What to Do If You Get a Tax Assessment Notice

A tax assessment notice is a formal document from a tax authority, like the Internal Revenue Service (IRS) or a state revenue agency, proposing a change to your tax liability. This notice is not a final bill but a legal determination that outlines adjustments to your filed tax return for a specific period. It results from the agency’s review and indicates they have identified a potential issue.

You have the right to either agree with the proposed changes or dispute them by a specified deadline. Ignoring the notice can lead to the proposed assessment becoming final, allowing the agency to begin collection actions.

Common Reasons for a Tax Assessment Notice

A frequent reason for receiving a tax assessment notice is a math or clerical error on your tax return. These are often computer-generated corrections for mistakes in arithmetic or for entering an amount on the wrong line, and the notice will explain the specific error. These are straightforward issues that can be resolved by reviewing your original return against the agency’s corrections.

Another common trigger is underreported income. Tax agencies use automated systems, like the IRS’s CP2000 program, to match income reported by third parties with the income you reported on your return. If the system finds a discrepancy where the income reported by payers is higher than what you reported, it will generate a notice proposing an adjustment.

You might also receive a notice because the tax authority has disallowed certain deductions or credits you claimed. This can happen if the agency requested documentation to support a deduction, and the information provided was insufficient or not received. The notice will specify which deductions or credits were denied and calculate the additional tax owed.

Finally, a notice can be generated due to a failure to file a tax return. If you do not file, the tax agency may create a Substitute for Return (SFR). Using information from third-party sources, the agency prepares a return on your behalf which does not include deductions or credits you might be entitled to, often resulting in a higher tax liability.

Decoding the Key Components of Your Notice

Notice Date and Number

Every tax assessment notice has a unique notice number, often in the top right corner, such as an IRS “CP” or “LTR” number. This number is for reference when communicating with the tax agency. The notice date establishes the start of the response period, which is typically 30 to 90 days.

Tax Period

The notice will state the specific tax period, usually a calendar year, to which the adjustments apply. Verifying this is important, as the issue may pertain to a prior year’s return and helps you locate the correct tax records.

Explanation of Changes

This section explains the agency’s reasons for the proposed changes, detailing which lines on your tax return have been adjusted and why. For example, it might state that income from a Form 1099 was not included or a deduction was disallowed.

Proposed Tax Adjustment

This figure is the base amount of additional tax the agency believes you owe, before penalties or interest are added. It is the direct result of adjustments made to your income, deductions, or credits.

Penalties

The notice will list any assessed penalties separately. Common penalties include the failure-to-pay penalty and an accuracy-related penalty for understating your tax liability. These are calculated as a percentage of the unpaid tax.

Interest

Interest is charged on any unpaid tax from the original due date of the return until the tax is paid in full. The notice shows the interest accrued up to the notice date, and it will continue to accumulate until the balance is paid.

Total Amount Due and Response Deadline

The notice summarizes the proposed additional tax, penalties, and interest into a total amount due. It also states the response deadline, the date by which you must pay or formally dispute the assessment. Missing this deadline can result in the loss of appeal rights.

Preparing Your Response to the Notice

The first step is to decide whether you agree or disagree with the proposed changes, as your preparation will differ based on this decision. A timely response is necessary to protect your rights.

If you agree with the assessment, your preparation is simple. Review the notice to confirm the calculations and understand the reason for the change. Then, gather the funds for payment or review your finances to determine if you need a payment plan.

If you disagree with the notice, your preparation must be more thorough. Begin by locating your original tax return for the year in question and compare it line-by-line with the changes proposed in the notice to pinpoint the exact items of disagreement. Next, collect all relevant documents that support your position, such as receipts for disputed expenses, bank statements, canceled checks, or legal agreements. If the dispute involves income, gather all Forms W-2, 1099, and K-1 to prove the income was reported correctly.

How to Formally Respond to the Tax Authority

When you agree with the assessment, the process is straightforward. The notice will include a payment voucher and instructions for how to pay. You can mail a check or money order with the voucher to the address provided or pay online through the tax authority’s official payment portal, such as IRS Direct Pay. If you cannot pay the full amount, you can request an installment agreement, often by submitting a specific form like the IRS Form 9465.

If you disagree with the notice, you must submit a formal written response by the deadline. This response should be a clear letter explaining why you disagree with each specific adjustment. Do not send original documents; instead, send copies of your supporting evidence, such as receipts or bank statements, along with your letter. Mail your complete response package, including the response form from the notice, to the address listed for disputes. Using certified mail is recommended to have proof of timely mailing.