What Is a Tax Assessment and How Do You Respond?

A tax assessment is an official determination by a tax authority, such as the Internal Revenue Service (IRS) or a state tax department, regarding a taxpayer’s tax liability. This process establishes the amount of tax owed, whether it results in additional tax due, a refund, or no change to the original filing. It formalizes the tax authority’s position on a taxpayer’s obligations.

Reasons for a Tax Assessment

Tax assessments can arise from various scenarios. These often arise from discrepancies or omissions identified by tax authorities. One common reason involves the completion of an audit, where the tax authority reviews a taxpayer’s financial records and income or expense claims. If an audit uncovers issues, it can lead to an assessment for additional tax.

Simple calculation mistakes or clerical errors on a tax return can also prompt an assessment. These errors might include arithmetic mistakes or inconsistent entries. The IRS addresses such errors under Internal Revenue Code Section 6213.

Another frequent cause is an information mismatch, where data reported by third parties does not align with what the taxpayer filed. For example, income reported on W-2 forms or 1099 forms may not match the amounts listed on a taxpayer’s return. Tax authorities identify these discrepancies, which can then lead to a proposed assessment.

When a taxpayer fails to file a required tax return, the tax authority may prepare a “Substitute for Return” (SFR) based on available third-party information. This SFR typically does not account for deductions, credits, or the most advantageous filing status, often resulting in a higher tax liability. The tax authority then assesses the tax based on this SFR. This can initiate collection efforts if the taxpayer does not respond.

Official Tax Assessment Notices

Tax authorities communicate proposed or final assessments through specific official notices. A common notice for proposed changes is the CP2000, known as an Underreporter Inquiry. This notice is generated when the tax authority detects discrepancies between reported income and third-party information, proposing changes before a final assessment.

The CP2000 is not a bill but a proposal, allowing the taxpayer to respond and resolve identified issues. It outlines the proposed amount due and explains the information used to determine these changes. Taxpayers usually have 30 days to respond.

A Notice of Deficiency, sometimes referred to as a 90-day letter, is a formal determination that additional tax is owed, typically after an audit or if an SFR has been created. It signifies the tax authority’s final decision on a tax deficiency, providing the taxpayer a 90-day window to petition the U.S. Tax Court if they wish to dispute the assessment without first paying the tax.

Following a final assessment, if the tax liability remains unpaid, taxpayers may receive demand for payment notices. These notices serve as a demand for payment for an already assessed tax liability, often sent after a proposed assessment has become final. They indicate the tax is due and may precede collection actions.

Responding to a Tax Assessment

Receiving a tax assessment notice requires a prompt response. The initial step involves reviewing the notice to understand the proposed changes, the reasons for the assessment, and the deadline for a response.

Taxpayers should gather all relevant supporting documentation for the tax year and issues identified in the notice. This might include receipts, bank statements, canceled checks, and previous tax returns. Organized documentation is essential for any dispute.

If the taxpayer agrees with the proposed assessment, they can pay the amount due by the deadline or arrange a payment plan. This signifies acceptance.

If the taxpayer disagrees with the assessment, procedural steps are available. For proposed assessments like a CP2000, the taxpayer should prepare a written response explaining their disagreement and submit supporting documentation. This aims to resolve discrepancies directly with the tax authority.

For a Notice of Deficiency, the taxpayer has two paths to dispute the assessment without paying the tax upfront. One option is to file a petition with the U.S. Tax Court within the 90-day deadline. This initiates a court case to challenge the tax authority’s findings. Alternatively, taxpayers can request a conference with the tax authority’s Appeals office, an administrative process to resolve disputes without litigation.

For demand for payment notices, if the assessed amount is correct but unaffordable, taxpayers can explore payment arrangements. Options include requesting an Installment Agreement to make monthly payments or, in cases of financial hardship, submitting an Offer in Compromise to settle the tax debt for a lower amount. For complex assessments or disputes, consulting with a qualified tax professional, such as a CPA, Enrolled Agent, or tax attorney, is advisable.