Ask the Advocate
We have received questions regarding our practice of issuing provisional assessments. The following is a brief explanation of the process and the authority to make such adjustments.
A provisional assessment is an assessment based on information developed as of the date of the issuance of the assessment, issued before the full completion of the audit to protect the statute of limitations, with the understanding that further development of the facts and issues may occur at a protest.
Basis of Assessment
Under R&TC Section 19033, we have the authority to examine original/amended returns filed by taxpayers, and issue a deficiency notice, if it is determined that the tax reported is less than the tax disclosed by the examination. The determination of the deficiency cannot be “arbitrary or without foundation.”
When issuing assessments, we have the initial burden to show that a proposed assessment is reasonable and rational; if we satisfy this burden, the proposed assessment is presumed to be correct, and the burden of proof falls upon the taxpayer.3
Taxpayers are required to provide and maintain accounting records in order to file an accurate tax return.4 In the absence of reliable books or records, the taxing agency is given great latitude to determine a taxpayer's taxable income by whatever method will, in its opinion, clearly reflect income.5 The choice as to the method of reconstructing income lies with the taxing agency; the only restriction being that the method is reasonable under the circumstances.6
In New Colonial Ice Co. v. Helvering (1934) 292 U.S. 435, 440 [78L. Ed. 1348], the courts held that deductions are a matter of legislative grace and the taxpayer seeking the deduction must be able to point to an applicable statute and show that the taxpayer comes within its terms.7 Additionally, the burden of proof for an item of deduction or credit is on the taxpayer.8
Validity of Notice of Deficiency
Under R&TC Section 19034, the notice of proposed assessment “shall set forth the reasons for the proposed deficiency assessment and the computation thereof.”
The validity of a notice of deficiency is determined by whether it informs the taxpayer of the basis of the assessment such that the taxpayer can intelligently protest the matter.9
In Scar v. Commissioner (1987) 814 F 2d. 1363, the Court discussed what is considered a valid notice of deficiency, sufficient to put a taxpayer on notice of the adjustments being made. Scar explains that a notice of deficiency "must at a minimum indicate that the IRS [the taxing agency] has determined the amount of the deficiency."
Provisional assessments must meet the legal qualifications discussed above (reasonable and rational basis and adequacy of notice), to qualify as a valid assessment. If a taxpayer has concerns about the legal sufficiency of a specific notice of proposed assessment, those issues should be raised at protest.
Steve Sims, EA
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3 Todd v. McColgan (1949) 89 Cal.App.2d 509, 201 P.2d 414; Appeal of Myron E. and Alice Z. Gire, 69-SBE-029, Sep. 10, 1969; Appeal of Ismael R. Manriquez, 79-SBE-077, Apr. 10, 1979; Appeal of Harold and Lois Livingston, 71-SBE-038, Dec. 13, 1971.
4 Appeals of Siroos Ghazali, 85-SBE024, April 9, 1985; Appeal of Michael S. Luft, 88-SBE-008, Apr. 8, 1988
5 Appeal of Siroos Ghazali, supra; Joseph F. Giddio, 54 T.C. 1530 (1970)
6 Appeal of Siroos Ghazali, supra; Herbert Schellenbarg, 31 T.C. 1269 (1959)
7 See also, Appeal of James M. Denny, 62-SBE-023, May 17, 1962
8 Segel v.Comm'r, 89 T.C. 816, 842 (1987), citing to Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943); Appeal of Robert R. Telles, 86-SBE-061, Mar. 4, 1986
9 Edison California Stores, 50-SBE-007, May 18, 1950