Understanding the Notice of Deficiency

A Notice of Deficiency is a formal communication from the IRS, often called a “90-day letter,” issued after an audit or review reveals discrepancies in your tax return. This notice informs you that the IRS believes you owe additional taxes, penalties, or interest and gives you a 90-day window (150 days if you reside outside the U.S.) to respond. Responding timely is critical to avoid the IRS assessing the tax automatically and starting collection procedures such as liens or wage garnishments.

What Triggers a Notice of Deficiency?

The IRS issues this notice when it audits your return or examines your tax records and finds a difference between what you reported and what the IRS found based on their review. Instead of immediate tax assessment and collection, the Notice of Deficiency offers you an opportunity to contest the liability either by paying or by petitioning the U.S. Tax Court.

How the Response Process Works

  • Receipt of the Notice: The IRS explains the reasons for the proposed additional tax with details about the amounts, penalties, and interest.
  • 90-Day Deadline: From the date on the notice, count 90 days (150 for U.S. residents abroad) to respond.
  • Response Choices:
  • Pay the additional tax, which ends the dispute.
  • File a petition with the U.S. Tax Court to dispute the IRS findings without needing to pay before the case is decided.
  • Contact the IRS agent or consider other settlement options.

Failure to respond within this period results in the IRS assessing the tax and commencing collection actions.

Real-Life Example

If you claimed a home office deduction that the IRS deems excessive during an audit, the Notice of Deficiency will specify the additional tax amount. Ignoring it lets the IRS make a formal assessment after 90 days and pursue collections. However, filing a petition within that window allows you to challenge the amount in Tax Court without paying upfront.

Who Can Receive a Notice of Deficiency?

This notice can be sent to individual taxpayers, business entities, or estates. It is commonly used for disputes involving income, estate, or gift taxes. Receiving one indicates the IRS has strong reasons to believe your official tax return is incorrect.

Tips for Preparing Your Timely Response

  1. Immediate Action: Note the 90-day deadline and plan your response quickly.
  2. Careful Review: Understand the IRS’s specific issues highlighted in the letter.
  3. Documentation Assembly: Gather all pertinent records, receipts, tax forms, and correspondence supporting your original tax position.
  4. Professional Assistance: Consider hiring a tax attorney, CPA, or enrolled agent experienced in IRS disputes for guidance.
  5. Select Your Response: Decide whether to pay, petition the Tax Court, or negotiate directly with the IRS.
  6. File Your Petition Timely: If disputing, ensure your petition to the U.S. Tax Court arrives within the 90-day limit.

Common Mistakes to Avoid

  • Ignoring the notice, mistakenly thinking it’s only informational.
  • Missing the 90-day deadline and losing court appeal rights.
  • Responding without proper documentation or professional counsel.
  • Assuming that paying the tax means admitting fault; depending on your situation, paying first and later seeking a refund might be strategic.

Frequently Asked Questions

What if I don’t respond to the Notice?
The IRS will assess and collect the additional tax, and you lose the opportunity to dispute it in Tax Court.

Can I get an extension on the 90-day deadline?
No, the 90-day period is a statutory deadline that is non-negotiable.

Must I pay the tax before disputing?
No. You can petition the Tax Court without paying upfront.

Does the deadline differ if I live abroad?
Yes, you get 150 days instead of 90.

For more detailed guidance, visit the IRS resource on Notice of Deficiency and explore related topics such as Tax Court Petition and IRS Taxpayer Rights. Understanding these steps ensures you protect your rights and respond properly to IRS challenges.