What Is a Notice of Deficiency Proposed Increase in Tax?

A Notice of Deficiency is a legal determination from the Internal Revenue Service (IRS) stating that you owe additional tax. Often called a “90-day letter,” it is sent by certified mail after an audit or review results in proposed changes that you have not agreed to. The notice is not a bill, but a formal proposal that starts a strict timeline for your response.

It details the proposed tax increase, penalties, and interest, and is sent when prior attempts to resolve discrepancies, like unreported income or disallowed deductions, have failed.

Receiving this notice grants you the right to challenge the IRS’s determination in U.S. Tax Court before paying the disputed amount. This is why the notice is often called your “ticket to Tax Court.”

Understanding Your Notice of Deficiency

The first page of the notice contains the Notice Date, which starts a strict 90-day period to file a petition with the U.S. Tax Court. This deadline is extended to 150 days if the notice is addressed to you outside the United States. The timeframe is absolute and cannot be extended.

The notice includes a summary of the proposed changes, often in a table. This section lists the additional tax the IRS believes you owe by tax year. It also shows any penalties being applied and the interest that has accrued on the deficiency.

For a detailed breakdown, look for an attached document like Form 4549-A, Income Tax Examination Changes. This form gives a line-by-line explanation of the adjustments to your tax return. It specifies the items the IRS has changed and provides the reason for each adjustment.

The package will also include response forms. You will find a waiver form, such as Form 4089, Notice of Deficiency-Waiver, to agree with the changes. It may also include information on or a copy of the Tax Court Petition form, T.C. Form 2, used to disagree and start a case.

Your Response Options and Their Consequences

You can agree with the IRS’s determination. If you agree, you accept the proposed adjustments and waive your right to challenge the matter in Tax Court. The IRS will then assess the additional tax, penalties, and interest and send you a bill for the total amount due.

Another option is to disagree and petition the U.S. Tax Court, which allows you to challenge the findings without first paying. Filing a petition starts a legal case and stops the IRS from assessing the tax or beginning collection activities for the disputed amount while the case is pending.

You can also choose to do nothing. If you do not respond within the 90-day period, you forfeit your right to go to Tax Court. The IRS will automatically assess the proposed tax deficiency and begin the collection process, which can include filing a tax lien against your property or levying assets like bank accounts and wages.

Challenging the Proposed Increase in Tax Court

To challenge the IRS’s findings, you must file a petition with the U.S. Tax Court using T.C. Form 2, available on the court’s website. On the petition, you must provide identifying information from your Notice of Deficiency. You must also state the tax years in dispute and the specific dollar amounts of the deficiency and penalties you are disputing.

The petition must state each error you believe the IRS made. List each specific adjustment from the notice that you disagree with. For each disputed item, you must state the facts you are relying on to prove the IRS is incorrect, but do not attach tax records or other evidence to the petition.

The completed petition can be filed electronically or by mail with the U.S. Tax Court in Washington, D.C. A $60 filing fee is required, though a waiver is available for financial hardship. After your petition is filed, the case is often referred to the IRS Independent Office of Appeals, which provides an opportunity to negotiate a settlement before trial.

Agreeing with the Proposed Increase

If you agree with the proposed changes, you can sign and return the waiver form included in the notice package, Form 4089. Signing this form allows the IRS to assess the tax immediately instead of waiting for the 90-day period to end. This can stop interest from accumulating sooner.

Mail the signed waiver to the IRS address provided. When you submit the form, you can include a full or partial payment for the proposed tax and interest.

If you do not include payment, the IRS will process the waiver, assess the deficiency, and send you a bill for the total amount. This bill will include the tax, penalties, and all accrued interest. You will then need to pay the balance or contact the IRS to discuss payment options like an installment agreement.