Yesterday the highest court in the U.S. declined to hear QinetiQ US Holdings Inc.’s challenge to a lower court ruling that held the IRS does not have to provide an explanation for issuing a notice of tax deficiency. This means that the 4th Circuit Court of Appeals decision stands.
In the lower court’s case Circuit Judge Barbara Milano Keenan said the following:
“After reviewing QinetiQ’s tax return, the Internal Revenue Service (IRS) issued a Notice of Deficiency concluding that QinetiQ had not shown its entitlement to the claimed deduction. QinetiQ later filed suit in the tax court, raising both a procedural and substantive argument. QinetiQ argued that the IRS failed to give a reasoned explanation in the Notice of Deficiency for denying the tax deduction.”…
The tax court rejected the procedural argument, holding that the Notice of Deficiency provided sufficient explanation.
The 4th Circuit Court of Appeals concluded that the IRS complied with all applicable procedural requirements in issuing the Notice of Deficiency to QinetiQ.
The Court went on to detail that:
“The IRS transmitted to QinetiQ a Notice of Deficiency stating that the IRS had determined that QinetiQ “had not established that it was entitled to a deduction ‘under the provisions of [26 U.S.C.] § 83,’ and that QinetiQ’s taxable income for the year thereby was increased by ‘$117. 777,501.’ The IRS did not give a further explanation of its decision in the Notice of Deficiency.”
“The Internal Revenue Code authorizes de novo review in the tax court of a Notice of Deficiency. Because the Code’s provisions for de novo review in the tax court permit consideration of new evidence and new issues not presented at the agency level, those provisions are incompatible with the limited judicial review of final agency actions allowed under the APA.”
“After issuing a Notice of Deficiency, however, the IRS may later assert in the tax court new legal theories and allege additional deficiencies. Likewise, a taxpayer may raise new matters before the tax court not previously considered during the administrative process.”
“We hold that the APA’s requirement of a reasoned explanation in support of a final agency action does not apply to a Notice of Deficiency issued by the IRS and that, therefore, the Notice of Deficiency issued to QinetiQ in this case was not subject to that APA requirement.”
“We next consider whether the Notice of Deficiency in this case was insufficient to satisfy the requirement of Section 7522(a) of the Code that the IRS ‘describe [in the Notice] the basis for, and identify the amounts (if any) of, the tax due, interest, additional amounts, additions to the tax, and assessable penalties.’ The statute further provides that ‘an inadequate description under the preceding sentence shall not invalidate such notice.’ However the statute is silent regarding the circumstances, if any, that will cause a Notice of Deficiency to be invalidated.”
“Some federal courts of appeal have held that a Notice of Deficiency may be invalidated for the failure to include certain information. The Ninth Circuit (which comprises the District Courts of AK, AZ, HI and CA [Central, Eastern, Northern and Southern]) implicitly has endorsed the application of a rule that major errors in the Notice of Deficiency causing prejudice to a taxpayer will render that determination invalid.”
“We hold that the Notice of Deficiency issued to QinetiQ satisfied the basic requirement of the Internal Revenue Code. The Notice of Deficiency informed QinetiQ that the IRS had determined a deficiency in an exact amount for a particular tax year, and incorporated by reference an enclosed statement that ‘the deduction you claimed for Salaries and Wages in the amount of $117,777,501 under the provisions of code [Code] § 83 is disallowed in full as you have not established that you are entitled to such a deduction.’ The Notice of Deficiency further informed QinetiQ that it had the right to contest this deficiency determination in tax court.”
“We discern no prejudice to QinetiQ due to the absence of additional information in the Notice of Deficiency.”
What is the result of all of this? If you disagree with the IRS in regards to your Notice of Deficiency you will have 90 days in which to file a petition with the tax court with the intent of bringing up new arguments or new evidence. If you are in this position you would very likely benefit from the experience of an attorney who is expert in tax collection matters. Call the Tax Resolution Institute at (818) 704-1443 for immediate assistance.