Many practitioners are reporting that they are receiving 90-day letters in CP2000 (underreported income) cases and correspondence exams after timely submitting substantiation documents but before the IRS has considered the response. Since it usually takes more than 90 days to resolve notices and correspondence exams on the IRS side, receipt of a 90-day letter creates additional paperwork and expense for the client in concluding the case.
If the taxpayer properly files a Tax Court petition in response to the 90-day letter, the case normally will be referred to an Appeals case manager for resolution prior to a Tax Court hearing. However, a taxpayer may employ another procedure to resolve a case without a Tax Court hearing. Internal Revenue Manual Section 184.108.40.206 provides a procedure for rescinding a 90-day letter. This procedure basically causes the 90-day letter to become null and void, as if it never occurred, except that, if the IRS grants the rescission, the running of the statute of limitation is suspended for the period the notice is outstanding prior to rescission. For example, if 60 days transpire between the date the 90-day letter is issued and the date the IRS official signs the formal agreement (generally, Form 8626, Agreement to Rescind Notice of Deficiency), then 60 days will be added to the statute-of-limitation period that applies to that tax return.
Rev. Proc. 98-54 offers three situations that can result in a rescission of a 90-day letter:
- The IRS issued the notice as a result of an administrative error. For example, the notice was issued (1) to the wrong taxpayer, (2) for the wrong tax period, or (3) without considering a properly executed Form 872, Consent to Extend the Time to Assess Tax, or Form 872-A, Special Consent to Extend the Time to Assess Tax;
- The taxpayer submits information establishing the actual tax due is less than the amount shown in the notice; or
- The taxpayer specifically requests a conference with the appropriate Appeals office for the purpose of entering into settlement negotiations; however, the notice may be rescinded only if the appropriate Appeals office first decides that the case is susceptible to agreement.
The revenue procedure also outlines when the IRS will not grant a rescission:
- On the date of the rescission, 90 days or less would remain before the expiration date of the period of limitation on assessment; however, a notice of deficiency may be rescinded in these circumstances if, before the rescission, the taxpayer and the IRS execute a consent to extend the statute-of-limitation period on Form 872 or Form 872-A;
- The 90-day or 150-day restriction period under Sec. 6213(a) has expired without the taxpayer's filing a petition with the Tax Court;
- The taxpayer has filed a petition with the Tax Court; or
- The taxpayer and the IRS, prior to the issuance of the notice of deficiency, have executed a Form 872-A covering any of the tax years in the notice of deficiency.
A notice of deficiency may be rescinded in the last situation, however, if, prior to rescinding the notice of deficiency, the taxpayer and the Service execute a new Form 872-A covering the same tax year or years as the earlier Form 872-A.
When does rescission make sense over filing a tax court petition?
Obtaining a rescission is not an easy process. In most cases, it is probably more expedient to just file a Tax Court petition and use the Appeals process to resolve the case. But there are situations that might warrant a rescission request rather than a Tax Court petition.
In the case of administrative error, such as an assessment against the wrong taxpayer or for the wrong tax period, or if the taxpayer wants to settle the case right away, it may be faster to use the rescission request procedure. The request goes directly to Appeals rather than through the Tax Court docketing queue.
Ninety-day letters issued to victims of identity theft for fraudulently filed returns have been identified as an administrative error by the IRS. Since it commonly takes more than six months to resolve an identity theft issue, a request for rescission is the appropriate first response to a 90-day letter in this case.
In all cases, if the rescission is not granted, the taxpayer still has a right to file a Tax Court petition within the 90-day window.
How to obtain a rescission
The first step in obtaining a rescission is to contact the person or office listed on the notice and request a Form 8626. The taxpayer should make the request as soon as possible after receiving the 90-day letter. The request should include all the facts and proof of qualification for rescission that support the request.
If the IRS grants the request, Appeals will issue Form 8626 and forward it for the taxpayer's signature. The taxpayer must return the form as soon as possible because it is not effective until signed by the appropriate IRS official. If it is not executed before the expiration of the 90-day window and if no Tax Court petition is filed, the taxpayer will lose all rights to a hearing or appeal.
While a rescission would seem to be a reasonable approach to case resolution in many cases, the appropriate situations for its use are really very limited. Additionally, its limited use could mean that some IRS personnel may be unfamiliar with the procedure, which could slow the process for timely completion. With that said, understanding how and when to use it and all the tools that are available for resolving IRS matters makes CPAs valued advisers to clients.
Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Janet C. Hagy is a shareholder of Hagy & Associates PC in Austin, Texas. Ms. Hagy is a member of the AICPA Tax Practice & Procedures committee. For more information about this column, contact email@example.com.