What Is a Notice of Deficiency Waiver From the IRS?

When the Internal Revenue Service (IRS) examines a tax return, it may determine that a taxpayer owes additional tax. This situation, known as a tax deficiency, arises when the amount of tax reported by a taxpayer is less than the amount the IRS believes is actually due. Such discrepancies can result from various reasons, including underreported income, overstated deductions, or mathematical errors. The process of resolving a tax deficiency with the IRS involves specific communications and formal steps.

What is an IRS Notice of Deficiency Waiver?

An IRS Notice of Deficiency Waiver, commonly referred to by its form number, Form 870, is a document presented to a taxpayer to formalize an agreement with the IRS’s proposed tax adjustments. This form serves as an acknowledgment that the taxpayer agrees to the additional tax liability determined by the IRS. Its primary function is to allow the IRS to assess and collect the agreed-upon tax without delay.

By signing Form 870, a taxpayer waives their right to receive a formal Notice of Deficiency, often called a 90-day letter. The formal Notice of Deficiency is a legal prerequisite for the IRS to assess additional income, estate, gift, and certain excise taxes if a taxpayer has not already agreed to the change. Agreeing to the Form 870 also means the taxpayer gives up their right to petition the U.S. Tax Court to dispute the deficiency.

The waiver is typically introduced at the conclusion of an IRS examination or audit when the taxpayer and the IRS examiner have reached a mutual understanding and agreement on the proposed changes to the tax return. This agreement allows for a more streamlined and quicker assessment process. The Form 870 is distinct from a formal deficiency notice, which is a legal determination of an outstanding tax liability and includes potential interest and penalties.

Situations Leading to a Waiver Request

The IRS typically presents a Notice of Deficiency Waiver, Form 870, at the conclusion of an IRS audit or examination. During an audit, the IRS reviews an individual’s or organization’s financial records to ensure the information reported on their tax return aligns with tax laws. If the IRS examiner proposes adjustments to the tax return and the taxpayer agrees with these findings, Form 870 is offered. This waiver serves as a mechanism to efficiently resolve the audit findings when an agreement is reached. This allows the IRS to proceed directly with assessing the additional tax, interest, and any applicable penalties.

While most commonly associated with the conclusion of an audit, the waiver can also be used in other specific situations where a taxpayer agrees to additional tax without the need for the IRS to issue a formal statutory notice. This immediate agreement facilitates the assessment process and can prevent further escalation of the matter. The form essentially signals to the IRS that the taxpayer concedes to the proposed tax changes.

Deciding Whether to Sign the Waiver

Signing the Notice of Deficiency Waiver, Form 870, carries direct and immediate consequences for a taxpayer. By executing this document, the taxpayer explicitly agrees to the proposed tax deficiency and, significantly, relinquishes their right to challenge that deficiency in the U.S. Tax Court. Upon signing Form 870, the IRS can immediately assess the tax, applicable interest, and any penalties.

A notable benefit of signing the waiver is its impact on interest accumulation; interest on the deficiency typically stops accruing 30 days after the waiver is filed. This cessation of interest can result in financial savings for the taxpayer.

Before signing, it is important for taxpayers to fully comprehend the implications of the agreement and to be in complete accord with the proposed changes. If a taxpayer agrees with the IRS’s adjustments, signing the waiver can be an efficient way to conclude the examination and mitigate further interest charges. Conversely, signing without full understanding could lead to unintended financial obligations.

What Happens If You Do Not Sign the Waiver?

If a taxpayer chooses not to sign the Notice of Deficiency Waiver or does not respond to it, the IRS will proceed with a more formal step. In such instances, the IRS will issue a formal “Notice of Deficiency,” often known as a 90-day letter. This official communication is a legal document informing the taxpayer of the IRS’s final determination regarding the additional tax owed.

The significance of the 90-day letter lies in the strict deadline it imposes. From the date of the notice, the taxpayer has 90 calendar days to file a petition with the U.S. Tax Court to dispute the deficiency. If the taxpayer’s address is outside the United States, this period is extended to 150 days.

Should the taxpayer fail to file a petition with the U.S. Tax Court within the specified 90-day period, the IRS is then legally permitted to assess the tax, interest, and penalties. Once assessed, the IRS can initiate collection actions, which may include levies or liens. Furthermore, interest continues to accrue on the unpaid tax until the tax is formally assessed and paid, potentially increasing the total amount owed.