Notice of Deficiency
An official determination made by the IRS regarding a taxpayer's shortfall in paying income tax.
What Is a Notice Of Deficiency?
A notice of deficiency is an official determination made by the IRS regarding a taxpayer's shortfall in paying income tax. This formal written notification asserts that the taxpayer must pay additional income tax, often accompanied by interest and penalties.
The IRS issues this notice when there is a disparity between the information provided by a taxpayer and the data submitted by a third party, like an employer or financial institution.
This discrepancy can involve details like expenses, income, or tax amounts. The IRS, relying on the information, adjusts the taxpayer's tax liability to align with the provided data. This notice serves as the main tool for rectifying inconsistencies in the IRS records about the taxpayer.
This notice may be alternatively called a statutory notice, a statutory notice of deficiency, or an IRS 90-day letter. The official designation for a notice of deficiency is IRS Notice CP3219A: Notice of Deficiency and Increase in Tax.
Receiving a Notice of Deficiency can be a stressful experience for taxpayers, as it signifies potential tax liabilities, penalties, and interest.
It is essential for taxpayers to carefully review the notice, understand the proposed adjustments, and assess the implications on their overall tax situation. Ignoring or neglecting the notice can lead to serious consequences, including additional penalties and enforcement actions by the tax authorities.
Key Takeaways
- A notice of deficiency is a formal declaration by the IRS regarding a taxpayer's tax shortfall, officially titled IRS Notice CP3219A: Notice of Deficiency and Increase in Tax.
- This notice is generated when the IRS suggests an alteration to a tax return due to discrepancies between the information provided on the return and their records.
- Common triggers for this notice include discrepancies in income reporting, deductions, credit disputes, and failure to respond to IRS inquiries. Addressing these issues promptly can contribute to a favorable resolution.
- The taxpayer must respond to the notice within 90 days of issuance.
Understanding Notice Of Deficiency
Tax regulations mandate that the Internal Revenue Service (IRS) must issue a notice of deficiency before imposing additional income, estate, gift, and specific excise taxes unless the taxpayer consents to the additional assessment.
Despite the wording in the notice of deficiency suggesting a proposed alteration, it is a legally binding declaration of a tax deficiency presumed to be accurate.
A notice of deficiency outlines the IRS's calculation of a tax deficiency and proposes adjustments to the taxpayer's return.
Before issuing this notice, the IRS sends a CP2000 notice as a pre-notification of discrepancies between the taxpayer's reported information and data provided by a third party.
If the taxpayer does not respond to the initial notification, the IRS will send Notice CP3219A, containing comprehensive details on the calculation of the additional tax and the necessary adjustments.
Note
Receiving this notice doesn't always result in owing more taxes; the IRS might find that the taxpayer mistakenly overreported their income, leading to a potential refund owed to the taxpayer.
The taxpayer is given a 90-day window from the date of receiving a deficiency notice to challenge the tax assessment in the tax court.
During this period, the IRS is prohibited from starting any collection efforts or assessments for outstanding taxes. The deficiency notice is required to specify the deadline for responding. If the taxpayer disagrees, they may file a petition with the tax court within the given timeframe.
It presents the taxpayer with the choice of either accepting the additional tax liability by signing a Waiver Form 4089 or disputing it in the U.S. Tax Court.
What is IRS Form 5564?
When the IRS issues the notice of deficiency to the taxpayer, they will also enclose Form 5564, which is the Notice of Deficiency-Waiver.
IRS Form 5564 is a tax document employed when a taxpayer agrees with a proposal from the IRS outlined in Notice CP3219A, addressing an underpayment of their tax liability.
If taxpayers agree with the conditions outlined in the CP3219A notice, they must complete and sign Form 5564. The signed form is then sent to the IRS, indicating their commitment to address the extra tax liability owed.
On the contrary, if a taxpayer disagrees with any aspect of the IRS notice regarding additional tax, it is recommended not to sign IRS Form 5564. Instead, they should commence the process of resolving the tax issue with the IRS through appropriate channels.
What To Do If You Agree With Your IRS Notice Of Deficiency?
If a taxpayer, after reviewing the IRS Notice of Deficiency, acknowledges and agrees with the assertion that they owe additional taxes, they can complete the IRS Form 5564 Deficiency Waiver.
This form communicates to the IRS that the taxpayer concurs with the suggested adjustments.
- Begin by carefully reviewing the IRS Notice of Deficiency to understand the situation before proceeding with the completion of IRS Form 5564. If uncertainties arise, consider consulting a tax professional to ensure a thorough understanding and appropriate action.
- Locate IRS Form 5564, which is typically affixed to the last page of your IRS Notice of Deficiency.
- Enter your personal identification information for tax purposes in the designated section at the top of IRS Form 5564. This entails providing precise details like your name, address, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), and filing status. Ensure the accuracy of this data to avoid complications when seeking help from the IRS.
- Affix your signature at the bottom of the form to officially attest to the accuracy of the provided information.
- Conclude the process by mailing the completed IRS Form 5564 to the IRS. Refer to the IRS Notice of Deficiency for the specific mailing address provided by the IRS.
What To Do If You Disagree With Your IRS Notice Of Deficiency?
