What to Do If You Receive a Notice of Deficiency 

Received a Notice of Deficiency from the Internal Revenue Service (IRS)? You’re not alone. This notice means that the IRS thinks you owe more tax money than you reported. But the agency doesn’t make this determination overnight; it’s a formal step it must take before it can legally force you to pay. 

The IRS issues a Notice of Deficiency after an extensive review of your tax return. If the IRS finds errors, like underreported income or a deduction it disagrees with, the agency may send a CP2000 notice. This notice proposes changes to your tax return. If you don’t dispute the changes, or the IRS doesn’t process your response quickly enough, it may send a deficiency notice. The IRS also uses Deficiency Notices to assess tax in years that you haven’t filed a return.

Keep reading to learn more about what a Notice of Deficiency is, how to reply, and what to do if you disagree with the notice. If you’ve recently received this notice and want help now, contact us today at Damiens Law. 

Key takeaways

• Notice of Deficiency – the IRS believes you owe tax due to underreporting on a return or for a year you didn’t file. 
• Response deadline if you disagree – 90 days (150 days if out of the country) from the notice date to dispute it by filing a petition with the U.S. Tax Court
• If you agree – sign the attached Form 5564 and make payment arrangements on the tax debt. 
• If you don’t respond – the IRS will assess the tax and move forward with collections.

What is a Notice of Deficiency? 

A Notice of Deficiency is the IRS’s official way of saying, “We think you owe us more money.”. It’s a formal written notice that tells you:

• The IRS calculated a higher tax bill than the one you reported on your tax return, or
• The IRS calculated a tax bill for a year when you didn’t file a return at all 

You may receive a Notice of Deficiency when tax information acquired from a third party, such as your employer or bank, doesn’t match the information you provided.. The IRS uses this notice to let you know they think the tax bill should be higher, based on the mismatch. It’s the first step to figuring out what’s correct. Typically, these notices are either labeled as 3219A or 3219N.

What is Notice 3219A? 

IRS Notice CP3219A is the official name for a deficiency notice. It clearly outlines the changes the IRS proposes to your tax return and how it calculated the tax it thinks you owe. The notice gives you two main paths forward:

• Accept the changes by signing Form 5564.
• Formally challenge the IRS’s decision by filing a petition in the U.S. Tax Court within the 90-day window

What Is CP3219N?

The IRS sends the IRS CP3219N to people with unfiled tax returns. If the agency believes that you owe tax, but you didn’t file, the agency may send this notice. 

The letter outlines the amount of tax the IRS thinks you owe and your options. Depending on the situation, you can:

• File a tax return within 30 days.
• Challenge the deficiency in Tax Court within 90 days.
• Explain to the IRS why you don’t need to file.

What Is Form 5564? 

Notice CP3219A also comes with IRS Form 5564, known as a Notice of Deficiency Waiver. It’s basically an “I agree” button for the proposed tax changes. If you agree with the IRS’s changes, you can sign and return this waiver and then make arrangements to pay the extra taxes you owe. 

How to Respond to a Notice of Deficiency

The right response depends on whether you disagree with the notice. Here’s a brief overview of the options, or keep reading for a more detailed look at what to do if you agree or disagree.

The “moral” of this story? If you don’t know what to do, consider contacting a tax attorney, such as Damiens Law.

What Should I Do If I Disagree with the IRS? 

You have three months from the date on the notice to request a recission (cancellation) or file a petition with the U.S. Tax Court. The 90-day period typically begins when the IRS sends the Notice of Deficiency, and by law, the IRS must include the deadline on the notice. The IRS is prohibited from conducting any assessment or collection actions until the 90-day period expires or the Tax Court issues a decision, whichever comes first.

Here are the options if you disagree.

Ask for a Deficiency Notice Withdrawal 

If you disagree with the IRS’s assessment that you owe more taxes, you can complete IRS Form 826 (Agreement to Rescind Notice of Deficiency) to request that the notice be withdrawn.

You must make this request within 90 days after receiving the deficiency notice. Include information about the notice’s tax periods, type of taxes involved, the tax amount owed, and any penalties. 

Form 8626 sends your case directly to appeals; if they don’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).

Consider talking to a tax attorney before you file Form 8626. In many cases, Tax Court is the best option. However, if your situation involves administrative errors or identity theft, it may make more sense to file this form. 

File a Petition with the U.S. Tax Court 

If you disagree with and want to challenge the additional tax, you can file a petition for redetermination in Tax Court. Submitting a petition stops the IRS from initiating collection action (wage garnishment, asset seizure, etc) until the matter is resolved.

