What to Do If You Receive a Notice of Deficiency
Before assessing additional income tax, estate tax, or several other taxes, the Internal Revenue Service (IRS) must issue a Notice of Deficiency. If the IRS realizes that you have under-reported the tax due on your return, the agency will issue you a 30-day letter to address the deficiency.
For example, the agency often sends out a CP2000 if it proposes changes to your tax return. Then, if you don’t dispute the changes, the agency may send a Notice of Deficiency. Sometimes, you may respond to the proposed changes, but if the IRS doesn’t process your response quickly enough, the agency may send out a deficiency notice. Similarly, if you haven’t filed a tax return, the agency may issue a 90-day letter of deficiency.
To help you out, this article explains what a Notice of Deficiency is, how to reply, and what to do if you disagree with the notice. If you’ve recently received a Notice of Deficiency and want help now, contact us today at Damien’s Law.
What is a Notice of Deficiency?
A Notice of Deficiency is the IRS’s notification of a taxpayer’s tax deficiency. It is a formal written notice indicating a taxpayer owes more income tax than what was declared on their tax return. The IRS may also send this notice when it wants to assess income tax against people who have unfiled tax returns.
A Notice of Deficiency is often provided when tax information acquired from a third party, such as an employer or financial institution, does not match the information supplied by the taxpayer. This may result in an increase or decrease in your tax liability.
What is Notice 3219A?
IRS Notice CP3219A is the official name for a deficiency notice. The notice describes any changes to your tax return and how any deficiencies were calculated. It also discusses your options, including signing Waiver Form 5564 to accept the higher tax burden or challenging the liability in the US Tax Court.
What Is CP3219N?
IRS CP3219N is the 90-day deficiency notice that the IRS sends to people with unfiled tax returns. If the IRS believes that you owe tax, but you didn’t file, the agency may send this notice.
The letter outlines how much tax the IRS thinks that you owe. Then, it explains your options. Depending on the situation, you can file a tax return within 30 days, challenge the deficiency in Tax Court, or explain to the IRS why you don’t need to file.
What Is Form 5564?
The IRS provides IRS Form 5564 with Notice CP3219A. The form is known as a Notice of Deficiency Waiver. If you have no objections to the IRS notice, you can sign this waiver, return it, and then make arrangements to pay any taxes due.
How Do I Respond to a Notice of Deficiency?
A Notice of Deficiency is often known as a 90-day letter since it gives you 90 days to dispute the tax assessment in Tax Court. You must respond within 90 days, but the right response depends on the situation. Here are some ways you can respond to your Notice of Deficiency.
Ask for a Deficiency Notice Withdrawal
If you disagree with the IRS’s assessment that you owe more taxes, you can request that the notice be withdrawn by completing IRS Form 8626 (Agreement to Rescind Notice of Deficiency).
This request must be made within 90 days after receiving the deficiency notice. Otherwise, the notice will not be withdrawn. On this request form, you must include information regarding the notice’s tax periods, the types of taxes involved, the amount of tax owed, and any penalties.
Consider consulting with a tax attorney before filing Form 8626. In a lot of cases, it’s more efficient to appeal through the Tax Court, but in cases involving administrative errors or identity theft, this can be the faster option. When you file Form 8626, your case goes directly to appeals, and if they won’t rescind the Notice of Deficiency, you can still file a case with the Tax Court (as long as you’re within the 90-day window).
File a Petition with the US Tax Court
If you disagree with the additional tax and want to challenge it, you can file a petition for redetermination in Tax Court. When you submit a petition, the IRS is prohibited from initiating any collection action (wage garnishment, asset seizure, etc) until the matter is resolved. There are more details about filing a petition in the sections below.
Submit an Offer in Compromise
If you agree with the Notice of Deficiency but cannot afford to pay the tax bill, consider an offer in compromise. The IRS may accept an offer in compromise to settle the tax liability for less than what is owed if paying the bill could cause you financial hardship.
You must meet tight eligibility standards to be approved for an offer in compromise. If approved, you can submit payment for the agreed-upon settlement amount to fix the tax issue. Then, you must stay compliant for about five years, or the IRS may rescind the agreement.
Pay the Tax in Full or Monthly Payments
If you agree with the amount owed, you can settle the case by paying the tax to the IRS. This can be done online or by sending a check or money order to the IRS at the address indicated on the notice.
If you agree to pay the amount owed but are unable to do so in full, you can request an installment agreement to pay the rest over time. Your specific tax position will dictate which payment options are available to you. You can apply for a payment plan online or by mail.
Pay Under Protest and Claim a Tax Refund
If you don’t agree with the tax, but you want a momentary resolution, you can pay the debt mentioned in the notice under protest. Then, file a form to request a tax refund. Consult with a tax attorney before taking this route.
