Every year, millions of Americans file their taxes. Deductions, tax credits, and different IRS forms can be confusing to sort through without help. This can accidentally lead to an IRS-issued Notice of Deficiency. Although these forms may seem intimidating, understanding the reasons behind their delivery and how to properly respond can help taxpayers move past these intimidating filing errors.
What Is a Notice of Deficiency?
The IRS’ legal determination of a taxpayer’s current debt is known as a “notice of deficiency.” It is a formal assertion in writing that a taxpayer owes more income tax, often including interest on that amount plus further penalties for unreported income. These notices are given out when the IRS suggests amending a tax return because they have discovered that the data presented on the return does not correspond to their records. A notice of deficiency may also be referred to as an IRS 90-day letter, a statutory notice, or a statutory notice of deficiency.
According to tax statutes, the Internal Revenue Service (IRS) must first issue a notice of deficiency before increasing an individual’s income tax, inheritance tax, gift tax, or certain excise taxes. If the taxpayer agrees to an additional assessment, then their tax holdings will be investigated further. The notice of deficiency is a legally binding determination of a tax deficiency. This deficiency is presumed to be right, even though it states that the IRS is suggesting a modification.
What to Do After Getting a Notice of Deficiency
An IRS deficiency notice can be addressed in several ways, including by submitting a proposal in compromise, filing an appeal, or requesting that the letter be withdrawn. Taxpayers can submit a petition, and an agent from the IRS will respond if they dispute the IRS assessments. However, taxpayers can settle their federal tax debt and end the case if they accept the assessment and modification. The process for addressing a notice of deficiency is as follows:
- Assessing the original statement. Once these letters are received, they should be carefully read to fully understand the commission’s findings and changes before determining how to respond.
- Submit a petition to the IRS. Taxpayers can appeal the Internal Revenue Service’s judgment by submitting a petition for redetermination in a tax court. The petition prevents the commission from acting until the court makes a decision. However, the petition must be filed with the court within 90 days of getting the notification. Any filing made after the deadline will be rejected by the Internal Revenue Service for lack of jurisdiction.
- Ask for the notice to be withdrawn. If there are any disagreements with a deficiency notice, they can be disputed. Keep in mind that, with the taxpayers’ permission, the IRS has the right to revoke a notice of deficiency. Because the commission would only revoke a notice of deficiency within 90 days, taxpayers should think about submitting their withdrawal requests with Form 8626 after the notification is received.
- Offer other ways to settle the debt. When taxpayers provide what the commission demands in payment within the deadline, the IRS often accepts an offer in compromise. After receiving a deficiency notice, taxpayers who have completed all required tax returns and have not filed for bankruptcy are qualified to submit an offer in compromise.
- Settle the debt. If in disagreement with the IRS’ modifications, taxpayers can pay the debt shown in the deficiency notice and apply for a tax refund. They can request a refund by completing Form 30. This form asks the IRS to reconsider the taxpayer’s situation and refund any already-paid taxes. Before the 90-day window closes, submit a request for tax refunds.
Each taxpayer and their situation can warrant a different way of responding to a notice of deficiency. After evaluating the options, speak with a tax attorney to find the best course of action.
Q: What happens if you don’t respond to the notice of deficiency?
A: The IRS must receive a reply to a notice of deficiency, or a petition to the Tax Court, before the deadline. If they do not, the taxpayer will then have to wait for further notice from the IRS about the issue. From there, the IRS will issue a tax bill that includes any penalties or interest payable by the person who received the notification. If necessary, the collection process will start.
Q: What does it mean when you get a notice of deficiency from the IRS?
A: These notices let taxpayers know that the amount they owe in taxes is being challenged by the IRS. Taxpayers whose IRS audits were conducted in person instead of by mail will receive IRS Letter 531. Taxpayers who had in-person audits will receive IRS Letter 3219. The statutory notice of deficiency is frequently referred to as a ticket to the Tax Court. This is because the notice gives individuals the option to contest the proposed adjustment before the Tax Court.
Q: What happens if the notice isn’t addressed after 90 days?
A: The IRS will assess the tax, issue a bill to the taxpayer, and begin the collection procedure if the 90-day window lapses without a resolution or the submission of a petition to the Tax Court. Taxpayers can now take further action to address the issue by:
- Asking for an audit reconsideration
- Paying the tax owed and then filing Form 1040X
- Revising a U.S. Individual Income Tax Return
- Settling their debt and filing a refund claim
Q: Does a notice of deficiency mean I owe money?
A: A tax bill is not a notice of deficiency, which is vital to understand. However, the IRS will review the tax, associated penalties, and interest indicated on the notice of deficiency. They will then send a bill if the taxpayer does not agree to the adjustments. Signing a Waiver Form 4089 or filing a petition in Tax Court inside the 90-day window is the best way to avoid any bill collection efforts from the IRS.
How to Deal With a Notice of Deficiency
Dealing with the IRS can be stressful, especially when getting a letter as intimidating as a Notice of Deficiency. Fortunately, with the help of an experienced tax attorney, sorting through the options for addressing these letters can help settle any deficiency claims. For those in California looking for help with a notice of deficiency, contact Coggins Law for more information.