How to Respond to a Notice of Proposed Assessment

A Notice of Proposed Assessment (NPA) is a formal letter from a tax agency, such as the Internal Revenue Service (IRS) or a state’s revenue department. This document informs a taxpayer about a proposed change to their tax return, which typically results in additional tax owed, along with potential penalties and interest. An NPA is a proposal, not a final bill, and it signifies the beginning of a process where taxpayers have the right to respond to the agency’s findings before a final determination is made.

Understanding the Notice

Upon receiving a Notice of Proposed Assessment, carefully dissect the document to understand its components. You should verify your taxpayer identification information, such as a Social Security Number or Employer Identification Number, for accuracy. It will also state the specific tax year or periods under review. The response deadline, which is often 30, 60, or 90 days from the date on the letter, is a time-sensitive element; missing this deadline can forfeit your right to dispute the changes.

The notice includes a detailed breakdown of the proposed amount due. This section will itemize the additional tax, any penalties being applied, and the interest that has accrued on the unpaid tax. For example, the IRS might apply a failure-to-pay penalty of 0.5% of the unpaid taxes for each month or part of a month that the taxes remain unpaid, capped at 25% of your unpaid liability. The notice will also include a section that provides the agency’s reasoning for the proposed changes.

Deciding How to Respond

After thoroughly reviewing the notice, you must decide whether to agree or disagree with the proposed assessment. If you find the agency’s adjustments to be correct, you will sign a response form included with the notice acknowledging your agreement. Once the agency receives this, the proposed assessment becomes final, and you will be sent a formal bill for the total amount due.

Conversely, if you believe the proposed changes are incorrect, you have the right to disagree. This action requires you to formally challenge the agency’s findings through a written protest. Choosing to disagree initiates a formal dispute resolution process where you will need to present your case and supporting evidence to the tax agency.

Preparing Your Formal Protest

When you decide to disagree, the first step is to compare your original tax return with the adjustments detailed in the notice. This review helps pinpoint the exact items in dispute, whether it is unreported income, disallowed business expenses, or incorrect tax credits. You must then gather all supporting documentation that substantiates your position, such as receipts, bank statements, legal agreements, or corrected informational returns like a Form W-2 or 1099.

Your formal protest letter must contain specific elements to be considered valid. It must include:

• Your name, address, and a daytime telephone number.
• The tax periods involved and a copy of the letter showing the proposed changes.
• A clear statement that you are appealing the findings and a list of the specific adjustments you dispute.
• A summary of the facts that support your position for each disputed item.

The statement of facts must be signed under the declaration: “Under penalties of perjury, I declare to the best of my knowledge and belief, the information contained in this protest and accompanying documents is true, correct, and complete.”

The level of detail required in your response can depend on the amount in dispute. A formal written protest is required for proposed adjustments over $25,000 per tax period. A formal protest is also required for all partnership, S corporation, and certain employee plan or exempt organization cases, regardless of the amount. In these formal protests, you should also cite the specific laws or other authorities that support your argument. For other cases involving $25,000 or less, you can opt for a simpler “small case request” instead of a full formal protest.

The Protest Submission Process

The correct mailing address for your protest will be specified in the Notice of Proposed Assessment you received. It is recommended to send the protest package using a trackable method, such as certified mail with a return receipt requested. This provides you with a dated proof of mailing and confirmation of delivery, which is valuable for proving you met the response deadline.

After submitting your protest, the tax agency will send an acknowledgment of receipt. The case is then assigned to an appeals officer who will conduct an independent review of your protest and the initial findings. This review process can take several months, during which the appeals officer may contact you for additional information. The outcome could be a conference to discuss the case or a final determination letter that upholds, reverses, or modifies the original proposed assessment.