Everything You Need to Know About an IRS Notice of Deficiency

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If you’re having trouble with the IRS, you may receive something in the mail called a notice of deficiency letter.

This official notice is designed to alert you of your current status and inform you that the information on your return does not match what the IRS has discovered.

Before you panic, read on to learn more about this notice, what it means for you, and what you can do about it if you receive one in the mail.

The Notice of Deficiency: What It Means

If you receive an IRS notice of deficiency, it usually means that the IRS is proposing a change to your tax return. But why would this happen? For most filers, it means that the IRS found a discrepancy between the information reported and what is currently on their records.

You will receive this notice if a third-party filer such as your employer or a financial institution has submitted the information that doesn’t match with what you filed. It could be a discrepancy in wages or money from a 401(k). There are several things the notice could point out that simply don’t match what the IRS has on file.

If you reported only one W2 but you have two jobs, you may receive a notice of deficiency. That’s because both of your employers submitted their information to the IRS but you only reported the income for one. This will trigger something called a review of unreported income.

When the IRS compares their records with your tax return, they’ll send a notice letting you know there is a discrepancy. Other items that may be different include things like your deductions, credits, or even a difference in the address information they have on file.

If the notice of deficiency includes a difference in taxes received or owed, you will also see this information on the notice. The IRS should explain how they reached this conclusion and what the proposed increase or decreased amount will be. You can challenge this discrepancy, but it’s important to note that you’ll only have 90 days to file an appeal.

Understanding the 90-Day Period

An IRS notice of deficiency is also often referred to as a “90-day letter.” That’s because you’ll have 90 days from the date of the letter to either accept the change or additional tax liability or you can elect to challenge or appeal the notice.

If you decide to dispute the information on the letter, you will need to file an appeal in Tax Court. The IRS should include information about the last date that a petition for appeal may be filed.

Up to 90 days or when the Tax Court makes its final decision, the IRS cannot collect any money from you. Keep in mind that this 90-day timeframe applies to whichever date is later so you can essentially stave the IRS off for three months until a final decision is reached.

It’s important to note that a notice of deficiency is not necessarily a bill. In fact, not all notices will include monies owed. Some of these notices simply point out a few differences between what is on record and you can easily accept the changes.

If you agree with what’s on the notice, simply sign the included waiver and send it back to the address listed. This indicates that you’re accepting the updates and changes and that you won’t attempt to appeal the decision later.

After you send in your signed waiver, you will also need to file an amended return. This will ensure that what is on record with the IRS is now officially a part of your annual tax return.

What if I Disagree?

If you believe that the notice was sent to you in error, there are some things you can do to get the issue resolved. First, you’ll need to produce a written statement fully explaining the reason you want to appeal. Make sure your statement is thorough and professional without giving too much information.

When in doubt, consult with a professional tax attorney who can help you draft an official letter. They can also determine the validity of your reason for the appeal and help save you processing time. The attorney may also notice if you’re incorrect before you decide to appeal which can also be extremely helpful.

Once you file your appeal, you will need to wait for a court date. Make sure you document everything showing the differences between what’s on your notice of deficiency and what you have on file. This information is crucial if you want to win your appeal.

The appeal may end up being unsuccessful, which means you will be required by law to pay the disputed amount. If you’re still positive that the IRS is wrong, you can file a lawsuit with the US Court of Federal Claims or you can take the case to a federal district court.

If you decide to go the way of a court case, make sure you hire an experienced tax lawyer who knows the law. They will be able to help you present your case and give you insight and advice on the best ways to proceed.

There is no way to extend your time once you receive a notice of deficiency. If you’re sure that the information is wrong, it’s essential that you file an appeal or make your case as soon as possible.

Ignoring the IRS

It might be tempting to ignore the IRS if they send you a notice of deficiency, but not communicating with them can have some very serious repercussions. If you don’t send back the signed waiver and 90 days pass, the IRS will assume that you owe the money listed on the notice.

You may be subject to a federal tax lien, which is a very serious matter. This type of lien can levy your wages, take away your personal property, and even take money directly from your bank account. In general, this type of lien is a claim on your assets which can be devastating if it’s not addressed.

Even worse than a federal tax lien is a federal tax levy. This happens when the IRS physically seizes your personal property. In addition, they may also garnish your wages and deplete your entire bank account.

The IRS can also take your assets and sell them in order to pay off your debt. Keep in mind that this type of situation only occurs after you’ve ignored the IRS after receiving several notices and after many attempts to communicate with you.

Depending on the severity of your situation, you could also face jail time if you ignore the IRS. Serving jail time is rare, however, you could end up in jail if the IRS does a criminal investigation and determines that your tax debt is a result of fraud. Tax fraud is a very serious crime that should never be ignored.

Overall, as long as you keep the lines of communication open, you should have no trouble sorting through a notice of deficiency. Speak to a tax professional who can help you understand how to interpret this form.

Repaying Taxes Due

When a final determination is made and you owe back taxes, there’s no need to panic. The IRS has several options that can make repayment easy.

Try to set up a payment plan so you can make payments each month until the total amount is paid in full. This method is the easiest way to satisfy the IRS and get any back taxes taken care of.

If you think you may be able to settle your debt for less than what you owe, you can submit an Offer in Compromise. This process is more involved than setting up a payment plan, but you could save quite a bit of money if you qualify.

However you choose to pay off your owed taxes, it’s important that you do so on time. Set up automatic withdrawals so you won’t need to worry about submitting your payment every month. The key is to acknowledge the IRS whenever they contact you and let them know your intentions of repayment.

As time goes on, you can pay off what you owe in full and move on with your life. Just remember that a notice of deficiency isn’t the end of the world and can usually be solved through simple communication.

Don’t Take Chances with the IRS

To prevent getting a notice of deficiency in the mail, try to report everything as accurately as possible and file an extension or amendment if anything changes. Never ignore the IRS and keep your lines of communication open.

When in doubt, consult with a tax attorney who will walk you through the process and give you legal representation as needed. There’s no need to panic when you get this notice as long as you do your best to fix any errors, make tax repayments, or file an appeal to resolve the problem.

If you need help from real attorneys who can solve your tax problems, contact us today and we’ll connect you with our team of tax attorneys.

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