An IRS Notice of Deficiency is a legal notice from the IRS that informs a taxpayer that their prior tax payment was deficient, or lacking necessary funds. This is sent when the IRS determines that a taxpayer’s tax return has omitted income information, and therefore their tax payment was smaller than it should have been.
Here’s how that happens: for every tax related document that you receive from your employers, financial institutions, lenders, and more, there is a corresponding record in the hands of the IRS. The IRS has detailed and complete information on every taxpayer’s financials for the year. When you self-report, file, and pay any outstanding taxes at the end of the year, the IRS cross-references your reporting with their records. If they discover that you have failed to report information that has led to your tax return’s deficiency, they will issue a Notice of Deficiency to inform you of such.
Though at the time of issuing your notice the IRS has already determined your deficiency, the Notice of Deficiency acts as a heads up for forthcoming taxes. It is required that the IRS send this notice prior to assessing the additional tax.
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How Does a Statutory Notice of Deficiency Work?
Once the IRS determines that a tax payment is deficient, they will issue a pre-assessment letter, also known as a 30-day letter. This letter informs the taxpayer that a deficiency is being proposed against them, and gives them the opportunity to appeal the assessment. If the taxpayer desires to do so, they must send their appeal within 30 days of receiving the letter.
If the taxpayer does not respond to the 30-day letter, the IRS will move forward with issuing a Notice of Deficiency. In the notice, the IRS will outline the details of the deficient payment, including the unreported income, as well as the calculations that have determined the deficiency.
Once a taxpayer has received the Notice of Deficiency, they have 90 days from the date of mailing to decide to challenge it in US Tax Court. This is why the IRS Notice of Deficiency is sometimes referred to as the 90-day letter. They must file a petition that they are challenging their notice. If they have additional information that backs up their claim, they should send that to the IRS, as well. The letter will list the last day to challenge the Notice of Deficiency. The IRS cannot proceed with any collections until the 90 days have passed.
Did you receive a Notice of Deficiency from the IRS? Not sure what to do?
If you agree with the Notice of Deficiency and don’t wish to challenge it, then simply sign Form 5564, the Notice of Deficiency, and send it back to the agency that issued it. They’ll return a bill that includes your unpaid taxes, as well as interest and penalties you’ve incurred due to your late payment. If you don’t respond to the Notice of Deficiency, you’ll receive this bill once your 90-day window has expired.
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