Tax Blog

What Is An IRS Notice of Deficiency?

By Kelly Hanley, Esq., Tax Attorney

Navigating the complexities of tax law can be daunting, especially when faced with an IRS Notice of Deficiency. Whether you’re a novice taxpayer or a seasoned professional, it’s crucial to understand what this notice entails and the appropriate steps to take when you receive one. In this comprehensive guide, we’ll dive into the nuts and bolts of an IRS Notice of Deficiency, often referred to as a 90-day letter, and the various ways to respond.

What is a tax deficiency?

In essence, a tax deficiency is a legal term used to describe the situation when the Internal Revenue Service (IRS) has determined that a taxpayer owes more taxes than the amount they have reported on their tax return. The deficiency can occur due to a myriad of reasons such as underreported income, overclaimed deductions, or misinterpreted tax laws. Remember, a deficiency is more than just an assessment; it’s a formal assertion of an outstanding tax liability.

What is a notice of deficiency from the IRS?

A Notice of Deficiency, also known as the Statutory Notice of Deficiency, is a formal written document the IRS sends to taxpayers when it concludes that they owe additional tax. This document serves two primary purposes:

  1. It notifies the taxpayer of the additional tax assessment.
  2. It allows the taxpayer 90 days (hence the term ’90-day letter’) to challenge the assessment in Tax Court without first paying the proposed amount.

The IRS meticulously computes the deficiency based on the information they have, and the notice typically provides a detailed breakdown of these computations.

What is a CP2000 notice of deficiency?

A CP2000 Notice, often confused with the Statutory Notice of Deficiency, is not exactly a notice of deficiency. Rather, it’s a proposal from the IRS indicating discrepancies between the information the IRS has received from third parties (like employers or financial institutions) and what the taxpayer reported on their tax return. It’s essentially a request for verification and possibly an indication of additional tax due.

What Is a CP3219A Notice?

A CP3219A Notice, also known as the Statutory Notice of Deficiency, is a document issued by the IRS when they propose a change to your tax return that results in additional tax owed, and when the IRS hasn’t received a response to previous notices about the issue. It’s a formal, legal notification outlining the IRS’s intention to assess a tax deficiency.

This notice is crucial because it outlines the proposed changes to your tax return, the reason for the changes, and the effect of these changes on your overall tax liability. Additionally, it provides detailed information on your right to challenge the IRS’s determination in the United States Tax Court if you disagree with their assessment.

For a CP3219A, the expected response time is typically 90 days. If you agree with the proposed changes, you can pay the amount owed. If you disagree, you can file a petition with the U.S. Tax Court.

Bear in mind that tax matters can be complex, and the implications of receiving a CP3219A Notice are significant. Therefore, it’s advisable to consult with a tax attorney or a tax professional to understand your options and decide the best course of action.

Why is a notice of deficiency also called a 90-day letter?

The Notice of Deficiency garners its more colloquial name, the 90-day letter, from the time frame the IRS grants taxpayers to respond. From the date the notice is mailed, taxpayers have 90 days (150 days if the notice is addressed to a person outside the United States) to either agree and pay the tax or file a petition with the U.S. Tax Court to contest the deficiency.

How to Respond to IRS Notice of Deficiency Step by Step

or, I received a notice of deficiency from the IRS, now what?

Upon receiving a Notice of Deficiency, the response should be strategic and immediate. Here are step-by-step instructions on how to respond effectively.

  1. Review the notice: Ensure you understand the proposed adjustments and computations. If you need clarification, consult with a tax professional or directly with the IRS.
  2. Organize your records: Gather all relevant tax documents that validate your tax return claims, such as receipts, bank statements, and payment records.
  3. Consult a tax professional: A tax attorney can guide you through the complexity of tax law, help you understand your options, and represent you before the IRS or in tax court.
  4. Decide to agree or disagree: After reviewing the notice and discussing it with a professional, you need to decide whether to agree or disagree with the IRS’s findings.

If you agree with the IRS deficiency notice: Send in IRS Form 5564 notice of deficiency waiver

If you agree with the assessment, sign and return the IRS Form 5564, Notice of Deficiency – Waiver. By signing this form, you’re waiving your right to contest the deficiency in the U.S. Tax Court. Following this, you must pay the amount due, including penalties and interest.

