CHAPTER II

PROCEDURE IN THE BUREAU OF INTERNAL REVENUE PRELIMINARY TO APPEAL TO

THE BOARD OF TAX APPEALS

Section 11. Introductory. The procedure followed in the Bureau of Internal Revenue in the determination of the correct tax due is not prescribed by statute, but is a matter of departmental regulation. The only right of appeal specifically provided for by the Revenue Act is that to the Board of Tax Appeals and, of course, to the courts. A liberal attitude has been adopted by the Bureau of Internal Revenue in providing numerous opportunities for the taxpayer to be heard before any deficiency is determined. by the Commissioner. The significance of the respective steps followed in the determination of a deficiency by the Commissioner is perhaps not generally appreciated. The following paragraphs in this chapter set out in some detail the procedure followed by the Bureau from the time of the filing of the re

turn to the time of the determination of the deficiency by the Commissioner, from which appeal may be taken to the Board of Tax Appeals.

Section 12. Income and Excess Profits Taxes. The orderly progress of a taxpayer's income tax return in the several divisions of the Bureau of Internal Revenue, preceding an appeal to the United States Board of Tax Appeals is briefly as follows:

The return is filed with the Collector in the Internal Revenue District in which the taxpayer has his legal residence or principal place of business,1 and payment is made of the entire tax or at the option of the taxpayer of one-fourth of the tax shown to be due.

After summary examination and listing, the return (except those on Forms 1040A and 1040 of gross income of $25,000 and less, and such other returns as the Collector is authorized by the Commissioner to audit) is forwarded by the Collector to the Commissioner of Internal Revenue at Washington, D. C.

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As soon as practicable thereafter each case is given an audit examination in one or more divisions of the Income Tax Unit. No attempt, however, is made to discuss here the assignment to, or to trace the case through, the respective divisions of the Unit, the course of which depends upon the issues involved in the particular case.

1 If the taxpayer has no legal residence or place of business in the United States, his return is filed with the Collector of Baltimore, Maryland.

2 A. & C. Mim. (Col. 3165). The procedure regarding audits in the Collector's office and protest of decisions there made is similar to that with respect to Washington audit, except that the taxpayer's protest should be addressed to and considered by the Collector's office prior to final determination at Washington if necessary. 3 Regs. 65, Art. 1211, as amended by T. D. 3708, approved May 22, 1925, effective June 1, 1925.

Following the general provisions of Income Tax Order effective June 1, 1925, all cases, except those which can be closed on the basis of information at hand without additional correspondence with the taxpayer, such as those involving only minor adjustments, or where certain items are known definitely to be improper deductions, are referred forthwith to a Field Agent for audit. If any items are considered doubtful, or if the case contains both items known not to be proper deductions and other doubtful items of any importance, the case will not be closed without such field audit.

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Cases Audited by Field Agent. In cases referred to the field for examination in the first instance, in lieu of office audit, the usual field investigation is completed under the supervision of an Internal Revenue Agent in Charge, and a copy of the Agent's report is first sent to the taxpayer. He is given 30 days within which to file his protest with the Revenue Agent in Charge, and arrange a conference, if desired, with respect to the Examiner's report. The protest and the Agent's recommendations, and other papers relating to the case, are forwarded to the Com

4 Income Tax Unit Order No. 13 Revised.

5 Considerable latitude is shown in the Department in an effort to close 1917, 1918, 1919, 1920, and 1921 cases by brief correspondence with the taxpayer prior to referring the case to the field. Taxpayers may at this initial stage obtain a hearing upon request.

6 Sometimes designated Supervising Internal Revenue Agent, dependent upon location.

7 This report may differ from the taxpayer's return as to (a) facts; (b) conclusions of fact; (c) meaning and application of the law, the Agent being bound by rulings and regulations accepted by the Treasury Department in the interpretation of the taxing statutes. (Official statement issued by the Bureau of Internal Revenue under date of October 2, 1923, later issued as I. T. 1815; I. R. B. II-30-1161, C. B. II-2, p. 235.)

8 Twenty days in which to protest were allowed under the old procedure of T. D. 3616, effective prior to June 1, 1925.

missioner. If no protest is made, the Agent's report is sent to Washington at the end of the 30-day period.

The Unit then makes an audit of the taxpayer's return and the Agent's report, together with any other information in its possession, and sends the taxpayer the usual A2 letter, sometimes called an “Assessment Letter," or more recently, a "30-Day Letter. "10 This letter contains in detail the conclusions of the Unit, and a calculation of the amount of tax due thereby, known as a "tentative deficiency." This letter also contains (a) a request that the taxpayer communicate his approval or disapproval of the Unit's findings, the former by signing and mailing to the Commissioner an acceptance agreement, form attached,11 and (b) a statement that if the taxpayer does not approve thereof, he may address a protest to the Commissioner within thirty days from the mailing (not receipt) 12 of the letter, then or later to be supported by additional evidence or brief.

If the taxpayer approves the Unit's findings, the amount of difference between the net amount of tax previously assessed and that found due by the Unit, in case the latter exceeds the former, is placed on the assessment list. The tax is technically assessed when the list is finally approved by signature of the Commissioner, or his assistant, acting in his behalf.13 Thereafter the lists are forwarded to the Collector,

9 Cases of over-assessment are not discussed here as, in themselves, they are not appealable, except possibly those involving certain claims in abatement which are referred to later. 10 See Form, Appendix, p. 170.

11 See Form, Appendix, p. 173.

12 This must be mailed in time to be received within such 30-day period or such period as extended in the ordinary course of the mails.

13 Letter of Solicitor to Deputy Commissioner Mires, in charge of Collectors, dated August 7, 1924.

with whom the return was originally filed, and in due time the tax is demanded of the taxpayer.

If, however, the taxpayer does not approve of the Unit's findings, as stated in the "30-Day Letter" he may within the 30-day period or such additional time as the Department stipulates, prepare and file a protest14 to contain the following:15

(a) The name and address of the taxpayer (in the case of an individual, the residence, and in the case of a corporation, the principal office or place of business).

(b) In the case of a corporation, the name of the State of incorporation.

(c) The designation by date and symbol of the letter advising of the tentative deficiency with respect to which the protest is made.

(d) The designation of the year or years involved and a statement of the amount of tax in dispute for each year.

(e) An itemized schedule of the findings to which the taxpayer takes exception.

(f) A summary statement of the grounds upon which the taxpayer relies in connection with each exception.

(g) In case the taxpayer desires a hearing, a statement to that effect.1

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14 Or request for hearing before the Income Tax Unit may be made without protest or formal brief, where a protest and facts have been submitted to the Revenue Agent in Charge in reply to the latter's "30-Day Letter" enclosing a copy of the Agent's report.

15 The same form for the protest should be observed in taking exception to adjustments contained in an Agent's report, addressed directly to the Agent in Charge.

16 While the exact method of conducting conferences in the Unit (in accordance with T. D. 3708) has not been finally determined to date, it is contemplated that a conference will first be arranged with the Auditor and a conferee; if they are not able to allow the taxpayer's contentions, the case will then be referred to a higher conference unit. If, as a result of this subsequent conference, the Unit is still in doubt as to the correctness of its decision, or if the taxpayer's contentions appear to have merit, especially if involving legal features not clearly covered by existing regulations, published rulings of the Department or published opinions of the Solicitor,