A Pinch of Salt- April 2011- Auditors Must Not Use Jeopardy Assessments to Coerce Taxpayers


In this A Pinch of SALT, we analyze a troubling state tax trend of the improper use of jeopardy assessments. Jeopardy assessment provisions are intended to protect the taxing jurisdiction from taxpayers who are impeding or escaping the rightful collection of tax. However, we have seen an increase in the use of jeopardy assessments for other purposes, including to force taxpayers to extend the statute of limitations, respond to overbroad information and document requests, and as leverage to compromise a case. We discuss the proper purposes for a jeopardy assessment, the varying state and federal statutory authority to issue a jeopardy assessment, the misuse of state jeopardy assessment provisions, and the practical considerations in dealing with a jeopardy assessment or the threat of one.

The story is becoming all too familiar — the state begins a tax audit by sending requests for information to which the taxpayer timely responds. Faced with budget cuts, an already overworked audit staff fails to complete the audit in a timely fashion. With the expiration of the statute of limitations imminent, the auditor seeks a waiver to extend the statute of limitations. The taxpayer, frustrated by months or years of delay, refuses to sign the waiver. In response, the state auditor threatens the taxpayer with an arbitrary and significant jeopardy assessment to encourage (or possibly coerce) the taxpayer to consent to waive the statute of limitations. Backed into a corner and faced with the daunting prospect of trying to challenge an unreaunreasonable and arbitrary assessment, the taxpayer bows to the pressure and signs yet another waiver, continuing a waiver signing cycle of pain.

When a taxpayer refuses to agree to the extension of a statute of limitations, the auditor will almost certainly issue a jeopardy assessment to prevent the expiration of the statute of limitations. A taxpayer that engages in the administrative dispute process invariably finds its matter returned to the auditor to continue audit work with an arbitrary jeopardy assessment hanging over its head. The taxpayer is put in a worse position than if it had agreed to the waiver of the expiration of the statute of limitations. What is a taxpayer to do, you ask? Challenge the validity of the jeopardy assessment! State tax administrators must have a reasonable belief that the collection of tax is jeopardized by delay based on the taxpayer’s actions before issuing a jeopardy assessment.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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