A Notice of Deficiency, commonly known as the “90-Day Letter,” is an IRS official communication sent when the agency believes you owe more tax than reported on your return. It provides a detailed explanation of the proposed tax adjustments and gives you exactly 90 days (from the date on the letter) to respond if you wish to challenge the findings before the tax becomes final. This formal notice is part of the IRS’s deficiency procedures, designed to ensure taxpayers have a chance to contest disputed tax assessments through legal channels.
The IRS issues the Notice of Deficiency after conducting an audit or review that identifies discrepancies such as unreported income, disallowed deductions, or math errors affecting your tax liability. Importantly, this letter is not a tax bill but a proposal of additional taxes owed.
How the Notice of Deficiency Process Works
- Receipt of the Notice: The IRS mails the Notice of Deficiency detailing the proposed tax increase and the reasons behind it.
- Careful Review: You should review the calculations and IRS explanations to verify if they align with your records.
- Options for Response: You can agree with the proposed changes and pay the tax, or you can dispute it by filing a petition with the U.S. Tax Court within 90 days. This court review allows an independent judge to examine your case without immediate payment.
- Consequences of Inaction: Failing to respond or petition within 90 days permits the IRS to formally assess the tax and initiate collection actions, including liens or levies.
Real-Life Examples
- A freelancer receives the Notice because some income was allegedly omitted, but after reviewing statements and contracts, they challenge the IRS in Tax Court.
- A business owner disagrees with disallowed travel deductions and opts to pay after weighing the cost of legal action.
Who Receives a Notice of Deficiency?
Any individual, business owner, or corporation whose tax return is audited or reviewed can receive a Notice of Deficiency if the IRS finds additional tax owed.
Tips for Handling a Notice of Deficiency
- Read Thoroughly: Understand the IRS’s findings and your options.
- Act Fast: The 90-day deadline is firm; missing it means losing the right to court review.
- Gather Documentation: Prepare all supporting evidence like receipts and bank statements.
- Seek Professional Advice: Tax attorneys or CPAs can assist with legal proceedings or negotiations.
- Never Ignore: Ignoring the notice may lead to enforced IRS collections.
Common Misunderstandings
- It’s not a bill yet but a proposed assessment.
- The 90-day period is essential for filing a Tax Court petition.
- You don’t have to pay immediately if you plan to contest.
Frequently Asked Questions
Can I negotiate after getting a Notice of Deficiency? Yes, you can try to resolve the issue with the IRS or petition Tax Court for a judicial decision. Payment plans or settlements may be possible.
What happens if I miss the 90-day deadline? The IRS will formally assess the tax and may start collection activities. You lose the option to have your case reviewed pre-assessment.
Is this the same as a tax audit? No, the audit is the examination phase. The Notice of Deficiency comes afterward if the IRS proposes changes.
Key Deadlines & Actions
| Action | Deadline | Notes |
|---|---|---|
| Receipt of Notice of Deficiency | Date on the letter | Start of 90-day response period |
| Filing Petition in Tax Court | Within 90 days | To dispute the proposed assessment |
| Paying Proposed Tax | Any time before assessment | After 90 days without challenge |
| IRS Tax Assessment | After 90 days if no dispute | IRS can begin formal collection |
For detailed guidance on Tax Court procedures and petitions, see Taking Your Case to U.S. Tax Court and How to Petition the U.S. Tax Court on FinHelp.
Sources
- IRS.gov: Notice of Deficiency (Tax Topic 308)
- U.S. Tax Court official site
- Investopedia: Notice of Deficiency
Understanding how to respond effectively to a Notice of Deficiency empowers you to protect your tax rights and avoid unnecessary penalties or collection actions. The 90-day letter is your formal opportunity to address IRS findings before they become legally enforceable.