Chapter 14 - § 14.5 • ALTERNATIVE LITIGATION STRATEGIES: DEFICIENCY AND REFUND ACTIONS

• Jurisdiction: Colorado

§ 14.5 • ALTERNATIVE LITIGATION STRATEGIES: DEFICIENCY AND REFUND ACTIONS

§ 14.5.1—When Deficiency and Refund Actions May Be Pursued

Organizations considering whether to proceed with a declaratory judgment action may also wish to consider alternative methods of litigating the IRS's adverse determinations. In addition, all types of exempt organizations may face the assessment of tax pursuant to an examination and wish to contest the assessment. In these cases, deficiency actions in Tax Court or refund actions in federal district court or the Court of Federal Claims may offer a viable means of contesting IRS determinations or tax assessments. This section briefly highlights key features of deficiency and refund actions. However, it should be noted that a full discussion of the rules and procedures applicable to deficiency and refund actions is beyond the scope of this chapter, and organizations should consult with legal counsel when considering these legal actions.

§ 14.5.2—Deficiency Actions — Basic Framework

As a result of an examination with tax changes or of the revocation of tax-exempt status, the IRS will determine the amount of tax owed — i.e., the deficiency. For example, if an organization's exemption is revoked retroactively, the IRS will calculate the tax owed upon the conversion of an organization's prior Form 990 filings to Form 1120 or 1041 filings as a taxable entity. See IRM § 4.75.31. Alternatively, an examination of an exempt organization may lead to the assessment of a tax deficiency based upon unrelated business income. In these cases (unless a settlement is reached or a successful appeal is made) the IRS will proceed to issue a statutory notice of deficiency assessing income tax due. Id. It should be noted, however, that there is no fixed time in which the IRS must issue the statutory notice of deficiency, and thus there is no certainty as to the time frame in which a deficiency action may be initiated. Once the statutory notice of deficiency is issued, an organization may file suit in the Tax Court within 90 days and defer payment until a final decision regarding the propriety of the deficiency assessment is made. I.R.C. § 6512.

§ 14.5.3—Refund Actions — Basic Framework

An organization may pay all or a portion of the income tax assessment from the statutory notice of deficiency (depending upon the...