What Is a Hammer Letter From the IRS?

When the Internal Revenue Service (IRS) communicates proposed changes to a taxpayer’s return following an examination, this interaction is often informally known as a “hammer letter.” This term signals a critical juncture in a tax dispute. It serves as a formal notification from the IRS indicating proposed adjustments to a tax return and offers a final opportunity for the taxpayer to agree before the agency takes further formal action. This correspondence is a pivotal step in the IRS’s process to resolve tax liabilities.

Understanding the Hammer Letter

The “hammer letter” is an informal term for a formal IRS communication, typically referred to as a “30-day letter.” This notice, which can manifest as various forms like Letter 950 or include forms such as Form 4549 (Income Tax Examination Changes) or Form 886-A (Explanation of Items), is issued after an audit or examination has concluded. Its primary purpose is to inform the taxpayer of proposed adjustments to their tax liability, which may include additional tax, penalties, and interest. The letter provides a final opportunity for the taxpayer to agree to these proposed changes.

The comprehensive package usually contains a cover letter, an examination report detailing the proposed adjustments, and instructions on how to respond. Form 4549 outlines the IRS’s proposed changes to income, deductions, credits, and the resulting tax liability, along with any applicable penalties and interest. Form 886-A, often attached to Form 4549, provides detailed explanations for the proposed adjustments or requests additional information. This communication seeks agreement from the taxpayer and precedes more formal collection or litigation steps if no resolution is reached.

Circumstances Leading to a Hammer Letter

An IRS audit begins when a tax return is selected for examination, often due to statistical anomalies flagged by the IRS’s computer systems or discrepancies with information reported by third parties, such as employers or financial institutions. Once selected, an IRS examiner reviews the taxpayer’s records, income, and expenses. This examination process can range from a simple correspondence audit, handled by mail, to more extensive office or field audits conducted in person.

During or after this examination, the examiner proposes changes to the taxpayer’s tax liability based on their findings. There is an opportunity for the taxpayer or their authorized representative to discuss these findings with the examiner, aiming to clarify discrepancies or provide additional supporting documentation. A “hammer letter” is issued when the taxpayer and the IRS examiner cannot reach an agreement on the proposed adjustments, or if the taxpayer fails to respond to initial attempts to discuss the findings. It signifies that the audit process at the examiner level has concluded without mutual consent on the tax liability.

Navigating Your Options

Upon receiving a “hammer letter,” taxpayers have several pathways to consider. One option is to agree to the proposed adjustments by signing and returning the agreement form, such as Form 4549. If the taxpayer agrees, the IRS will formally assess the additional tax, penalties, and interest, and then issue a bill for the amount owed. This action closes the audit for the specific tax period.

Alternatively, a taxpayer can disagree with the proposed adjustments and choose to appeal the IRS’s determination. This involves requesting a conference with the IRS Independent Office of Appeals, an administrative process designed to resolve tax disputes without litigation. For disputed amounts exceeding a certain threshold, the taxpayer must prepare and submit a formal written protest outlining the reasons for disagreement and their position. The Appeals Office provides an independent review, offering an opportunity for settlement based on the hazards of litigation.

Not responding to the “hammer letter” within the specified timeframe, usually 30 days, will lead to further formal action by the IRS. The IRS will then proceed with assessing the proposed tax and initiating subsequent steps in the collection process. Consulting with a qualified tax professional, such as a Certified Public Accountant (CPA), tax attorney, or Enrolled Agent, is recommended. These professionals can evaluate the proposed adjustments, assist in preparing a response, and represent the taxpayer throughout the appeals process.

What Happens Next

If a taxpayer does not agree to the proposed adjustments after receiving a “hammer letter” and does not pursue an appeal or fails to respond, the IRS will take the next formal step by issuing a Notice of Deficiency. This communication is also known as a “90-day letter” because it provides the taxpayer with a 90-day window to respond. The primary purpose of this notice is to inform the taxpayer of their legal right to petition the U.S. Tax Court to challenge the IRS’s determination.

This petition must be filed within the 90-day deadline from the date the Notice of Deficiency was mailed; for taxpayers located outside the United States, this period extends to 150 days. If no petition is filed with the U.S. Tax Court within this statutory period, the IRS can proceed with assessing the tax and initiating collection actions, such as liens or levies. Neither the “hammer letter” nor the Notice of Deficiency constitutes a demand for immediate payment; rather, they establish the taxpayer’s right to dispute the proposed tax liability.