IRS Notice of Deficiency Increase in Tax: What to Do Next
Receiving an IRS Notice of Deficiency requires a timely decision. This guide clarifies the choices you have and the specific actions required for each path.
An IRS Notice of Deficiency, often called a “90-day letter,” is a legal notice sent via certified mail that proposes a change to your tax liability. It is not an immediate bill but a formal assertion that you owe additional tax, sent after an audit or when your return’s information doesn’t match data from third parties. The notice, which can be a Letter 3219 or Letter 531, starts a strict timeline for you to respond.
If you have not previously responded to IRS inquiries or consented to proposed changes, the agency sends this notice. It provides you with the legal right to challenge the proposed deficiency in the United States Tax Court before paying. Failure to act within the specified timeframe forfeits this right and allows the IRS to assess the tax.
Understanding Your Notice of Deficiency
Upon receiving a Notice of Deficiency, review the document to understand the IRS’s position. The notice will specify the tax year or years under examination and present a proposed amount of additional tax, referred to as the deficiency.
The notice also details any penalties the IRS is proposing, such as accuracy-related penalties for a substantial understatement of tax or failure-to-pay penalties. The letter will provide a brief explanation for why each penalty is being applied.
Finally, the notice will include calculations for interest accrued on the proposed deficiency from the original due date of the tax return. The date on the notice starts the 90-day period to file a petition with the U.S. Tax Court, which is extended to 150 days if the notice is addressed to you outside the United States.
Required Information and Decisions for Your Response
To analyze the IRS’s claims, gather your financial records, starting with your copy of the tax return for the year cited in the notice. Compare the figures on your return with the adjustments proposed by the IRS. You will need to collect all supporting documentation you used to prepare that return, including:
- Forms W-2 from employers
- Forms 1099 from payers
- Any records of income that did not generate a form
- Receipts, bank statements, and canceled checks that substantiate any deductions or credits
- Prior IRS correspondence about this tax year, such as a CP2000 notice or a formal audit report.
After a thorough review of your documents, you must decide whether to fully agree, fully disagree, or partially agree with the proposed changes. This decision is the foundation for the procedural path you will take.
Procedural Steps for Responding to the Notice
If you agree with the IRS’s findings, you will need to sign and return the waiver form included with your notice, which is often a Form 4089. Signing this form allows the IRS to assess the tax immediately without waiting for the response period to expire. After returning the waiver, you should arrange to pay the amount due, which can be made online through the IRS Direct Pay system or by mailing a check with the payment voucher.
If you disagree with the notice, your formal recourse is to challenge the determination in court without first paying the tax by filing a petition with the U.S. Tax Court. The Tax Court provides a petition form on its website, which you must complete, explaining which adjustments you dispute and why you believe they are incorrect. The completed petition must be mailed to the U.S. Tax Court in Washington, D.C., or filed electronically through the court’s eFiling system before the deadline expires. There are no extensions to this statutory deadline.
Consequences of Your Response or Inaction
If you agree with the deficiency, sign the waiver, and pay the amount owed, the IRS will formally assess the tax. This action generally closes the case for that tax year, and you will receive a final bill for the assessed amount.
Filing a petition with the U.S. Tax Court means the IRS is legally barred from assessing the disputed tax or taking collection action while the case is pending. After your petition is filed, your case is referred to the IRS Independent Office of Appeals to try and negotiate a settlement.
If you fail to respond to the Notice of Deficiency within the allowed timeframe, the IRS will automatically assess the tax, penalties, and interest detailed in the notice. The proposed deficiency becomes a legal debt. Following the assessment, the IRS will send a formal bill demanding payment, and if you do not pay, the agency can begin its collection process, which may include filing a federal tax lien or issuing a levy on your wages or bank accounts.