ruled that a notice of deficiency that was actually received by the taxpayers without prejudicial delay was valid even though it was not sent by certified or registered mail and in Scheidt, 967 F2d 1448, 92-2 USTC 50,326, 70 AFTR 2d 92-5121 (10th Cir. 1992), cert denied, 113 S. Ct. 811 (1992), the Court ruled that a notice of deficiency that is actually received without delay prejudicial to the taxpayer's ability to petition the Tax Court is sufficient to toll the statute of limitations as of the date of mailing, even if the notice is misaddressed. In Williams, 935 F2d 1066, 91-2 USTC 50,317, 68 AFTR2d 91-5048 (9th Cir. 1991), the court ruled that a deficiency notice sent to the last known address is valid.  In Ward, 907 F2d 517, 90-2 USTC 50,430, 66 AFTR2d 90-5298   

5th Cir. 1990), the court ruled that two weeks is enough time to notify the IRS of a new address before the issuance of a statutory notice of deficiency.  In Borgman, 888 F2d 916, 89-2 USTC 9635, 64 AFTR2d 89-5795 (1st Cir. 1989), the court held that a notice of deficiency that reached the taxpayer was valid despite the wrong address. 

 

      The IRS is generally entitled to consider the address on taxpayer's most recently filed return as the taxpayer's last known address.  See Pomeroy, 864 F2d 1191, 89-1 USTC 9168, 63 AFTR2d 89-626 (5th Cir. 1989).  In Zolla, 724 F2d 808, 84-1 USTC 9175, 53 AFTR2d 84-652 (9th Cir. 1984), cert denied, 469 US 830 (1984), the court ruled that the address on the taxpayer's most recent return was his last known address in the absence of any allegation by the taxpayer that he advised the IRS of a more recent address. Information gained by a collector should not necessarily be imputed to the audit agents who mailed the notices of deficiency.

      In Miller, 94 TC 316 (1990), the court ruled that a statutory notice of deficiency that was not mailed to the wife's last known address was valid and in Coleman, 94 TC 82 (1990), the court ruled that the IRS' mailing of a statutory notice of deficiency was timely despite an unstamped Postal Service form. 

      In Pietanza, 92 TC 729 (1988),60 TCM 948, aff'd 935 F2d 1282 (3rd Cir. 1911), the IRS could not prove that it mailed a notice of deficiency.  The individuals were assessed a deficiency after the statute of limitations had expired.  They argued in tax court that they were never sent a notice of deficiency and that the assessment was invalid.  The IRS claimed that it sent a notice of deficiency and produced a certified mailing receipt and a draft copy of the notice that contained numbers that were different than the assessment.  The IRS lost the administrative file and could not produce a copy of the mailed notice.

       In the case of Ahrens, 530 F2d 781 (8th Cir. 1976), the court ruled in favor of the IRS and relied on procedural regularity.  However, in this case the presumption of regularity could not apply because (1) the IRS never referred to the deficiency notice in its correspondence, it did not present adequate evidence of its administrative procedure and there was no corroborative evidence to show that the notice was received.    In the case of  Abeles, 91 TC 1019 (1988), the tax court laid out the rules on the last known address requirement. 

      Compliance with Section 6212(b)(2) requires that the IRS send duplicate originals of the joint notice of deficiency to each spouses last known address whenever the IRS has been notified. Prior to the time that the notice of deficiency is to be issued that the joint files maintain separate last known addresses.  For purposes of determining whether a notice of deficiency has been properly mailed to the individual's last known address, the address that appears on the most recently filed return is the proper address unless the IRS has been given clear and concise notification of a different address.  The last filed return is the return that has been properly processed by an IRS service center such that the address appearing on the return was available to the IRS agent when that agent prepared the notice of deficiency.  In Magazine, 89 TC 321 (1987), nonaq., 1988-1 CB 1,  the court ruled that the IRS's customs and practices regarding the mailing of a notice of deficiency did not permit a finding that the subject notice as mailed. Direct evidence was required to prove that it was mailed

IRS Can Reconstruct TIP Income

 

