Definition
When the Internal Revenue Service (IRS) sends a notice of deficiency to a taxpayer, it is a formal way of saying that the IRS has found that the taxpayer owes more income tax than they should have.An explanation of what a Notice of Deficiency is, along with an example of one
The Internal Revenue Service (IRS) will send a taxpayer a notice called a "notice of deficiency" if it determines that the taxpayer is responsible for paying more income tax. When the information on a tax return does not match the information that the IRS has in its records, this situation arises. For example, if a taxpayer doesn't file a tax return for a given year but the IRS thinks that the taxpayer owes tax for that year, the IRS will send the taxpayer warnings telling them that they owe tax for that year and telling them to file a tax return. If the taxpayer does not file a tax return or otherwise respond to the IRS's inquiries, the IRS will eventually make its own determination of the taxpayer's liability for the year and send the taxpayer a notice of deficiency. This will occur if the taxpayer does not file a tax return or otherwise respond to the IRS's inquiries. This paper is also called the 90-day letter and the statutory notice of deficiency. Acronym: SNODHow does one respond to a Notice of Deficiency?
Before the Internal Revenue Service (IRS) sends a formal notice of deficiency to a taxpayer, it is required to first establish whether or not there is a need for the notice and then alert the taxpayer. The Internal Revenue Service will initiate the process if: The Internal Revenue Service (IRS) has reason to think that a taxpayer owes more tax than what the taxpayer declared on their tax return. If a taxpayer does not file a tax return but the IRS deems that the taxpayer still has a tax burden, the taxpayer will be subject to a tax penalty. The Internal Revenue Service will start sending letters and notices to the taxpayer if it is decided that any one of the reasons listed above is accurate. In most cases, these initial communications either inform the taxpayer that their tax return has been chosen for audit, request the taxpayer provide the IRS with documentation to support positions taken on their tax return, or instruct the taxpayer to file any outstanding tax returns that may have been overlooked. Also, these first messages could tell the taxpayer that their tax return has been chosen for an audit. If these initial attempts to resolve the issue are unsuccessful or if the taxpayer does not respond to these communications by the IRS, the IRS will determine the amount of tax that is owed by the taxpayer and send them a notice of deficiency. If the taxpayer responds to these communications from the IRS, the IRS will not determine the amount of tax that is owed by the taxpayer. After that, it is up to the taxpayer to decide whether or not they concur with the amount of tax that the IRS has concluded they are responsible for paying. If the taxpayer is willing to waive the deficiency, the Internal Revenue Service (IRS) will send them a notice of deficiency waiver, which they can sign and then pay the tax. The notice of deficiency waiver, which is often referred to by its official name, Form 5564, is a distinct document from the notice of deficiency. If you do agree with the amount of tax that the IRS says is owed, you need to fill out Form 5564 and either mail it or fax it to the address or fax number that is stated on the notice. If you do not agree with the amount of tax that is owed, you need to contact the IRS. The taxpayer has the option of doing one of the following if they disagree with the amount of tax that the IRS has determined they are responsible for paying:Give the IRS more information to help settle the dispute with them
You have ninety days from the date that is printed on the notice of deficiency to file a petition with the United States Tax Court. The taxpayer has the opportunity to legally challenge the deficiency determination made by the IRS when they file a petition with the Tax Court. Also, if you file a petition with the Tax Court, the IRS can't figure out how much tax you owe or try to collect it until the Tax Court has made its decision. If the taxpayer doesn't respond to the notice of deficiency or file a petition with the Tax Court within the first ninety days after receiving it, the Internal Revenue Service (IRS) will assess the determined tax and start collection operations, if necessary. If a taxpayer who lives outside the United States gets notice of deficiency from the Internal Revenue Service (IRS), they have 150 days instead of 90 days to file a petition with the Tax Court if they disagree with the amount of tax that the IRS says is owed in response to the notice.Notices of Deficiency They come in a variety of shapes and sizes
