Key Takeaways
- IRS document proposing tax changes and additional taxes.
- Taxpayers have 90 days to dispute in Tax Court.
- Not a bill, but triggers IRS collection rights.
- Issued for unreported income or disallowed deductions.
What is Notice of Deficiency?
A Notice of Deficiency is an official IRS document informing you that they propose changes to your tax return, typically indicating additional taxes owed due to unreported income or disallowed deductions. It triggers your right to respond before the IRS can assess and collect the disputed amount, under Internal Revenue Code Section 6212.
This notice is often called a 90-day letter, giving you a limited timeframe to act, and is a crucial part of your tax obligation management.
Key Characteristics
The Notice of Deficiency has distinct features designed to clearly communicate IRS findings and your options:
- Specific tax years: Identifies which tax periods are under review.
- Proposed adjustments: Details discrepancies such as unreported income or disallowed deductions, often triggered by third-party data.
- Amount owed: Includes additional tax, penalties, and interest calculated by the IRS.
- Explanation and computation: Shows how the deficiency was determined and outlines response options.
- Response deadline: Typically 90 days to petition the U.S. Tax Court or agree to changes.
- Delivery method: Sent by certified or registered mail for proof of receipt.
How It Works
When the IRS detects a gap between your reported tax and what information from employers, financial institutions, or other sources shows, it issues a Notice of Deficiency. This document allows you to contest the proposed changes without immediately paying the disputed amount.
You can respond by petitioning the U.S. Tax Court within 90 days, agreeing to the adjustments, or negotiating alternatives like an offer in compromise. Ignoring the notice results in automatic assessment and potential collection actions such as liens or levies.
Examples and Use Cases
Notices of Deficiency arise in various scenarios where IRS analysis shows discrepancies:
- Unreported income: A freelancer receiving a Form 1099-MISC may get a notice if that income isn’t reported.
- Disallowed deductions: Overstated home office expenses can trigger adjustments increasing tax owed.
- No filed return: The IRS may substitute a return, leading to a deficiency notice if taxes are unpaid.
- Company-specific cases: Airlines like Delta have faced notices related to employee benefit reporting, illustrating real-world applications.
Important Considerations
Respond promptly to a Notice of Deficiency to preserve your rights and avoid automatic assessment. Consult a tax professional experienced with IRS procedures and the Independent Appeals Process if applicable.
Be aware that interest on the proposed amount accrues daily, and failure to act could lead to enforced collection. Understanding your ability to pay options can guide your next steps effectively.
Final Words
A Notice of Deficiency signals a proposed tax adjustment and gives you a limited window to challenge the IRS before collection actions begin. Review the details carefully and consider consulting a tax professional to determine whether filing a petition with the Tax Court is the best course.
Frequently Asked Questions
A Notice of Deficiency is a formal legal document from the IRS proposing changes to your tax return, usually because of underreported income or disallowed deductions. It gives you 90 days to respond before the IRS can assess and collect the additional tax.
The IRS issues this notice when it detects a tax deficiency—meaning you owe more tax than reported—based on third-party data like W-2s or 1099 forms. It serves as an official proposal before the IRS can assess and collect the tax.
You typically have 90 days from the date the IRS sends the notice to file a petition with the U.S. Tax Court. If you live outside the U.S., you have 150 days to respond.
You can agree with the proposed changes, dispute them by filing a petition with the U.S. Tax Court, or take other actions such as submitting additional information. Ignoring the notice can lead to the IRS assessing the tax and pursuing collection.
No, the Notice of Deficiency is not a bill or an audit notice. It’s a proposed assessment that informs you of the IRS’s findings and your rights before they officially assess the tax and begin collection.
The notice details the tax year under review, proposed adjustments like unreported income or disallowed deductions, the amount owed including penalties and interest, and explains how the IRS calculated the deficiency along with your response options.
If you do not respond within the timeframe, the IRS can formally assess the tax deficiency and begin collection actions such as liens or wage garnishments. It’s important to address the notice promptly.
Yes, you can petition the U.S. Tax Court within 90 days of the notice date to dispute the proposed changes. The notice is considered correct unless you prove otherwise in court.
