Receiving a notice from the Internal Revenue Service (IRS) can be a nerve-wracking experience for anyone. One type of notice that can raise significant concerns is the IRS Notice of Tax Deficiency. This official communication from the IRS informs taxpayers that the agency has determined an additional amount of tax is owed. In this article, we will delve into the details of what an IRS Notice of Tax Deficiency is, why it is issued, how to respond to it, and what steps taxpayers can take to address this potentially daunting situation.
Understanding the IRS Notice of Tax Deficiency
An IRS Notice of Tax Deficiency, also known as a 90-day letter or a statutory notice of deficiency, is a formal notification sent by the IRS to inform taxpayers that their reported tax liability is insufficient, and additional taxes are owed. This notice is typically issued after the IRS has conducted a review or audit of a taxpayer’s return and identified discrepancies, errors, or underreported income.
Key Elements of an IRS Notice of Tax Deficiency:
- Explanation of Deficiency: The notice outlines the specific discrepancies or issues identified by the IRS on the taxpayer’s tax return. This could include unreported income, overstated deductions, credits, or other tax-related matters.
- Proposed Changes: The IRS specifies the proposed adjustments to the taxpayer’s tax return that result in the additional tax liability. These adjustments are based on the IRS’s calculations and findings.
- Deadline: The notice provides a deadline by which the taxpayer must respond to the proposed changes. The standard deadline is typically 90 days from the date of the notice, hence the name “90-day letter.”
- Right to Challenge: The notice informs the taxpayer of their right to challenge the proposed changes through the U.S. Tax Court or by entering into negotiations with the IRS through the appeals process.
- Assessment of Tax: If the taxpayer does not respond or chooses not to challenge the proposed changes, the IRS will assess the additional tax liability and begin the collection process.
Why Is an IRS Notice of Tax Deficiency Issued?
IRS Notices of Tax Deficiency are typically issued for one of the following reasons:
- Discrepancies in Reported Income: The IRS may identify discrepancies between the income reported on a taxpayer’s return and the information provided by third-party sources, such as employers, financial institutions, or investment firms. If these discrepancies result in underreported income, the IRS will issue a notice.
- Errors in Deductions or Credits: Mistakes or inaccuracies in claiming deductions, credits, or exemptions on a tax return can lead to a Notice of Tax Deficiency. The IRS will correct the errors and propose changes to the return.
- Audit Findings: Tax returns selected for audit may result in the discovery of discrepancies, omissions, or errors that lead to additional tax assessments. The IRS will issue a notice outlining the audit findings and proposed adjustments.
- Cryptocurrency Transactions: In recent years, the IRS has increased its scrutiny of cryptocurrency transactions. Failure to report income from virtual currency transactions can trigger a Notice of Tax Deficiency.
- Failure to Respond to Prior Notices: If a taxpayer fails to respond to previous IRS notices, such as a CP2000 Notice, and the issues remain unresolved, the IRS may escalate the matter by issuing a Notice of Tax Deficiency.
Responding to an IRS Notice of Tax Deficiency
Receiving an IRS Notice of Tax Deficiency does not necessarily mean you are in trouble, but it does require prompt and careful attention. Here are the steps to take when you receive such a notice:
- Review the Notice: Carefully read the entire notice to understand the specific issues identified by the IRS, the proposed adjustments to your tax return, and the deadline for responding.
- Verify the IRS’s Findings: Compare the IRS’s proposed changes with your own records and tax return. Ensure that you agree with their findings and calculations. Mistakes can occur, and you may find errors that need to be corrected.
- Gather Supporting Documents: Collect all relevant documents, such as pay stubs, bank statements, receipts, and any other evidence that can substantiate your tax return claims and disprove the IRS’s proposed changes.
- Respond to the Notice: You have several options for responding to the Notice of Tax Deficiency:
a. Agree with the Proposed Changes: If you agree with the IRS’s findings, you can simply pay the additional tax liability by the specified deadline. If you are unable to pay in full, consider setting up a payment plan with the IRS.
b. Disagree with the Proposed Changes: If you disagree with the IRS’s findings and believe your tax return is accurate, you can file a protest with the IRS Office of Appeals. Follow the instructions provided in the notice for filing your protest.
c. Request a Conference: You have the option to request a conference with the IRS Office of Appeals to discuss your case and provide additional documentation or arguments to support your position. - Seek Professional Assistance: If you find the process overwhelming or if you believe you might need assistance in handling the matter, consider consulting a tax professional, such as a certified public accountant (CPA) or tax attorney. They can help you navigate the process and represent your interests to the IRS.
- Be Mindful of Deadlines: Ensure that you adhere to the response deadline provided in the notice. Failing to respond within the specified timeframe can result in the IRS assessing the additional tax liability and initiating collection actions.
Options After Responding to the Notice
After responding to the Notice of Tax Deficiency, several outcomes are possible:
- Agreement: If the IRS accepts your response or if you reach an agreement through the appeals process, the matter will be resolved, and no further action will be necessary.
- Disagreement: If the IRS continues to disagree with your response, they may proceed with their proposed adjustments. At this point, you may need to consider further legal action, such as challenging the IRS’s decision in the U.S. Tax Court.
- No Response: Failing to respond to the notice within the specified deadline can result in the IRS assessing the additional tax liability and initiating collection actions, such as wage garnishments or bank levies.
Conclusion
Receiving an IRS Notice of Tax Deficiency can be unsettling, but it is essential to approach the situation with a clear understanding of the issues, your rights, and the options available to you. Whether you agree or disagree with the proposed changes, responding promptly and providing supporting documentation is crucial. Seeking professional assistance when needed can also be a valuable resource in navigating the process and ensuring a favorable resolution. Ultimately, addressing the Notice of Tax Deficiency in a timely and thoughtful manner is essential for protecting your financial interests and maintaining compliance with tax laws.
