The IRS has the ability to force an assessment or collection of tax if it believes collecting the tax is in jeopardy because of delays. The IRS also has the ability to issue a termination assessment which can force you to declare all income up to that point in the year. A termination assessment basically asks you to pay your tax immediately for income you have earned in the current tax period. Be advised that it is best practice to consult an attorney if you are ever faced with either a jeopardy or termination assessment.
Jeopardy Assessment for Different Tax Periods
In general, a jeopardy assessment is used by the IRS against tax periods that have already been filed by the taxpayer. This means that the IRS will use a jeopardy assessment against you in situations where you have already filed a tax return. The IRS can also use it for years that you should have filed a return but never did. This is assuming that the IRS can determine the tax deficiency that you owe.
A termination assessment is a bit different because it is usually used in extreme situations where the assessment of tax needs to be determined prior to the end of the year and before your tax return is due. Once your tax return comes due, the IRS is not allowed to issue a termination assessment.
How a Termination Assessment Works
The purpose of a termination assessment is to stop the tax period and assess the tax deficiency. The IRS will determine your tax liability starting from the first day of your tax year until the termination was issued. This tax assessment time frame will be less than the normal year tax period and will immediately impose collection of the tax deficiency. This does not require you to file an additional return, your tax year will continue to be the same and you can file a regular tax return before April 15th.
Reasons for Issuing a Jeopardy or Termination Assessment
The reasons for issuing either a jeopardy or termination assessment are the same. These reasons include:
1. If it appears that the taxpayer is getting ready to leave the country and avoid paying the IRS. If you are a resident and non resident alien, the IRS requires that you sign a compliance agreement with them stating why you are leaving and when you plan to pay your tax liability.
2. If the IRS thinks that you are going to attempt to hide or transfer assets away from them they may issue a jeopardy or termination assessment. Some of these situations would include a taxpayer establishing a corporation to hold an asset, transferring assets out of the country, selling an asset and more. There is no limit to the schemes a taxpayer can come up with to try and hide assets from the IRS.
3. In some situations the IRS will catch onto a taxpayer that has a financial situation that continues to rapidly deteriorate. In these situations the IRS will issue an immediate assessment to try and collect the tax before the taxpayer becomes completely insolvent.
4. If a taxpayer has filed returns that claim very little to no income but documents are claiming the possession of large sums of cash, the IRS may issue an immediate assessment. This could include both a termination assessment for the current year and a jeopardy assessment for the prior years.
5. When a taxpayer uses multiple addresses in an attempt to make it hard to locate and determine the taxpayer’s assets, an immediate assessment may be warranted.
6. If a taxpayer is unable to provide financial information to backup their return after documents have been requested by the IRS, an immediate assessment may be needed.
7. If it appears that the taxpayer’s assets are dissipating rapidly due to various expenses, the IRS may try to collect the remaining assets as soon as possible.
How an Immediate Assessment Is Conducted
Once the IRS has made their assessment for the tax period in question, they are required to notify you within 5 days. This notification will inform you of the assessment and also in regard to the information that was used to determine the assessment. The IRS will also issue you a Notice of Deficiency explaining the tax amount owed.
Once this notification is delivered to you, you only have 30 days to request an administrative appeal if you do not agree with the assessment. If you choose to make a request for an appeal, you must make it in writing and support it with evidence to prove your appeal is warranted.
If your administrative appeal did not turn out the way you would have liked it to, you can continue to fight your assessment by filing a civil lawsuit against the United States. If you wish to file a civil suit you must do so within 90 days after the results of your administrative appeal or on the 16th day after you filed for an administrative appeal.
Depending on your circumstances, you may be allowed to file a suit in District Court or Tax Court. There are two requirements to have your suit filed in tax court:
1. You must have been issued a Notice of Deficiency and then timely applied for reconsideration of your assessment with the Tax Court.
2. One or more of the taxes and tax years must be included in the notice of assessment against you.
As always, never take civil litigation lightly. It is in your best interest to seek the best legal representation that you can afford when dealing with the IRS. The tax code is extremely complex and you should not let just anyone interpret it for you.