Receiving a Notice of Deficiency from the Internal Revenue Service (IRS) can be an unsettling experience. Often referred to as a “90-day letter,” this notice is a formal statement from the IRS notifying you that there is a discrepancy in your tax return that leads to additional taxes owed. Understanding how to respond to this notice is crucial to managing the situation effectively and minimizing any additional financial burden.
Introduction
A Notice of Deficiency is issued by the IRS when they determine that the amount of tax reported on a tax return is less than what the IRS calculates is owed. This notice provides you the right to challenge the IRS’s determination before the tax is assessed. Here’s what you need to know to navigate this process.
Understanding the Notice of Deficiency
1. What is a Notice of Deficiency?
The Notice of Deficiency is a formal notice from the IRS that proposes a change to your income tax amount. It provides a detailed explanation of the difference between the amount reported on your return and what the IRS believes you owe.
Key Points:
- Deadline: The notice gives you 90 days (150 days if you are outside the United States) to respond.
- Details Provided: It outlines the taxes owed, plus any interest and penalties.
2. Why Did You Receive This Notice?
You might receive a Notice of Deficiency for several reasons, including:
- Unreported Income: The IRS has information indicating you received more income than you reported.
- Incorrect Filing Status: If you chose a filing status that the IRS disagrees with.
- Errors in Credits or Deductions: If you claimed credits or deductions that you were not eligible to receive.
How to Respond to a Notice of Deficiency
1. Review the Notice Carefully
Examine the changes the IRS proposes. Understand each adjustment, why it was made, and how it affects your tax liability.
Key Points:
- Identify Mistakes: Check for any errors in the IRS’s calculations or misunderstandings about your income or deductions.
- Gather Documentation: Prepare any documents that support your original return, like receipts, logs, or bank statements.
2. Decide How to Respond
You have a few options when responding to a Notice of Deficiency:
a. Agree with the Notice
If you agree with the IRS’s findings:
- Pay the Amount Owed: Include any interest and penalties.
- Set Up a Payment Plan: If you can’t pay the full amount immediately, you can arrange a payment plan with the IRS.
b. Disagree with the Notice
If you disagree with the IRS’s adjustments:
- File a Petition with the Tax Court: You can challenge the determination before the United States Tax Court within the 90-day period (150 days if abroad).
- Contact the IRS: Discuss the notice with the IRS. Sometimes, misunderstandings can be resolved without going to court.
3. Understand the Timeline
The timeline is crucial when dealing with a Notice of Deficiency:
- 90-Day Limit: You must file a petition with the Tax Court within 90 days of the notice date. There are no extensions.
- Preparation Time: Use this time to gather documents and consult with a tax advisor.
4. Consult a Professional
A tax professional can provide invaluable help:
- Expertise: They can help interpret the notice and suggest the best course of action.
- Representation: They can represent you in discussions with the IRS or in court.
5. Plan for Payment
If you end up owing additional tax:
- Budget: Plan how you will pay the additional amount.
- Consider IRS Payment Plans: If you cannot pay in full, consider an installment agreement.
Preventative Measures for the Future
- Keep Accurate Records: Maintain detailed and organized financial records to support your tax return.
- Understand Tax Laws: Stay informed about changes in tax laws that could affect your filings.
- Use Professional Tax Services: Consider using a tax professional, especially if your tax situation is complex.
Conclusion
Receiving a Notice of Deficiency is not the final word on your tax liabilities. By understanding the notice, exploring your options, and responding appropriately within the given timeline, you can effectively manage and often mitigate any additional taxes owed. Always remember, taking proactive steps and seeking professional advice can make navigating these challenges much smoother.
