When the IRS reviews your tax return—often following an audit—and believes you owe more than reported, it initiates IRS deficiency procedures to address the dispute. These procedures ensure you have a clear, legal path to challenge the IRS’s findings, protecting your due process rights before any additional tax is assessed or collected.
The process typically begins with a 30-day letter (often called a “proposed deficiency letter”) that outlines the IRS’s proposed changes to your tax return. This letter includes:
- A detailed examination report explaining the IRS’s findings and calculations.
- Information about your rights to appeal these findings.
- Form 870 (Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment), which you can sign to agree with the proposed changes.
You have three primary options upon receiving this letter: accept the proposed deficiency by signing Form 870, appeal the findings through the IRS Office of Appeals, or take no action. If you appeal, you generally must file a formal written protest explaining your disagreement and may attend an appeals conference, where an independent Appeals Officer reviews your case to seek a fair resolution without litigation.
If the dispute isn’t resolved after the appeals process—or if you didn’t appeal—the IRS will issue a Notice of Deficiency (commonly called a 90-day letter). This is your critical opportunity to petition the U.S. Tax Court within 90 days (or 150 days if you’re outside the U.S.). Filing this petition allows you to contest the deficiency without having to pay the disputed tax upfront. Missing this deadline means the IRS can assess the tax and begin collection, and your only recourse may be paying the tax first and filing a refund claim afterwards.
For example, consider Sarah, a small business owner audited by the IRS that disallowed some of her home office deductions. After receiving the 30-day letter, she appealed by submitting a protest and attending an appeals conference, which resulted in a compromise and a smaller tax adjustment she accepted. Had she not appealed, Sarah could have received a 90-day letter and needed to file a Tax Court petition to further dispute the issue without prepayment.
Taxpayers of all types—individuals, married couples, and businesses—may encounter deficiency procedures whenever the IRS proposes a higher tax liability after examination.
To navigate deficiency procedures effectively, remember:
- Respond promptly to IRS letters; ignoring them risks losing appeal opportunities and facing collection.
- Understand your rights, including appeal rights and U.S. Tax Court access.
- Keep detailed records to support your tax positions.
- Seek professional representation from tax attorneys, CPAs, or enrolled agents, especially when dealing with complex issues or court cases.
- Act swiftly on the 90-day letter deadlines.
Common misunderstandings include believing the 30-day letter is a final bill (it’s not) or thinking you must pay disputed tax before going to court (U.S. Tax Court allows prepayment challenge). Missing key deadlines or trying to self-represent in complex cases can lead to unfavorable outcomes.
For detailed guidance on appealing to the IRS Office of Appeals, visit our article on The Role of the IRS Appeals Office. To understand Tax Court procedures and filing petitions properly, see Taking Your Case to U.S. Tax Court.
According to IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree With the IRS (https://www.irs.gov/pub/irs-pdf/p5.pdf), following deficiency procedures carefully safeguards your rights and options.
For authoritative IRS resources, see the official IRS page on Notice of Deficiency (IRS Form CP3219).
By understanding and properly engaging in IRS deficiency procedures, you can effectively protect your interests during tax disputes and ensure the IRS follows all legal requirements before collecting additional taxes.