An interesting aspect of federal income tax procedure is the power of the IRS to impose ‘mathematical or clerical error’ assessments without going through the standard deficiency procedures necessary prior to assessment. Under standard deficiency procedures, prior to an income tax assessment the IRS must go through a series of procedural hurdles, including the issuance of the notice of deficiency, which allows Tax Court review prior to assessment. This system is designed to protect taxpayer rights, and gives the taxpayer an important power – the power for judicial review prior to assessment and collection. With a mathematical or clerical error, however, the IRS can go directly forward with assessment and collection. Typically, these cases are uncontroversial, e.g. when there is a simple addition or subtraction error on a return. But sometimes there are more substantive issues that come under this category, which is defined under I.R.C. §6213(g)(2).
A recent case is instructive. A client claimed head-of-household status on the return, but listed no dependents. The reason was simply that the client’s child lived with the client for the majority of the tax year, but under the waiver provisions of I.R.C. §152(e) the client had waived the exemption claim in favor of the other parent. The IRS denied head-of-household status based on the failure to include named dependents on the return as a mathematical or clerical error. The difficulty here is that the client appears to be correct on the head-of-household status, but the only remedy without deficiency procedures is to pay the claimed tax and file a refund claim, an arduous and time-consuming process, especially where the amount is not large.
There are some procedural opportunities to avoid the refund process in this situation. First, prompt response to the assessment (within 60 days) should cause the IRS to reverse the assessment, whatever its validity, and shift the matter to the deficiency procedures. I.R.C. §6213(b)(2). Second, the ‘merits’ of the matter should be a matter to be addressed in a collection-due-process hearing, because the client typically has not received a prior Appeals hearing or notice of deficiency. I.R.C. §6330(c)(2)(B) and Treas.Reg. §301.6330-1(e)(3) Q&A E2.
See generally, Perkins v. Commissioner, 129 T.C. 58 (2007).