An IRS Notice of Deficiency, also known as a “90-day letter,” is a notice that no taxpayer wants to receive. It was sent to you because the IRS is proposing an increase to your taxes due to a mail or in-person audit. Understanding this notice and knowing how to respond can save you a lot of stress and potentially save you money. Let’s look at what an IRS Notice of Deficiency is, why you might receive one, and the steps to take if you do.
What is an IRS Notice of Deficiency?
The IRS Notice of Deficiency is a written notice (either letter CP3219 or 531) from the IRS declaring its intent to assess a tax deficiency. In layman’s terms, the IRS has determined that you owe more taxes than you reported on your tax return.
The notice is sent when the IRS finishes examining your tax return and proposes changes to your tax liability, but you haven’t responded or signed an agreement accepting the changes. Unless you consent, the IRS cannot assess the proposed deficiency without first allowing you to challenge these adjustments in the Tax Court.
This IRS notice is a proposal, not a bill. It provides a detailed breakdown of proposed changes to your tax return and allows 90 days (150 if you’re outside the U.S.) to agree or dispute. Receiving an IRS Notice of Deficiency does not immediately make you liable for payment. Instead, you can challenge the assessment by filing a petition in the U.S. Tax Court.
Why You Might Receive One
Here are some reasons why you may receive a Notice of Deficiency and a proposed increase in taxes from the IRS:
- Inconsistent Information: When information provided by a third-party filer, such as an employer or financial institution, does not match the information you reported. For instance, if you have received 1099s from multiple banks that reported interest income paid to you, but you forgot to report one of them.
- Disallowed Deductions or Credits: If you claimed deductions or credits the IRS disagrees with and therefore has disallowed. For example, you claimed a charitable contribution deduction for $2,000 and have no documentation.
- Unreported Income: If the IRS finds income you did not report on your tax return. One example of unreported income is cash received from a side gig that you failed to include on your return.
- Failure to File: If you didn’t file a tax return, the IRS may file a substitute for return (SFR) for you, which will result in the issuance of a notice of deficiency. An SFR almost always results in a higher tax bill than if you filed your own return.
How to Respond to an IRS Notice of Deficiency
- Carefully Review the Notice: Read the notice carefully to understand why the IRS believes you owe additional tax. The Notice of Deficiency provides a detailed explanation, including the proposed changes to your return.
- Consult with a Tax Professional: If the notice is complex or the amount in dispute is substantial, it may be wise to consult with a tax professional, such as a CPA or tax attorney, who is familiar with the notice of deficiency process.
- Decide Whether to Agree or Disagree: If you agree with the adjustments, sign and return Form 5564, Notice of Deficiency-Waiver to the IRS and pay the amount owed. If you disagree, you should consider petitioning the U.S. Tax Court.
- File a Petition if You Disagree: If you disagree with the IRS’s assessment, you can petition the U.S. Tax Court. It’s important to remember that you must do this within 90 days of receiving the notice. When the amount in question is significant, seeking legal counsel is highly recommended.
- Consider Your Payment Options: If you agree with the notice but cannot pay the total amount immediately, you might qualify for an installment agreement with the IRS. Other options exist if you can’t afford monthly payments that will fully pay the tax debt. East Coast Tax Consulting Group can help determine the appropriate option for you. Remember, ignoring the problem won’t make it disappear; it will only worsen the situation with added penalties and interest.
If you ignore the notice or fail to take action within the specified period, the IRS will assess the deficiency, and it becomes legally enforceable. This means they can begin collection action, like levying your bank accounts or garnishing your wages.
Get Help With IRS Letters 3219 and 531
While an important letter, the IRS Notice of Deficiency is not the end of the world. Armed with knowledge, professional advice, and a proactive approach, it is something that can be handled effectively. Remember, understanding your rights and obligations as a taxpayer is the key to confidently navigating the complex world of taxation. Call East Coast Tax Consulting Group today for help with IRS Letters 3219 and 531.