Pay Under Protest and Claim a Tax Refund 

If you disagree with the tax, but you want a temporary resolution, you can pay the debt outlined in the notice under protest and then file a form to request a tax refund. Consult with a tax attorney before taking this route.

A tax attorney can help you file a formal Claim for Refund (Form 843). You must file this claim within a specific timeframe (usually three years from the date you filed the original return or two years from the date you paid the tax). A tax attorney will guide you through the process to ensure you complete the process correctly.

Request An Audit Reconsideration 

If you received the deficiency notice after an audit, you may still be able to request a reconsideration. If you’ve missed the deadline to submit an appeal, you may still have this option.

Consider requesting an audit consideration if you disagree with the proposed tax adjustments but didn’t file an appeal within that statutory window. You may be able to request an audit reconsideration when:

• You have new information for the IRS about its audit of your income or expenses. 
• You disagree with the IRS’s assessment of your tax liability.
• You missed the audit appointment or didn’t deliver your information to the IRS.
• You moved and didn’t receive the IRS audit report.

You cannot, however, request an audit reconsideration if: 

• You’ve already paid what you owe.
• You agreed previously to pay what you owed. 
• The U.S. Tax Court or another court ruled that you owe the tax.

I Agree with the Notice. What Should I Do? 

Your Notice of Deficiency will include Waiver Form 5564, which you must sign and return to the IRS if you accept the proposed additional tax. To reduce the penalties on your account, pay in full or 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, include: 

1. Your personal and contact information, including your name and address.
2. Your tax information, including the kind of tax, the tax year, and the amount owed.
3. Your signature and the signatures of your spouse, 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. Please note: your approval doesn’t exclude you from submitting a refund claim (after paying the tax) if you later believe you are entitled to one.

What If I Can’t Pay in Full

If you can’t pay in full, consider exploring one of the following payment or relief options. You can apply directly with the IRS or work with a tax attorney:

• Installment Agreement – Make monthly payments on your tax debt. You can get up to 10 years or until the collection statute expiration date, if sooner, to pay off your balance. 
• Offer in Compromise – The IRS may accept an OIC to settle the tax liability for less than the full amount if doing so would cause financial hardship. You must meet strict eligibility standards to qualify for an OIC. If approved, you’ll pay the agreed-upon settlement amount to resolve your tax debt. You must stay compliant with your taxes for about five years, or the IRS may rescind the settlement.
• Currently Not Collectible Status – If you prove that you can’t pay anything without facing extreme hardship, the IRS will mark your account as CNC and stop all collection actions. This status is only temporary until your finances improve. 

What if I ignore the Notice of Deficiency 

If you don’t sign a Waiver Form 5564 agreeing to the information or don’t file a petition with the Tax Court within 90 days, the IRS will assess and bill the tax, penalties, and interest specified on the Notice of Deficiency. The IRS may also try to collect the bill involuntarily through tax liens, wage garnishments, and asset seizures.

FAQs 

Why Did I Receive a Notice of Deficiency? 

The IRS sends a Notice of Deficiency when it receives information from a third party, such as an employer, that differs from what you reported on your tax return. Generally, you’ll 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 don’t need to modify your return unless you have additional income, credits, or expenses to declare. 

What if I Just Filed My Tax Return? 

If you submitted your tax return(s) during the last twelve weeks, you’re not required to do anything when you receive a deficiency notice. However, submitting a return doesn’t extend your deadline for filing a petition with the Tax Court. If the deficiency notice includes information different from what you 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 exactly 90 days (150 days if the notice is sent 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 still 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? 

Remember: a Notice of Deficiency is not a tax bill. However, if you don’t sign Form 5564 consenting to the changes or submit a petition with the U.S. Tax Court within 90 days, the IRS will bill you for the tax, penalties, and interest specified on the notice. Then, the agency may move forward with collection efforts.

Get Help With Notices of Deficiency

If you’ve received a Notice of Deficiency and you need help, you’ve come to the right place. We can help you

• Understand the IRS’s proposed changes to your tax return.
• Dispute changes if you disagree.
• File a petition in Tax Court if needed.
• Set up payments or apply for relief if you agree with the changes.
• File unfiled returns

Damiens Law helps clients in all stages of this process navigate IRS audits, tax return adjustments, unfiled returns, collection notices, and various other tax problems. Don’t wait, or you could miss an important deadline. Instead, contact us and get help today.