What is an IRS Notice of Deficiency?

What is an IRS Notice of Deficiency?


Receiving an IRS notice of deficiency doesn’t necessarily mean that you will wind up with a number of legal troubles. However, it does mean that you should immediately speak with an experienced tax attorney from Abajian Law about your situation. A notice of deficiency, also known as a 90-day letter,is a letter that must be sent to a taxpayer before the IRS can begin to collect taxes in income or estate tax cases.

Why is a Notice of Deficiency Also Called a 90-Day Letter?

The recipient of the IRS notice of deficiency letter has only 90 days from the date issued on the notice to file a petition with the IRS. Once you file the petition with the IRS, the agency cannot collect the taxes you owe until a hearing is held in front of the United States Tax Court or you are able to come to an agreement with the IRS on the taxes you owe.

Understanding the Notice of Deficiency IRS

Taxpayers are often sent a notice of deficiency (CP3219A notice) because the IRS has received information from employers or creditors about them that is different from the information found on their tax returns. The difference in information may lead to higher or lower taxes owed to the IRS. A notice of deficiency will explain the following:

  • How the amount of taxes owed was calculated
  • The steps taxpayers can take if they agree or disagree with the amount owed
  • How the taxpayer can challenge the ruling in Tax Court

What to do if Issued a Notice of Deficiency

If you receive a notice of deficiency, be sure to read the document in its entirety. The amount stated on Form 5564, Notice of Deficiency – Waiver, might be different from what your tax return says you owe the IRS. It is important to take note of the different amounts because not every item can be argued in Tax Court. You can take the following steps to respond to the notice:

  • If you agree with the changes on the notice, sign Form 5564 and mail or fax it to the IRS;
  • If you disagree with the changes on the notice, file a petition with the Tax Court by the date listed on the notice; or
  • If you disagree with the changes on the notice and have additional information for the IRS to review, send that information to the agency and also file a petition as this will not extend the amount of time permitted to file the petition.

How to Handle Incorrect Information on Your Tax Returns

Having incorrect information on your tax return can make your life difficult. It is important that you review all of your other returns to ensure that the information on them is correct and doesn’t match the incorrect information found on your federal income tax return. If you find incorrect information on additional returns, file Form 1040-X (Amended U.S. Individual Income Tax Return) to ensure that the mistakes are corrected.

It is important to keep the notice of deficiency tax court in your records. If possible, make multiple copies of it in the event that you lose the original. You should also correct the information on your copy of the tax return that is incorrect even though it has already been filed with the IRS.

What if I Don’t File a Petition?

If you decide against filing a petition with the Tax Court, you will be unable to fight the increase in tax amount sent by the IRS until the taxes due are paid in full even if you have information that proves the IRS is wrong in its decision. If you choose this route, you will need to request a refund from the IRS by filing one of the following forms:

  • Form 1040X
  • Form 1120X
  • IRS Form 843

You still won’t be able to appear in court until the initial claim you filed has been denied by the IRS or six months have passed since the claim was filed. If you wind up having a hearing in Tax Court, there will be limitations as to what you will be allowed to challenge.

How to Respond to IRS Notice of Deficiency

Deciding to file a petition with the IRS upon receipt of a notice of deficiency is the best route for you to take, especially if the IRS notified you of an increase in the amount of taxes you owe. Once you have filed a petition, the IRS has just 60 days to answer it with the Tax Court. You will receive a copy of the answer submitted by the IRS via mail.

The majority of answers recorded by the IRS with the Tax Court often deny statements made by taxpayers aside from their names and addresses. However, if the IRS has other issues to raise regarding your taxes or information, it must raise them in the answer filed with the Tax Court.

If the IRS accused you of fraud in its answer to the Tax Court, the agency will lay out all of the evidence it has of tax fraud. You will then be given an opportunity to reply to the IRS’ answer to your petition.

IRS Notice of Deficiency Appeal

After you have submitted a reply to the IRS’ answer to your petition, you will be given an opportunity to settle the case with the IRS. The Appeals Office of the IRS will contact you to schedule a hearing. In some instances, the IRS will concede their position once the case reaches the Appeals Office. In other instances, the IRS will not budge when meeting with the taxpayer about the new amount owed to the agency. For the most part, the IRS will only settle with the taxpayer if the following issues are present:

  • The IRS is concerned about evidence admissible in court
  • The IRS is concerned about the factual findings of the Tax Court
  • The IRS is concerned about the Tax Court’s interpretation of the law

IRS Notice of Deficiency Payment Plan

Should you be required to pay the new amount set forth by the IRS, you can create a plan for IRS notice of deficiency payment. The IRS provides payment plan options for taxpayers who cannot afford to pay the full amount of taxes owed when filing their tax returns. It is important to note that interest will be charged on the new amount until it is paid in full with the agency. This means that even if you create a payment plan, interest will accrue on the full amount owed until the payment plan has been completed. The IRS accepts payments via the following methods:

  • Credit cards
  • Debit cards
  • Check
  • Payroll deductions

If you agree with the changes issued by the IRS on the notice of deficiency waiver Form 5564, you should sign the IRS notice of deficiency response form and complete and file Form 9465 (Installment Agreement Request) to set up your payment plan with the IRS.

Am I Required to Amend My Tax Return?

When you are issued a tax court notice of deficiency, you do not have to amend your tax return with the IRS if the information found on the “changes to your tax return” section of the notice is correct. You only have to amend your tax return if you have additional income to report, additional expenses to report, or credits to report to the IRS.

Should you have additional expenses, income, or credits to report to the IRS, be sure to complete Form 1040-X (Amended U.S. Individual Income Tax Return) and write CP3219 on the top of the return so that the agency knows you are amending it. The amended return should be attached to Form 5564. The amended return should be mailed or faxed to the address or number provided on the notice of deficiency waiver and not sent to any other office of the IRS.

Tips for Future Filing Years

Having to deal with incorrect information on your tax return is stressful. You can avoid this problem in future filing years by doing the following:

  • Keep all of your records accurately and completely;
  • Do not file your tax return until you have all of your income statements;
  • Check all of the documents received from employers, banks, and mortgage companies for incorrect information;
  • Include all of the income you made in the year on your tax return;
  • Follow instructions provided by the IRS on how to report expenses, deductions, and income correctly; and
  • File an amended income tax return should you receive additional information after you filed the original return.

Fewer mistakes are made when income tax returns are filed online. Taxpayers often also find deductions and credits they qualify for when filing taxes online with the IRS, which is often free of charge.

Issued a Notice of Deficiency? Contact a Tax Attorney Immediately

If you have been issued a notice of deficiency which resulted in an increase in tax by the IRS, you should contact an experienced tax attorney immediately. Doing so will ensure that your rights are protected when dealing with the IRS and that you are properly represented should your case go to trial in the Tax Court.

Call the office of Abajian Law at (818) 396-5059 to schedule a consultation with a tax attorney. We have offices in Glendale, Los Angeles, and Irvine to better serve our clients. We will fight to protect your rights when dealing with IRS tax issues.

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