N is for Notice of Deficiency.

Few things can be scarier for taxpayers than receiving mail from the Internal Revenue Service. No matter how intimidating it might be, always open the mail. Always.

Sometimes, those letters can be good news. More often than not, however, the IRS is sending you a notice because they want more information from you or they have determined that there is a problem with your return. But even when the news isn’t great, you still want to open the mail timely because IRS notices are generally subject to strict deadlines. If you miss those deadlines, your options for contesting a change to your return could be limited.

One of the more daunting letters from the IRS is a CP3219B Notice. The formal title is “Statutory Notice of Deficiency” but it’s more commonly referred to as a 90-day letter or simply, a Notice of Deficiency. The purpose of the notice is to let you know that the IRS intends to assess a tax deficiency. It further informs you of your right to petition the United States Tax Court if you don’t agree with the changes.

This letter is never your first point of contact with the IRS. Sometime before you receive a Notice of Deficiency, the IRS would have sent you a previous notice asking you to compare your information as listed on your return with the information the IRS has received, or otherwise provide more information to IRS. It may also be sent when you have failed to file a tax return. The Notice of Deficiency is the next step, either in response to the information that you’ve submitted or because the IRS didn’t hear from you. The Notice will focus on a very specific issue (or issues) involving your tax return.

The Notice of Deficiency isn’t a bill. However, you do have the option of paying the additional tax as assessed by the IRS. If you agree with the proposed changes on the Notice of Deficiency, the IRS asks that you complete, sign and return a form 4089, Notice of Deficiency – Waiver (it will be included with your Notice of Deficiency). You can send payment with that form or the IRS will later send you a bill together with any interest and applicable penalties.

If you don’t agree with the additional tax as proposed, you have a couple of options:

  • You can respond to the Statutory Notice of Deficiency directly; or
  • You can petition the United States Tax Court by the due date shown on the notice.

If you respond to the Notice by sending additional information to IRS, it’s important to understand that your response does not extend the deadline to file a petition with the U.S Tax Court. You have 90 days (150 if the notice was addressed outside the United States) to file the petition. No extensions.

You don’t have to have an attorney to file in Tax Court though it may be advisable. There is a $60 filing fee due when the petition is filed. The filing of your case also postpones the collection of the tax until the matter is resolved. Be advised, though, that if you can’t pay the tax due, filing in Tax Court is not the way to extend collections statutes or establish a payment plan.

If your matter totals $50,000 or less (including additions), you can opt to file a small tax case. There are special rules for these kinds of cases. On the plus side, this track is faster and generally less formal (a bonus, in particular, if you’re filing yourself). On the minus side, it’s important to understand that a judgment in small tax cases is not appealable.

But what if you don’t respond to the IRS and you don’t want to file a petition in Tax Court? If you don’t do anything by the due date, the IRS has the authority to assess the tax and try to collect it from you. At that point, your options are more limited than before and generally focus on resolving collections matters.
The takeaway here? Open your mail, read the notice carefully, and follow the instructions. If you have concerns or questions, contact your tax professional. But don’t wait too long: deadlines are important. And in the case of a Notice of Deficiency, those deadlines cannot be extended.

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

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