What is an IRS Notice of Deficiency? Understanding Your Rights and How to Respond
Have you ever received a threatening letter from the IRS stating you owe more money? If so, you might have received what’s known as an IRS Notice of Deficiency. This can be a stressful experience, but it’s crucial to understand what this notice means, its implications, and how you should respond to it.
What is an IRS Notice of Deficiency?
An IRS Notice of Deficiency—also called a statutory notice of deficiency or a 90-day letter—is a formal notification from the IRS stating they believe you owe additional taxes. It’s typically issued when the IRS determines that there’s an underreporting of income, incorrect deductions, or other discrepancies in your tax return.
This notice isn’t just a warning—it’s a legal notice informing you that the IRS intends to assess additional tax unless you respond within the prescribed time frame, usually 90 days.
Why Did You Receive a Notice of Deficiency?
There are several reasons why you might receive a Notice of Deficiency, including:
- Unreported Income: If the IRS discovers income that was not reported on your tax return (such as a missing 1099 form), you could be issued this notice. You may have also received a CP2000 notice prior to the Notice of Deficiency.
- Incorrect Deductions or Credits: The IRS may flag deductions or credits that it believes were incorrectly claimed, leading to a deficiency.
- Audit Findings: If you were audited and disagreed with the audit findings, or did not respond, a Notice of Deficiency could follow.
What Information Does a Notice of Deficiency Contain?
A Notice of Deficiency will provide several key pieces of information that you need to carefully review, including:
- Amount Owed: The notice will show the additional tax the IRS believes you owe.
- Supporting Details: This includes explanations for why the IRS believes you owe additional taxes, such as missing income or adjustments made during an audit.
- 90-Day Deadline: You’ll typically have 90 days from the date of the notice to respond. This is why the notice is often referred to as a “90-day letter.”
What Happens If You Don’t Respond to the IRS Notice of Deficiency?
If you don’t respond to the IRS within the 90-day period, the agency will move forward with its assessment and begin the collection process. This may involve:
- Placing a lien on your property
- Levying your bank accounts or assets
- Garnishing your wages
Ignoring this notice can lead to serious financial consequences, so it’s crucial to respond within the allotted time frame.
How to Respond to an IRS Notice of Deficiency
You have several options when responding to a Notice of Deficiency:
- Agree with the IRS: If you agree with the IRS’s determination, you can simply sign the included waiver form and pay the amount owed. If you can’t afford the full amount, you may be able to set up a payment plan.
- Disagree with the IRS: If you disagree with the IRS’s assessment, you have the right to challenge it. You can file a petition in Tax Court within the 90-day window. Filing this petition puts the IRS’s collection efforts on hold while you go through the court process.
Why You Should Consider Filing a Petition in Tax Court
Filing a petition in Tax Court is often the best way to resolve disputes with the IRS. Once in Tax Court, you can work with IRS attorneys and potentially come to a settlement or even go to trial. While it’s possible to file the petition yourself using a form from the Tax Court’s website, it’s often best to work with an experienced tax attorney. A tax attorney can help you evaluate your position and navigate the complexities of Tax Court, increasing your chances of achieving a better outcome.
Don’t Ignore Your Notice of Deficiency—Take Action!
It’s important to understand that a Notice of Deficiency is a serious matter that requires your attention. Ignoring the notice will not make it go away and can lead to significant financial consequences. Be sure to review the notice carefully to understand why the IRS believes you owe additional taxes and what your next steps should be.
If you disagree with the IRS’s position or are unsure of how to proceed, consulting with a tax attorney is a wise decision. Tax attorneys can help you assess your situation, file the necessary petitions, and represent you in Tax Court.
Need Help with an IRS Notice of Deficiency?
If you’ve received a Notice of Deficiency and need guidance on how to respond, I’m here to help. As an experienced tax attorney, I can review your situation and discuss your options with you, whether that involves negotiating with the IRS or filing a petition in Tax Court. Contact me today to schedule a consultation and ensure you’re taking the right steps to protect your financial interests.