      The IRS spends lots of time figuring out how to harass the weakest members of our society as they let the rich corporations get away with millions.  For example, the IRS routinely audits restaurants and attacks the waiters and waitresses.  To determine the tips received by taxpayers, individual waitresses in a restaurant, the IRS obtained the total sales of the restaurant and the number of hours worked by each waitress and then they figured the net sales of food and drink made by each.  Then the IRS assumed that the waitress made 10 percent of the sales as tips.  The Tax Court determined that such a determination was entitled to the presumption of correctness.  Since the waitresses didn't have records, the IRS won.  Anson, 328 F2d 703, 64-1 USTC 9293, 13 AFTR2d 858 (10th Cir. 1964).  In the case of Way, 60 TCM 124 90,590 P-H Memo. TC (1990), the IRS determined the tip income by using a formula from the case of McQuartrs, 32 TCM 1122; 73,240 P-H Memo, TC (1973).  The formula was based on the hours worked and the payouts to other staff workers to arrive at the net tip income. In Bartell, 48 TCM 461; 84,346 P-H Memo, TC (1984), the IRS reconstructed a hair stylist's tip income.  After conducting a nationwide investigation into unreported tip income of service industry employees, the IRS reconstructed the taxpayer's tip income based on the results of its investigation.  The taxpayer was a hair stylist in the beauty saloon of a New York City department store and he reported that he received the same amount of tips each month.  The amount that he reported as receiving was very small in relation to his gross sales.  The IRS reconstructed his income by claiming that he made 15% in tips and the Tax Court ruled in favor of the IRS.

 

      In Hascouet, 43 TCM 1347; 82,261 P-H Memo, TC (1982), the IRS reconstructed the income of the waiters based on the restaurant's records of gross sales.  The court ruled for the IRS.  In Rodriguez, 25 TCM; 66,118 P-H Memo, TC 1966, the IRS determined that the income of a waiter from tips was $2,400 by taking 12% of all food and beverage sales.  The Court ruled in favor of the IRS. In Martinez, 23 TCM 1263; 64,209 P-H Memo. TC (1964), the IRS reconstructed the tip income of waiters in New York City restaurants by taking a percentage of sales, adjusting the figure for amounts paid to busboys and allocating the net amount to each waiter on the basis of total wages paid each since all were paid on a uniform time basis.  The court ruled in favor of the IRS.

 

       In one case, the taxpayer did win.  In Payne, 23 TCM 670; 64,119 P-H Memo, TC (1964), and a hairdresser at R. H. MACY's beauty shop reported as tips 2 percent of the gross sales earned by him.  He kept a daily record of his tips in a notebook and the amount recorded therein agreed with the total reported.  The IRS increased the tips by applying a 2 percent rate to sales.  The IRS held for the taxpayer even though the 2 percent rate was suspicious because he had evidence of the figures.  The IRS' determination was "pulled out of the air" and was unreasonable.  (Payne, 23 TCM 670; 64,119 P-H Memo. TC (1964).

 

      The IRS can also reconstruct income based on hearsay from informants.  In Dellacroce, 83 TC 269 (1985), the Tax Court determined that a deficiency assessment based on hearsay from an informant was arbitrary without confirmation of other evidence.  The IRS cannot rely on the presumption of correctness to uphold an assessment based on hearsay evidence that connects the individual with a taxable activity.  It is not sufficient for the IRS to show that such a determination is not arbitrary and unreasonable if it fails to buttress the determination with substantive evidence.  The IRS' determination of the value of the stock was correct since it was traded on the market.

 

       In Jackson, 73 TC 394 (1970), a deficiency notice based on an informer's data was held to be invalid.  The court held that this was one of  "those rare occasions" where the exception to the rule that the Tax Court will not look behind a notice of deficiency was applicable. The individual who provided the data relied on by the IRS did not qualify as a "respectable third party citizen-informant."  He had been arrested for narcotics violations, thus giving rise to an inference that the information given was done in the hope of alleviating his punishment.  In addition, he later jumped bail and refused to cooperate at all. (Jackson, 73 TC 394 (1979).