NOTE: THIS POST IS DIRECTED AT TAXPAYERS WHO ARE NOT TAX PROFESSIONS.  HENCE, CITATIONS TO INTERNAL REVENUE CODE SECTIONS, REGULATIONS AND COURT CASES ARE, WITH ONE EXCEPTION, NOT INCLUDED.

The IRS is the worst creditor to have. If you owe money to a bank or hospital, they generally must take you to court before they can start seizing your assets to pay what is owed.  The must obtain an order, called a judgment.  They can then record the judgment on public records to protect their place in line versus other creditors to whom you owe money. 

The IRS has a special status. It generally (exceptions are discussed below) does not have to go through the process of going to court to reduce its claim against you to judgment.  It can assess, that is record the tax as a liability you owe, and seize your assets without first obtaining a court order.

When you file a tax return reporting a tax due, a tax lien is created on your assets for the amount due.   The IRS will eventually send you a Notice and Demand for payment that will include interest and penalty (such as failure to file or pay tax), both of which are added to the tax you owe.  If you do not pay IRS may then send you a Notice of Intent to Levy (initially, usually on your bank accounts).  If you believe IRS is unreasonably ignoring less severe collection measures, you can request a Collection Due Process Hearing with the Appeals Division of IRS.   Following the hearing which can be in person , virtual or telephone, the IRS Appeals Officer will prepare a Notice Determination which will state that the IRS Levy action was reasonable or not.  This determination is reviewable in Tax Court but generally only as to whether the Appeals Officer abused his or her discretion in making the determination.

If you filed a return showing no tax due but IRS adjusts your return based on 1099s or W-2s it received from third parties, the same procedures apply as with a tax due return but at Appeal you can also argue that you do not owe the tax.  In that case, the Tax Court would review the Appeals Decision on whether you owe the tax de novo, or based on all facts and law.

If IRS determines you owe additional tax on a return filed based on a formal audit and you do not agree to allow IRS to assess and collect the tax, penalty (such as substantial understatement or negligence) and interest IRS cannot immediately assess the additional tax.  It must first mail to you at your last known address a Notice of Deficiency.  The NOD states the amount of the deficiency in tax IRS has determined.  You then have 90 days (no extensions allowed) to file a petition in the U.S.  Tax Court stating errors you believe overstate the tax claimed to be due in the IRS Notice of Deficiency.  If no petition is filed IRS will assess the tax and commence to attempt to collect through voluntary payment or forced collection actions (levy, seizure, foreclosure of tax lien).  The IRS will also record its federal tax lien to secure its position vis-a- vis other creditors. A public record of the federal tax lien negatively impacts your FICO credit score.

There are some penalties, however, for which the IRS may assess the tax and collect via its administrative powers to levy and seize assets.  Some penalties expressly require IRS to go to court to collect.  The FBAR penalties, for example, provide that IRS may, within two years of assessment, bring a suit to reduce the taxpayers’ liability for the penalty to judgment.

Other penalties may or may not be immediately assessed and collected administratively, depending on whether the particular penalty is deemed assessable under the Internal Revenue Code.

The U.S. Tax Court has recently held that the $10,000 penalty for failure to timely file Form 5471 is not an assessable penalty.  Thus, to collect the penalty IRS would have to bring a civil suit in federal court to obtain a judgment.  Farhy v. Commissioner 160 T.C. No. 6 (filed April 3, 2023).  This issue ultimately could reach the U.S. Supreme Court.  If upheld on appeal it would have far-reaching effects as its conclusion could be applied to other foreign reporting penalties such as failure to file Form 3520 with regard to foreign trust interest or foreign gifts of more than $100,000.

Robert S. Steinberg