30-DAY LETTERS VS. 90-DAY LETTERS IN ESTATE TAX AUDITS

In estate tax audit situations, the IRS only has a 3 year statute of limitations to assess additional taxes. If the IRS takes too long to initiate an audit, or the audit drags on too long, the taxpayer may lose an opportunity to have unagreed audit issues reviewed by an Appeals Office prior to the issuance of a 90-day letter.

When audit items are unagreed, the normal course of operation is for the IRS to issue a 30-day letter of the IRS’ findings. The 30-day letter asks the taxpayer to agree to the IRS’ findings. The taxpayer can either agree, go over the examiner’s head and take the issue up with the IRS Appeals Office, or do nothing (in which case the IRS will then send a notice of deficiency). Thus, the 30-day letter is the taxpayer’s ticket to the Appeals Office where the taxpayer may receive a more favorable result than at the agent level, especially since appeals officers can factor into settlements the likelihood of IRS success if an issue is litigated.

If there is not enough time before the statute of limitations expires, the IRS will skip the 30-day letter and instead issue a 90-day letter (notice of deficiency). The 90 -day letter indicates a deficiency in tax. The taxpayer that wants to fight on can either pay the tax and sue for a refund in District Court, or file a petition for review in the Tax Court without paying the tax. There is no effective opportunity for Appeals Officer review prior to taking one of those two steps (although the taxpayer can file in the Tax Court and then go to Appeals).

Recent guidance to auditors provides that Appeals will need to at least 180 days left on the statute of limitations before a case should be referred to them. Adding the 30 days provided under a 30-day letter, examiners are directed to skip the 30-day letter and issue a 90-day letter if there are less than 210 days remaining on the statute of limitations on the day that the taxpayer communicates disagreement with the proposed adjustments.

If there are more than 210 days, the examiner need not automatically issue a 30-day letter. Instead, the examiner should examine all the facts and circumstances to see if a 30-day letter is appropriate. The factors to be reviewed include:

-how much time is needed for the examiner to  issue the 30-day letter, receive the taxpayer's response, and then consider that response;

-how likely is it that the taxpayer will request an extension of the initial 30 day response period;

-a minimum of 30 days to process the case file to Appeals;

-a minimum of 10 days to account for time needed to process the case filing from the date of closing to review and closing by the Group Manager;

-the nature of the issues and the complexity of the facts involved; and

-the applicable legal authorities.

Throughout the audit process, taxpayers and their representatives that anticipate going to Appeals should endeavor to move the case along as quickly as possible so as to not lose the opportunity to go to Appeals under a 30-day letter.

SB/SE Division's Interim Guidance On Issuance of Statutory Notice of Deficiency  (June 24, 2010)