21.4 Taxation Practice Basics
Key Takeaways
- Taxation is one of the twenty-five areas of law NALS lists under Part 4 Legal Knowledge, and paralegal work in the field is dominated by procedure and deadlines rather than by computation.
- The authority hierarchy runs from the Internal Revenue Code through Treasury regulations to revenue rulings and procedures, with private letter rulings binding only the taxpayer who requested them.
- A statutory notice of deficiency, called the 90-day letter, is the ticket to Tax Court: a petition filed within 90 days permits litigation without paying the tax first.
- The general assessment limitations period is three years from filing, extended to six years for a substantial omission of gross income and unlimited for a false return or a failure to file.
- Circular 230 governs practice before the IRS, and only enrolled agents, attorneys, and CPAs hold unlimited representation rights, so a paralegal never represents a taxpayer before the IRS.
21.4 Taxation Practice Basics
[!NOTE] NALS PP Exam Blueprint Focus: Taxation appears in the Part 4 Legal Knowledge list of areas of law. A PP candidate is not expected to compute a tax liability. What is expected is fluency in the procedural framework — the authorities, the deadlines, the forums, and the boundary between paralegal support and prohibited representation.
The Hierarchy of Tax Authority
| Level | Source | Weight |
|---|---|---|
| Statute | The Internal Revenue Code, Title 26 of the United States Code | Controlling, subject to constitutional limits |
| Treaties | Bilateral income tax treaties | Coordinate with the Code |
| Regulations | Treasury regulations — final, temporary, and proposed | Final and temporary regulations carry substantial authority; proposed regulations do not bind |
| Revenue rulings | The IRS's published position applied to a stated set of facts | Binding on the IRS; taxpayers may rely if facts are substantially identical |
| Revenue procedures | Published statements of internal practice and procedure | Guidance on how to do something |
| Private letter rulings | Rulings issued to a specific taxpayer on request | Binding only as to that taxpayer; may not be cited as precedent |
| Notices and announcements | Interim guidance | Persuasive |
| Case law | Tax Court, district courts, Court of Federal Claims, courts of appeals, Supreme Court | Precedential within the hierarchy |
A paralegal researching a tax question checks currency with particular care, because the Code is amended frequently and because a regulation can be outdated relative to a statutory amendment.
Entity Taxation at a Glance
| Entity | Tax treatment |
|---|---|
| Sole proprietorship | Reported on the owner's individual return; no separate entity-level tax |
| General and limited partnership | Pass-through; the entity files an information return and issues Schedule K-1 to partners |
| Limited liability company | Default pass-through — disregarded if single-member, partnership if multi-member — with an election available to be taxed as a corporation |
| C corporation | Entity-level tax on income, with a second tax at the shareholder level on distributions |
| S corporation | Pass-through, subject to eligibility limits on the number and type of shareholders and a single class of stock |
| Trust and estate | Taxed on retained income; distributed income generally carries out to beneficiaries |
| Exempt organization | Exempt from income tax on exempt-function income; may owe tax on unrelated business income |
Entity classification drives the choice-of-entity analysis that appears in transactional practice, and the paralegal's role is usually assembling formation documents and filing the elections rather than advising on the choice.
Examination and Appeals
| Stage | What happens |
|---|---|
| Return filing | The return starts the assessment limitations period |
| Examination | Correspondence, office, or field audit; information document requests; possible summons |
| Revenue agent report and 30-day letter | Proposed adjustments plus an invitation to protest to the Independent Office of Appeals within 30 days |
| Appeals conference | Settlement based on hazards of litigation; the Appeals function is independent of examination |
| Statutory notice of deficiency (90-day letter) | The formal determination of a deficiency |
| Tax Court petition | Must be filed within 90 days of the notice — 150 days if addressed outside the United States |
| Assessment and collection | Follows if no petition is filed |
[!WARNING] The statutory notice of deficiency is the single most important document in tax procedure. It is the taxpayer's ticket to the United States Tax Court, and it is the only route to litigating the liability without paying the tax first. The 90-day period is jurisdictional and cannot be extended. A paralegal who receives a 90-day letter calendars the deadline immediately, records the date on the notice, and escalates the same day.
Choosing the Litigation Forum
| Forum | Prepayment required? | Jury? | Notes |
|---|---|---|---|
| United States Tax Court | No | No | Specialized tax judges; small case procedure available for disputes under a statutory threshold, with no appeal |
| United States District Court | Yes — pay, then sue for refund | Yes | General jurisdiction court |
| United States Court of Federal Claims | Yes — pay, then sue for refund | No | Nationwide jurisdiction |
A refund suit requires first filing an administrative claim for refund and having it denied or six months elapse.
