Notice of Deficiency Letter: What to Do Next

A Notice of Deficiency is a formal legal notice from the Internal Revenue Service (IRS) proposing a change to your tax liability. It is not a bill, but a declaration that the IRS believes you owe more tax than reported. This document, often a CP3219A notice, means the IRS has completed a review and determined a deficiency, which may include penalties and interest.

Understanding the Notice of Deficiency

The Notice of Deficiency imposes a strict 90-day deadline, often causing it to be called a “90-day letter.” This is the period a taxpayer has to file a petition with the U.S. Tax Court to dispute the findings before the tax is assessed. The 90-day count begins on the date the notice is mailed to your last known address, and the IRS cannot extend it. If the notice is addressed to someone outside the United States, this period is extended to 150 days.

The notice states the tax year or years in question and the exact amount of the proposed deficiency. It also provides a breakdown of how the deficiency was calculated, including any penalties and accrued interest. Common penalties include accuracy-related penalties, which can be 20% of the underpayment for issues like negligence or substantial understatement of income tax.

A Notice of Deficiency is issued after an IRS audit or when a taxpayer fails to respond to a less formal notice. For instance, if the IRS sent a CP2000 notice about a data mismatch and the taxpayer did not resolve the discrepancy, a statutory Notice of Deficiency often follows.

Deciding How to Respond

You can either agree or disagree with the IRS’s proposed changes. Agreeing with the deficiency is the most straightforward option. This involves signing the enclosed waiver form, Form 5564, which allows the IRS to assess and bill you for the amount shown on the notice and waives your right to petition the Tax Court.

If you disagree with the IRS’s findings, the recourse is to challenge the determination in U.S. Tax Court. Filing a petition allows you to contest the proposed deficiency without first paying it, a principle known as “prepayment review.” This is a feature of the Tax Court not available in other federal courts.

It is also possible to pay the disputed tax amount to stop interest from accruing while still proceeding with a Tax Court petition. This action does not forfeit your right to challenge the deficiency. This can be a strategic choice for those who wish to mitigate interest charges but still believe the IRS determination is incorrect.

Preparing a US Tax Court Petition

To disagree with a Notice of Deficiency, you must file a petition with the U.S. Tax Court using Form 2, which is available on the court’s website (ustaxcourt.gov).

The petition requires specific information from the Notice of Deficiency, including:

• Your full name, current address, and taxpayer identification number
• The date the Notice of Deficiency was issued and the city and state of the IRS office that sent it
• The specific tax years involved
• The exact dollar amount of the deficiency and any proposed penalties

You must also explain the errors you believe the IRS made, listing each specific adjustment you disagree with. Following this, you must provide a summary of the facts that support your position. These facts should be clear and directly related to the identified errors.

Filing the US Tax Court Petition

The completed petition must be filed with the U.S. Tax Court within the 90-day period. You can file by mail or electronically. To file by mail, send the petition to the Clerk of the U.S. Tax Court in Washington, D.C. 20217, using certified or registered mail to establish a postmark date as proof of timely filing.

The second method is electronic filing through the court’s online system, DAWSON, which is the court’s preferred method. After the petition is filed and the $60 filing fee is paid, the court will docket the case.

Upon docketing, the court serves a copy of the petition on the IRS Chief Counsel’s office. The case is then referred to the IRS Independent Office of Appeals, providing an opportunity to negotiate a settlement before a trial.

Responding After the 90 Day Deadline

Missing the 90-day deadline to file a Tax Court petition forfeits the opportunity to challenge the proposed deficiency before payment. The IRS will then assess the tax, penalties, and interest from the notice. You will then receive a formal bill and demand for payment.

The remaining recourse is to first pay the full amount of the assessed tax deficiency. After payment, you must file a formal claim for a refund with the IRS. This is done by filing an amended tax return, Form 1040-X, for the tax year in question, detailing why a refund is warranted.

If the IRS denies the refund claim or fails to act on it within six months, you gain the right to sue for a refund. This lawsuit must be filed in either your local U.S. District Court or the U.S. Court of Federal Claims, not the U.S. Tax Court. This “pay-then-sue” process is a different route for challenging an IRS determination.