What Is a Statutory Notice of Deficiency?

A Statutory Notice of Deficiency is a formal legal document from the Internal Revenue Service (IRS) stating the agency believes a taxpayer owes more tax than was reported on their return. This notice serves as a legal prerequisite for the IRS to assess additional tax. Its purpose is to inform the taxpayer of a proposed increase in their tax liability and grant them a specific timeframe to challenge that determination in the United States Tax Court before payment is required.

The notice is not a bill. Instead, it represents the conclusion of an IRS audit or review, triggered by discrepancies between a tax return and data the IRS receives from third parties. Receiving this document signifies a moment where a taxpayer must decide how to proceed, as it opens a direct path to litigating the dispute.

Key Information Included in the Notice

A Statutory Notice of Deficiency contains several components that explain the IRS’s position. The notice package includes a comprehensive explanation of adjustments and details precisely why the IRS is proposing the changes. It may list disallowed deductions, credits claimed in error, or unreported income.

The document will also include:

• The proposed deficiency, which is the specific amount of additional tax the IRS has determined is due.
• Any applicable penalties, such as those for accuracy-related issues or failure to pay.
• Interest that has accrued on the proposed tax deficiency from the original due date of the tax return.
• The tax year or years in question, allowing the taxpayer to identify which of their past returns is the subject of the adjustments.

The 90-Day Response Deadline

The notice includes a strict response deadline. A taxpayer has 90 calendar days from the date printed on the notice to file a petition with the U.S. Tax Court. This 90-day period is a jurisdictional requirement, meaning the Tax Court has no authority to hear a case if the petition is filed late, and the IRS cannot grant an extension.

The calculation of the 90 days includes all Saturdays, Sundays, and legal holidays. If the 90th day falls on a weekend or a legal holiday in the District of Columbia, the deadline is extended to the next business day. The IRS is required to send the notice via certified mail to the taxpayer’s last known address.

For taxpayers who are physically outside of the United States on the date the notice is mailed, the response period is extended to 150 days. To meet the deadline, a mailed petition must be postmarked by the United States Postal Service on or before the final day. Using certified mail provides proof of a timely postmark.

Available Taxpayer Response Options

Upon receiving a Statutory Notice of Deficiency, a taxpayer has three distinct paths. The first option is to agree with the IRS’s determination. By agreeing, the taxpayer accepts the proposed tax, penalties, and interest as a legitimate debt.

A second option is to disagree with the notice and petition the U.S. Tax Court. This action formally challenges the IRS’s findings and initiates a legal case. This path allows the taxpayer to dispute the proposed deficiency without first having to pay the amount in question.

The final option is to do nothing and let the 90-day period expire. This choice forfeits the right to petition the Tax Court. Once the deadline passes without a response, the IRS will automatically assess the full amount of the tax, penalties, and interest listed in the notice and will issue a formal bill.

Procedures for Responding to the Notice

Procedure for Agreeing

For a taxpayer who agrees with the proposed deficiency, the process is straightforward. The notice package includes a waiver form, often Form 4089. To finalize the agreement, the taxpayer signs and dates this form and mails it to the IRS office indicated in the notice. Signing the waiver allows the IRS to assess the tax immediately and begin the billing process.

Procedure for Disagreeing (Filing a Tax Court Petition)

To disagree, a taxpayer must prepare a formal petition to the U.S. Tax Court. This can be done using the court’s official Form 2, “Petition,” which is available on the U.S. Tax Court’s website. The petition must state the tax years in dispute, the specific amounts of the deficiency being challenged, and a summary of the errors the taxpayer believes the IRS made.

A copy of the Notice of Deficiency must be attached to the petition, but other evidence like receipts or tax returns should not be included. Because the petition is a public document, sensitive information like Social Security numbers should be redacted from any attachments.

Once prepared, the petition must be filed with the court, not the IRS. It can be mailed with a $60 filing fee to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. Alternatively, a taxpayer can file electronically through the Tax Court’s online portal, DAWSON. This requires creating an account, uploading the petition, and paying the filing fee online by 11:59 p.m. Eastern Time on the last day of the 90-day period.