A proposed assessment is a formal notice from the Internal Revenue Service (IRS) indicating that, based on their review or audit of your tax return, they believe you owe additional tax, penalties, or interest. Unlike a final assessment, this notice serves as a preliminary report to inform you of discrepancies between what you reported and what the IRS has determined. It provides an opportunity to examine their calculations and respond before the IRS formalizes its claim.
Why You Might Receive a Proposed Assessment
The IRS may issue a proposed assessment for various reasons, including:
- Mathematical Errors: Simple mistakes like miscalculations or omitted figures.
- Unreported or Underreported Income: Income reported to the IRS by third parties, such as employers or financial institutions, that you did not include.
- Disallowed Deductions or Credits: Claimed deductions or credits that the IRS determines are ineligible or incorrectly claimed.
- Audit Findings: If an audit uncovers discrepancies, the IRS will issue a proposed assessment summarizing their findings.
- Missing Information: Such as omitted Forms W-2 or 1099.
Receiving a proposed assessment can be unsettling but remember it is not a final tax bill; it’s part of the IRS’s process to ensure tax compliance.
Understanding the Process and Your Options
When you receive a notice—often a CP2000 or a 30-Day Letter—it will detail:
- The IRS’s proposed adjustments to your income, deductions, or credits.
- The additional tax, penalties, and interest due based on these adjustments.
- How to respond and the deadline for your reply (usually 30 days).
Agreeing with the Proposed Assessment
If you recognize the oversight or error, you can accept the IRS’s findings by:
- Signing and returning any agreement form included with the notice.
- Paying the additional amount due or arranging a payment plan through an installment agreement if immediate full payment isn’t possible.
This resolves the issue and updates your tax account accordingly.
Disagreeing with the Proposed Assessment
If you believe the IRS is mistaken, you should:
- Collect all relevant documentation supporting your original return, including receipts, bank statements, and income records.
- Respond in writing within the specified deadline, clearly explaining your reasons and attaching evidence.
- Consider consulting a tax professional such as a CPA, Enrolled Agent, or tax attorney for complex cases.
If unresolved, you might receive a Statutory Notice of Deficiency (90-Day Letter), which allows you to petition the U.S. Tax Court or request an appeals conference (IRS Appeals Office Review).
Real-Life Examples
Example 1: Sarah forgot to report $5,000 in freelance income because no 1099-NEC was issued. The IRS’s data matching identified this unreported income and sent a proposed assessment.
Example 2: Mark deducted travel expenses on his small business return, but the IRS disallowed part of these as personal expenses during an audit, prompting a proposed assessment.
Who Can Receive a Proposed Assessment?
Any taxpayer, whether individual, small business owner, or corporation, can receive a proposed assessment if the IRS finds discrepancies during their review or audits.
Tips for Handling a Proposed Assessment
- Read the notice carefully and understand the deadlines.
- Organize your financial documents for the tax year in question.
- Respond promptly—do not ignore the notice.
- Send copies, not originals, of supporting documentation.
- Maintain a clear, professional, and factual tone in all communications.
- Consider professional tax help if the issues are complex or the amount is significant.
- Explore payment options like installment agreements or offers in compromise if you cannot pay immediately.
Common Pitfalls
- Ignoring the notice can result in the IRS finalizing the assessment and beginning collections.
- Sending original documents risks loss or unreturn.
- Emotional or hostile responses can hinder resolution.
- Assuming either the IRS or yourself is always right without evidence can worsen the situation.
- Not knowing your rights under the IRS Taxpayer Bill of Rights may limit your options.
Table: How to Respond to a Proposed Assessment
| Scenario | Your Action | Outcome | Next Steps If Required |
|---|---|---|---|
| Agree with IRS | Sign form, pay or set up payment plan | Tax liability resolved | None unless payment plan needed |
| Disagree | Provide detailed explanation, submit documentation | IRS reviews and may adjust or uphold assessment | Appeals process or Tax Court |
| Need More Time | Request deadline extension (when allowed) | Potentially granted extension | Prepare and submit full response |
| Ignore Notice | No response | IRS finalizes assessment, starts collections | Enforcement actions like liens and levies |
FAQs
Is a proposed assessment the same as an audit?
It is a notice resulting from an audit or review, detailing proposed tax changes—not the audit itself.
How long do I have to respond?
Typically 30 days from the notice date; check your specific notice for deadlines.
What if I can’t pay the full amount?
Respond anyway. The IRS offers installment plans and offers in compromise for qualifying taxpayers.
Does receiving a proposed assessment mean I will be audited every year?
No, but it highlights areas to improve to avoid future issues.
Should I hire a professional?
Professional help is recommended for significant or complex assessments.
Additional Resources
This comprehensive guide aims to demystify the IRS proposed assessment process, helping taxpayers understand their rights, responsibilities, and options to address tax discrepancies effectively.