Limitations Periods
| Situation | Period |
|---|---|
| General assessment | 3 years from the later of the filing date or the due date |
| Substantial omission of more than 25% of gross income | 6 years |
| False or fraudulent return, or no return filed | Unlimited |
| Collection after assessment | 10 years, subject to suspensions |
| Refund claim | The later of 3 years from filing or 2 years from payment |
A taxpayer may consent to extend the assessment period, and various events — bankruptcy, a pending offer in compromise, a collection due process request — suspend the running of the collection period.
Collection
The collection sequence:
- Assessment, followed by notice and demand for payment.
- A federal tax lien arises automatically on assessment and attaches to all of the taxpayer's property; filing a Notice of Federal Tax Lien perfects priority against competing creditors.
- Levy seizes property, following a final notice of intent to levy and notice of the right to a hearing.
- Collection Due Process hearing — a request filed within the statutory window after the lien filing or levy notice suspends collection and preserves Tax Court review of the Appeals determination.
Resolution alternatives:
| Option | Description |
|---|---|
| Installment agreement | Payment over time; streamlined options exist below dollar thresholds |
| Offer in compromise | Settlement for less than the full amount based on doubt as to collectibility, doubt as to liability, or effective tax administration |
| Currently not collectible status | Collection suspended for financial hardship |
| Penalty abatement | Reasonable cause, statutory exception, or first-time abatement |
| Innocent spouse relief | Relief from joint liability under one of three statutory paths |
Estate, Gift & Employment Taxes
- Estate tax is reported on the federal estate tax return, generally due nine months after death with an available extension to file. The portability election preserves a deceased spouse's unused exclusion for the survivor and must be made on a timely filed return.
- Gift tax is reported on the annual gift tax return for gifts exceeding the annual exclusion or gifts of future interests. Because exclusion and exemption amounts are indexed and change by statute, a paralegal always verifies the current figures rather than relying on a prior year's worksheet.
- Employment taxes carry a distinct exposure: the trust fund recovery penalty imposes personal liability on responsible persons who willfully fail to collect and pay over withheld taxes. It reaches officers, bookkeepers, and anyone with authority over which creditors get paid.
Practice Standards and the Paralegal's Limits
Circular 230 governs practice before the IRS. Representation rights are tiered:
| Practitioner | Rights |
|---|---|
| Attorney, CPA, enrolled agent | Unlimited representation before the IRS |
| Annual filing season program participant | Limited representation for returns they prepared |
| Unenrolled return preparer | Very limited |
| Paralegal | None — a paralegal never represents a taxpayer before the IRS |
[!WARNING] Tax is a high-risk unauthorized practice area for paralegals. A paralegal may gather records, prepare schedules and summaries, draft documents for attorney review, calendar deadlines, and communicate the attorney's instructions. A paralegal may not sign a power of attorney as representative, appear at an examination or Appeals conference as the taxpayer's representative, advise a client on a filing position, or give an opinion on liability.
A limited federally authorized tax practitioner privilege protects some tax advice communications with a federally authorized practitioner, but it is narrower than the attorney-client privilege and does not apply in criminal matters or to tax shelter promotion.
The Paralegal Workstream
- Deadline control — 30-day and 90-day letters, refund claim deadlines, collection due process request windows, estate and gift return due dates.
- Document assembly — organizing returns, notices, transcripts, and correspondence into a chronological administrative file.
- Transcript analysis — ordering and reading account and return transcripts to reconstruct assessment and payment history.
- Financial statement preparation — assembling the income, expense, asset, and liability data supporting an installment agreement or offer in compromise, for attorney review.
- Power of attorney processing — preparing the representation form for the attorney's signature and filing it.
- Estate tax return support — asset schedules, appraisals, date-of-death valuations, and deduction documentation.
A client brings in a statutory notice of deficiency dated 40 days ago proposing $86,000 in additional tax. The client cannot pay and wants to contest the liability. What is the critical procedural point?
A taxpayer filed a timely return reporting $400,000 of gross income but omitted $130,000 of additional gross income, with no fraud involved. How long does the IRS have to assess additional tax?
A supervising attorney is out of the office when an IRS revenue agent calls to schedule an examination conference and asks the paralegal to confirm the client's position on a disputed deduction. What may the paralegal do?