In some circumstances, the IRS may resort to a series of procedures known as jeopardy or termination assessment and collection.
If the IRS believes that the collection of an unassessed liability is in jeopardy, it may take steps to begin collection proceedings without following the normal assessment and collection procedures (see Internal Revenue Manual (IRM) §126.96.36.199). This sometimes occurs during an audit if the examiner discovers information suggesting that the taxpayer has concealed assets so as to make their discovery and tax collection extremely difficult. An examiner who believes that such a situation exists may consider pursuing a jeopardy or termination assessment under the Internal Revenue Code.
“Jeopardy assessment” and “termination assessment” are defined in Secs. 6851, 6861, and 6862. A jeopardy assessment applies to a closed tax year, one for which the due date of the return has passed. Thus, a jeopardy assessment can be made only after the taxpayer has filed a full-payment return or a deficiency has been determined. Sec. 6861 applies to income, estate, gift, and certain excise taxes. Sec. 6862 applies to employment and excise taxes not covered by Sec. 6861.
A termination assessment (defined in Sec. 6851) is used in a more extreme case of jeopardy than a regular jeopardy assessment, such as when the IRS suspects the taxpayer will flee the country. In a termination assessment, the taxpayer’s tax year is deemed to be terminated and treated as a completed tax year for the purposes of assessing the tax liability. A termination assessment applies to the current tax year or the immediately preceding tax year if the tax return’s due date has not yet passed. Termination assessments are used only on income tax returns.
IMPLICATIONS OF A JEOPARDY ASSESSMENT
A jeopardy assessment causes all taxes, penalties, and interest to become immediately due and payable. If a tax liability has been assessed and the IRS believes that the collection of the amount is in jeopardy, the Service may immediately proceed to collect the amount by levy without waiting for the usual 10-day period after notice and demand (Sec. 6331(a)). The IRS may also take collection steps even before the end of the 30-day period after it has given notice of intent to levy when it believes that the collection of the tax liability is in jeopardy (Sec. 6331(d)(3)). A jeopardy assessment is frequently used in cases involving narcotics, illegal wagering, and other forms of illegal activity, or when the taxpayer is preparing to leave the United States.
DEALING WITH JEOPARDY AND TERMINATION ASSESSMENTS
The remedies available to a taxpayer against whom the IRS has made a jeopardy or termination assessment are generally the same as those available to a normal taxpayer. Once the taxpayer has received a notice of deficiency from the IRS, he or she can either file a Tax Court petition for redetermination, or he or she can pay the deficiency in full, file a refund claim with the IRS, wait six months (unless the IRS denies the claim sooner), and file a refund action in federal district court or the Court of Federal Claims.
Several procedures may minimize the negative effects of a jeopardy or termination assessment. First, assuming collection has not already taken place, collection procedures can be stayed if the taxpayer posts bond in the amount of the desired stay (Sec. 6863(a)). The bond amount may then be reduced upon taxpayer request in proportion to any payment, abatement, or determination by the Tax Court.
A second option for the taxpayer is to reach an informal agreement with the local IRS office to provide payment of the assessment. This option is not a matter of right and is entirely subject to the discretion of the director of the local office. As such, it may not always prove a viable or satisfactory option for the taxpayer.
The IRS may grant a taxpayer an abatement of a jeopardy or termination assessment if it determines that the jeopardy does not in fact exist. This outcome can be achieved if the taxpayer or his or her attorney convinces the IRS that the assessment was improperly made or excessive in amount. To argue successfully for an abatement, the taxpayer or attorney should be prepared to demonstrate support by a statement of reasons, the report of findings, and a new tax computation (IRM §188.8.131.52).
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