A notice of deficiency is a formal determination by the IRS indicating that a taxpayer owes additional income tax, along with potential interest and penalties. This written notification is issued when discrepancies arise between the information on the taxpayer’s return and the IRS’s records. Sometimes referred to as a statutory notice or an IRS 90-day letter, its official label is IRS Notice CP2319A: Notice of Deficiency and Increase in Tax.
Tax laws stipulate that the IRS must issue a notice of deficiency before levying additional income, estate, gift, and certain excise taxes, unless the taxpayer has agreed to the assessment. Although framed as a proposed change, the notice of deficiency stands as a legally authoritative determination of tax deficiency.
Key Takeaways
- Legal Determination: A notice of deficiency is an IRS declaration of a taxpayer’s tax deficiency, formally known as IRS Notice CP2319A: Notice of Deficiency and Increase in Tax.
- Discrepancies: It is issued when the IRS identifies discrepancies between the taxpayer’s reported information and their own records.
- Third-Party Information: Typically, such discrepancies are triggered by mismatches between the taxpayer’s return and information received from third-party filers like employers or financial institutions.
How a Notice of Deficiency Works
The Initial Trigger
A notice of deficiency usually stems from tax information tat does not align with third-party filings—whether from an employer or a financial institution. It arrives after a taxpayer fails to respond in a timely manner or contest a preliminary notice, known as the 30-day letter.
The 30-Day Letter
The IRS first issues a 30-day letter when an examination hints at a proposed tax deficiency. Taxpayers are then given 30 days to respond before the IRS enacts the suggested changes to the return.
Detailed Explanation and Actions
Upon issuing a notice of deficiency, the IRS details any alterations and computes the deficiency amount. Taxpayers can either accept the additional liability by signing a Waiver Form 4089 or dispute the claim in U.S. Tax Court.
The 90-Day Period
Sometimes called a 90-day letter, this notice gives taxpayers a 90-day window to contest the tax assessment in court. This period cannot be extended and starts from the notice’s mailing date. During these 90 days, or until a Tax Court decision is final, the IRS is prohibited from starting collection activities.
A notice of deficiency does not translate to an immediate tax bill. However, if taxpayers fail to sign a Waiver Form 4089 or file a petition with the Tax Court within these 90 days, the IRS will finalize the assessment and initiate collection, including sending a bill for the tax, penalties, and interest specified in the notice.
Stay empowered through knowledge and understand your rights when dealing with an IRS notice of deficiency.
Related Terms: tax assessment, 90-day letter, Form 4089, Tax Court.
References
- Internal Revenue Service. “4.8.9 Statutory Notices of Deficiency”.
- Internal Revenue Service. “Understanding Your CP3219A Notice”.
- Internal Revenue Service. “Form 4089”.