Request An Audit Reconsideration
If you received the deficiency notice after an audit, you may be able to request a reconsideration. Audit reconsideration is generally available to taxpayers who have missed the 90-day deadline for submitting an appeal.
Consider requesting an audit consideration if you disagree with the proposed tax adjustments but did not file an appeal within the statutory window. You can request an Audit Reconsideration when:
- You have new information to provide to the IRS regarding the audit of your income or expenses.
- You disagree with the IRS’s assessment of your tax liability.
- You failed to appear for the audit appointment or deliver your information to the IRS.
- You moved and did not receive the IRS audit report.
You cannot, however, request an audit reconsideration if:
- You have already paid the total amount owed.
- You previously agreed to pay the sum owed.
- The US Tax Court or another court has ruled that you owe the tax.
What If I Disagree with the Deficiency Notice?
As noted above, you have 90 days of receiving this notice to request a recision or file a petition with the US Tax Court. The 90-day period begins when you receive the Notice of Deficiency. The IRS is required by law to include the deadline for filing a petition on the notice. The IRS is additionally prohibited from performing any assessment or collection actions until either the 90-day period expires or a Tax Court decision is issued, whichever comes first.
Should I File a Petition with the US Tax Court?
It is not required for you to submit a petition with the US Tax Court. You may be able to address the matter without going to court if you contact the IRS directly. The person identified at the top of the first page of your Notice of Deficiency can address your questions. You can also send a letter to the address listed at the top of the first page.
If you disagree with the additional tax and wish to contest it, you must file a petition for redetermination in a tax court within 90 days.
How Do I File a Petition with the US Tax Court?
You can file a paper petition by mail or in person, or you can file an electronic petition through the Court’s DAWSON system. You can also hire a tax attorney to file the petition for you.
I Agree with the Notice, What Do I Need to Send?
Waiver Form 5564 is included with your Notice of Deficiency and must be signed and returned to the IRS to notify them that you accept the proposed additional tax. To reduce the penalties on your account, make payment arrangements as soon as possible after filing this form.
How Do I Fill Out Form 5564?
If you accept the Notice of Deficiency and want to complete and submit Form 5564, you must include the following information:
- Your personal and contact information, including your name and address.
- Your tax information, including the kind of tax, the tax year, and the amount owed.
- Your signature and the signatures of your spouses if you filed a joint return.
Once completed, send the form to the IRS at the address listed at the top of your deficiency notice. It’s important to note that your approval does not exclude you from submitting a refund claim (after paying the tax) if you later believe you are entitled to one.
What if I Don’t Respond to the Notice of Deficiency
Suppose you do not sign a Waiver Form 5564 agreeing to the information or file a petition with the Tax Court within 90 days. In that case, the IRS will assess and bill the tax, penalties, and interest specified on the Notice of Deficiency. Then, the IRS may try to collect the bill involuntarily through tax liens, wage garnishments, and asset seizures.
Why Did I Receive the Notice?
The IRS sends a Notice of Deficiency when they receive information from a third party, such as an employer, that contrasts with what you reported on your tax return. Generally, you will receive a notice about proposed changes to your tax return or a notice about not filing before you receive the deficiency notice.
Do I Need to Amend my Return?
If the information in the “changes to your tax return” section of the notice is correct, you do not need to modify your return unless you have additional income, credits, or expenses to declare.
What if I Just Filed My Tax Return?
Suppose you submitted your tax return(s) during the last twelve weeks. In that case, you are not required to do anything when you receive a deficiency notice, but submitting a return does not prolong your deadline for filing a petition with the Tax Court. Thus, if the deficiency notice introduces info that differs from the details reported on your return, you may want to petition the courts.
Can I Have More Time to File My Past-Due Return?
When you receive your notification of deficiency (90-day letter), you have only 90 days (150 days if the notice is sent to someone outside the United States) to file a correct tax return or submit a petition in Tax Court. If you file after that, the IRS will accept your late return, but you may face considerable delays if you file it after the 90-day period has passed.
Is a Notice of Deficiency a Bill?
It is important to recognize that a Notice of Deficiency is not a tax bill. However, if you do not sign Form 5564 consenting to the changes or submit a petition with the US Tax Court within 90 days, the IRS will bill you for the tax, penalties, and interest specified on the notice. This may result in IRS collection efforts.
Get Help With Notices of Deficiency
Have you received this notice? Do you understand the proposed changes to your tax return? If so, do you need help disputing them or agreeing and setting up payments? Have you received a deficiency notice about unfiled tax returns? Do you need help responding or filing tax returns?
Regardless of where you are in this process, you have come to the right place. At Damien’s Law, we help clients deal with IRS audits, tax return adjustments, unfiled returns, collection notices, and all kinds of other tax problems. Don’t wait or you could miss an important deadline. Instead, contact us and get help today.