What Is a Statutory Notice of Deficiency?
This guide explains the IRS Statutory Notice of Deficiency, detailing the taxpayer's legal standing and the strategic choices within the 90-day response period.
A Statutory Notice of Deficiency is a legal notice from the Internal Revenue Service (IRS) that proposes a change to your tax liability. It is a formal assertion that you owe more in taxes than what was reported on your income, estate, or gift tax return. This document, often called a “90-day letter,” is issued after an audit or when information from third parties, like employers or financial institutions, doesn’t match the information on your return.
The notice’s issuance is required by law before the IRS can formally assess and demand payment for additional tax. Receiving this letter, which may be an IRS Notice CP3219A, triggers a specific timeframe for you to act. It grants you the right to challenge the IRS’s proposed changes in the United States Tax Court before you have to pay the disputed amount.
Understanding the Contents of the Notice
When you receive a Statutory Notice of Deficiency, it is important to review its contents to understand the IRS’s position. The notice will state the proposed additional amount of tax the IRS believes you owe. This figure is broken down to show the principal tax deficiency, any penalties being applied, and the interest that has accrued on the deficiency.
The document will specify the tax year or years under examination, so you know which return is being adjusted. The date the notice was mailed is also included, as this date starts the countdown for your response. The notice will also explicitly state the deadline by which you must respond.
The notice must provide an explanation for the proposed changes. This section details the specific adjustments the IRS has made, such as disallowing certain deductions, adjusting credits, or adding unreported income. The letter will also include information on your right to contact the Taxpayer Advocate Service, an independent organization within the IRS that can assist taxpayers.
Deciding How to Respond
After understanding the notice, you must decide on a course of action, as there are several paths you can take. One option is to agree with the IRS’s determination. If you conclude the proposed deficiency is correct, you can accept the changes by signing and returning an enclosed waiver form, such as Form 5564, Notice of Deficiency – Waiver. Signing this form allows the IRS to assess the tax immediately and send you a bill.
A second path is to disagree and challenge the determination without first paying the tax. This is accomplished by filing a petition with the U.S. Tax Court before the 90-day deadline expires. This action moves the dispute into the judicial system, and it prevents the IRS from assessing the tax or beginning collection activities while the case is pending.
A third strategy involves paying the disputed tax first and then seeking a refund. After payment, you would file a formal claim for refund with the IRS, using Form 1040-X, Amended U.S. Individual Income Tax Return. If the IRS denies your claim or does not act on it within six months, you can then file a lawsuit for a refund in a U.S. District Court or the U.S. Court of Federal Claims.
Filing a Petition with the U.S. Tax Court
If you choose to challenge the IRS’s findings in U.S. Tax Court, you must prepare and file a formal petition. The court has strict rules, and a complete and timely petition is necessary to have your case heard. To file, you will need several pieces of information, and a complete copy of the Statutory Notice of Deficiency must be attached to your petition.
The petition must include:
- Your full name, current address, and taxpayer identification number.
- The specific tax years you are disputing.
- The exact amount of the deficiency you disagree with and the errors you believe the IRS made.
- A summary of the facts that support your position.
The U.S. Tax Court provides a simplified petition form, Form 2, which can be downloaded from the court’s website. The court requires a $60 filing fee, though a waiver may be available if you can demonstrate an inability to pay. The completed petition must be filed with the court either electronically or by mail to its address in Washington, D.C.
The 90-Day Deadline and Consequences of Inaction
The deadline for filing a petition with the U.S. Tax Court is absolute and strictly enforced. The 90-day period, or 150 days for those abroad, begins on the date the Statutory Notice of Deficiency is mailed and cannot be extended by the taxpayer or the IRS for any reason. If the final day falls on a Saturday, Sunday, or legal holiday in the District of Columbia, the deadline is extended to the next business day.
Failing to file a petition within this window has significant consequences. Once the deadline passes, you lose the right to challenge the proposed tax in Tax Court before payment. The IRS is then legally authorized to assess the tax, which officially records the liability and makes it a legally enforceable debt.
Following the assessment, the IRS will issue a formal bill, known as a Notice and Demand for Payment. If the bill is not paid, the IRS can begin its collection process. This can include filing a Notice of Federal Tax Lien, which is a public claim against your property, or issuing levies to seize assets such as wages from an employer or funds from a bank account.