If you disagree with the tax deficiency notice: Make an IRS notice of deficiency appeal or petition form in the U.S. Tax Court

Should you disagree with the IRS’s assessment, you have the right to appeal. File a petition with the U.S. Tax Court before the expiration of the 90-day period. It’s advisable to have a tax attorney assist with this process.

The IRC Section 6603 Partial Payment Deposit

The IRC sec 6603 Partial Payment Deposit is a strategy that allows you to make a deposit on the proposed tax amount, stopping the accrual of interest and penalties while you dispute the IRS’s findings. This deposit is refundable if you succeed in your appeal. This tactic demonstrates good faith while providing some fiscal relief.

Audit Reconsideration after Notice of Deficiency or Amended Return

Audit reconsideration is an administrative process where the IRS reevaluates the results of a prior audit in which a deficiency was assessed. If new information comes to light or original information was overlooked, this process can offer another opportunity to dispute the assessment.

Pay the Tax Due and File a Formal Claim for a Refund

Another option is to pay the proposed tax in full and then file a formal claim for a refund. If the IRS denies your claim or fails to act within six months, you can file a lawsuit in federal court for a refund. This strategy is used when you wish to take the case to a venue other than the Tax Court.

Pay the Balance Due and File a Lawsuit in Federal Court for a Refund

Similarly, you can pay the balance in full, file a claim for a refund, and if denied, sue the federal government in a U.S. District Court or the U.S. Court of Federal Claims. This route is often chosen when you want a jury trial, which is not available in Tax Court.

Can I Still Get a Payment Plan?

Yes, if you receive a Notice of Deficiency and can’t pay the entire tax amount due, the IRS offers several payment options, including installment agreements, which allow you to pay your tax debt over a specified time frame.

However, it’s crucial to understand that while the payment plan might alleviate some immediate financial stress, interest and penalties will continue to accrue on the outstanding balance until it’s paid in full.

Here’s a step-by-step guide to apply for a payment plan:

  1. Evaluate your financial situation: Determine how much you can realistically afford to pay each month towards your tax debt.
  2. Choose the right plan: The IRS offers short-term (120 days or less) and long-term (more than 120 days) payment plans, both of which can be set up online, via phone, or by mail.
  3. Apply for the payment plan: Fill out the necessary forms and submit them to the IRS. For online applications, you’ll need to create or log into your IRS account.
  4. Stay compliant: Once your payment plan is in place, ensure you meet all agreed payments and continue to file and pay all future taxes on time to prevent defaulting on your agreement.

You might even qualify for an Offer in Compromise, but always remember to seek professional advice when dealing with complex tax issues. A tax attorney can help you navigate this process and represent your best interests before the IRS.

Do You Need Help with a Statutory Notice of Deficiency or IRS Appeal? Contact The Tax Defenders

Receiving a Notice of Deficiency can be a jarring experience, but it doesn’t have to spell disaster. With proper understanding and expert assistance, you can navigate this complex terrain and find a resolution. As a seasoned tax attorney with 20 years of experience, I’ve helped countless clients resolve IRS issues, and I can help you too.

When it comes to the intricacies of an IRS Notice of Deficiency, expertise and proactive action are key. If you’ve received a 90-day letter, time is of the essence. Reach out to The Tax Defenders today. Together, we can turn this daunting experience into a manageable process. 312-345-5440.

Can the IRS rescind a notice of deficiency?

The ability for the IRS to rescind a Notice of Deficiency, also known as a 90-day letter, does exist. However, it’s not a unilateral decision. The IRS can only withdraw this notice if there’s mutual agreement between the agency and the taxpayer, as outlined in IRC § 6212(d). In other words, both parties must concur for the rescission to be effective.

How long does the IRS have to assess a deficiency?

The timeline for the IRS to assess a tax deficiency is not indefinite. As dictated by IRS statutes, this agency has a window of three years following the due date of the tax return or the actual filing date, whichever comes later, to make the tax assessment. This crucial deadline is also known as the ‘statute expiration date’ in tax law terminology.

What does notice of deficiency means from the IRS?

An IRS Notice of Deficiency, in the realm of tax law, is an official written assertion by the IRS indicating an assessed tax deficiency against a taxpayer. In simpler terms, it means the IRS believes you owe additional income tax beyond what you’ve already reported. This notice typically includes not just the extra tax due but also potential interest and penalties associated with the discrepancy.