The Internal Revenue Service (IRS) gives taxpayers several notices of deficiencies tailored to their individual circumstances. Detailed explanations of each notice of deficiency kind can be found down below.IRS Letter 3219
The Internal Revenue Service (IRS) issues notice of deficiencies in the form of letter 3219 to taxpayers with whom it conducted a correspondence audit that did not result in an agreement with the taxpayer. A request for more information about a certain issue or item on the taxpayer's tax return is a correspondence audit.From Notice CP3219A from the IRS
Taxpayers who the IRS has concluded did not adequately state their tax liability on their tax return will get a notice of deficiency in the form of a CP3219A notice from the IRS. This is based on information that the Internal Revenue Service obtained from tax records prepared by third parties such as employers, such as W-2s and 1099s.CP3219B IRS Letter
The Internal Revenue Service (IRS) sends business taxpayers a letter called CP3219B as a notice of deficiency if it determines that the taxpayers underreported their tax responsibilities on their tax returns.CP3219C IRS Letter
The Internal Revenue Service will send a letter 4800C to a taxpayer if it has reason to believe that the amount of the taxpayer's withholding or refundable credits that were reported on their tax return may be erroneous or fabricated. In the event that the taxpayer does not respond to letter 4800C at all or does not react appropriately to the letter, the Internal Revenue Service (IRS) may issue CP3219C to the taxpayer as a notice of deficiency. If a taxpayer wants to avoid getting a notice of deficiency, or CP3219C5, they must respond to Letter 4800C within 30 days of getting it.Notice CP3219N from the IRS:
Individuals who did not submit a tax return but for whom the IRS determined a tax burden based on information provided by third parties will typically get a notice of deficiency in the form of a CP3219N from the Internal Revenue Service (IRS).Letter 531
The Internal Revenue Service (IRS) sends a notice of deficiency in the form of letter 531 to taxpayers with whom it did an in-person audit that did not lead to a deal between the IRS and the taxpayer.Letter 902
As a notice of shortfall for estate or gift taxes, the Internal Revenue Service (IRS) delivers letter 9002. If there is an estate involved, the fiduciary has the ability to file a petition with the Tax Court.Responses to Concerns Regarding Notices of Deficiency
Within the Internal Revenue Service (IRS), there is a department known as the Taxpayer Advocate Service, which is an independent service with the aim of ensuring that taxpayers are treated fairly. The Taxpayer Advocate Service cited a lack of clarity in notices of deficiency as one of the "most serious" faults with the Internal Revenue Service in its 2018 Annual Report to Congress. This report was submitted in conjunction with the organization's fiscal year. Many taxpayers with low and moderate incomes rely heavily on notices of deficiency because they provide them with the opportunity to contest any concerns with their tax return before the case is brought before a federal district court. The 90-day letter is the only way for taxpayers to appeal a decision made by the Internal Revenue Service (IRS) before making a payment. As things are, the Taxpayer Advocate Service found, as stated in its Annual Report to Congress for the year 2018, that the process does not adequately do the following:Immediately inform taxpayers of their legal entitlements.
Make sure that everyone understands their rights by using language that is unambiguous and direct. Make sure that taxpayers have access to the right information about where their local taxpayer advocate is and how they can get help from them. Approximately 59% of those who receive a SNOD have an annual income of less than $50,000.In addition to this, taxpayers with modest incomes are also less likely to file a petition with the Tax Court. The Taxpayer Advocate Service advised that all notices of deficiency be redesigned in order to make SNODs more advantageous to all taxpayers, including those with low and intermediate incomes.Key Takeaways
The Internal Revenue Service (IRS) may send a taxpayer a notice of deficiency. This is a legal notice that says the taxpayer owes a certain amount of tax because the taxpayer's tax return doesn't match the records kept by the IRS. When a taxpayer gets notice of deficiency, he or she can either agree with the notice and pay the tax, try to settle the dispute with the Internal Revenue Service (IRS), or ask the United States Tax Court to hear the case. Within the first ninety days of getting a notice of deficiency from the Internal Revenue Service (IRS), a taxpayer who wants to legally challenge the IRS's decision about how much tax is owed can file a petition with the Tax Court. Depending on the specifics of a taxpayer's case, the Internal Revenue Service (IRS) may give them one of several notices of deficiencies.