If taxpayers find themselves in disagreement with an IRS Notice of Deficiency asserting additional tax liability, several avenues are available to address the issue within the 90-day timeframe.
In more complex cases, seeking assistance from an IRS audit attorney may be advisable.
Initiate a Petition with the IRS
Taxpayers can file a petition with the IRS within 90 days of receiving the Notice of Deficiency, seeking a redetermination in tax court.
Filing a petition temporarily halts further collection actions until the court reaches a decision. It's crucial to adhere to the 90-day deadline, as no extensions are granted.
Initiate Withdrawal of Deficiency Notice
If a taxpayer disputes the IRS assessment, they can submit a request for withdrawal of the deficiency notice using IRS Form 8626, Agreement to Rescind Notice of Deficiency.
This request must be made within the 90-day window, including details about the tax periods, types of tax, amounts, and any penalties.
Explore Offer in Compromise
For taxpayers facing financial hardship, the IRS may consider approving an offer in compromise, allowing them to settle the tax debt for less than the total owed.
Strict eligibility criteria apply, including being current on filing income tax returns. If approved, the taxpayer can submit payment for the agreed settlement amount to resolve the issue.
Submit payment for the revised tax amount and initiate a refund request
Alternatively, if taxpayers wish to resolve the deficiency notice while still disagreeing with the assessments, they can pay the outlined debt and file for a tax refund using IRS Form 843.
This form is utilized to request a reassessment of the tax case by the IRS within the 90-day deadline.
Consequences if You Decide to Ignore the IRS Notice of Deficiency
If you choose to disregard the IRS Notice of Deficiency, which is an official determination of a taxpayer's owed additional income tax, there can be various serious consequences.
Federal Tax Lien
A federal tax lien is a formal notice indicating the IRS's intent to seize your wages, personal property, or the funds in your bank account. This is essentially a claim on your assets, though the IRS has not yet taken any action.
Federal Tax Levy
If you continue to ignore the notice and leave your tax debt unpaid, the IRS may proceed to a federal tax levy.
This involves the actual seizure of your possessions, including garnishing your wages, freezing your bank account, and taking possession of your assets to be sold to settle the debt.
A levy typically follows multiple warnings and attempts by the IRS to communicate with you about your tax liability.
Jail Time
Although uncommon, the IRS might initiate a criminal investigation if they suspect fraud in your case. In such situations, a taxpayer who neglects their obligations might face the possibility of imprisonment.
It's crucial to promptly address the IRS Notice of Deficiency and take appropriate action to resolve any discrepancies or outstanding tax liabilities to avoid these severe consequences.
How Can I Avoid a Notice of Deficiency Next Year?
To avoid receiving a Notice of Deficiency from the IRS next year, consider the following tips:
- Accurate Reporting: Ensure that the information you report on your tax return is accurate and matches the IRS records. Double-check all income, deductions, and credits to minimize the chances of discrepancies.
- Organized Recordkeeping: Keep organized records of your financial transactions, receipts, and any supporting documents. This makes it easier to provide documentation in case of an IRS audit and helps you report accurate information.
- Timely Filing: File your tax return on time. Failing to file or filing late increases the likelihood of IRS scrutiny. If you need more time, consider filing for an extension, but be aware that an extension to file is not an extension to pay any taxes owed.
- Prompt Payment: Pay any taxes owed on time to avoid penalties and interest. If you are unable to pay the full amount, consider setting up a payment plan with the IRS to fulfill your tax obligations.
- Seek Professional Help: Opting for the assistance of a tax professional or accountant during tax preparation is a wise choice. Their expertise can play a crucial role in maintaining the accuracy of your return, ensuring compliance with tax laws, and minimizing the potential for errors.
- Respond to IRS Correspondence: If you receive any communication from the IRS, respond promptly. Ignoring IRS notices can lead to more significant issues. If you disagree with an IRS assessment, address the concerns on time.
- Audit Preparedness: Be prepared for the possibility of an IRS audit. Maintain thorough documentation for all income, deductions, and credits claimed on your return. Organized records will make the process smoother if selected for an audit.
- Consider Professional Review: Before submitting your tax return, consider having it reviewed by a tax professional. They can catch potential issues and provide valuable insights to help you avoid discrepancies.
Notice Of Deficiency FAQs
A Notice of Deficiency, also known as a 90-day letter or CP3219A, is a formal communication from the IRS to inform a taxpayer of the agency's intent to assess additional taxes.
The IRS sends a notice when it detects inconsistencies or problems in the details submitted on a taxpayer's tax return, leading to a suggested modification to the taxpayer's tax obligation.
The taxpayer can choose to either accept the suggested modifications and settle the extra tax amount or reject them and submit a petition to the United States Tax Court within 90 days of receiving the notice.
Certainly, individuals can challenge a tax decision by submitting a petition to the Tax Court, allowing them to present their arguments and submit relevant documents.
If the deadline is missed, the proposed changes on the notice become final, and the IRS can assess the additional taxes. The taxpayer must act promptly and seek professional advice if needed.
While direct negotiations aren't possible, the taxpayer can present their case during the appeals process or work with the IRS to establish a payment plan if they agree with the changes.
Authored and researched by Rani Thakur | LinkedIn
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