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How Do I Respond to an IRS Deficiency Notice?

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Every year, millions of taxpayers receive notices from the Internal Revenue Service (IRS). Any notice may or may not always be a cause for concern, but receiving a deficiency notice from the IRS can be particularly alarming and requires prompt attention.

April 23, 2024
Author: NCH

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This article will explain what you should do if you get a deficiency notice from the IRS, as well as discuss the importance of a statutory notice of deficiency.

What Is a Tax Deficiency?

A tax deficiency occurs when a taxpayer owes more taxes than originally reported and paid. It can result from unintentional mistakes or deliberate attempts to evade taxes, among other causes. The IRS identifies deficiencies through audits or other forms of review.

Understanding Statutory Notices of Deficiency

The IRS issues a statutory notice of deficiency, also known as a 90-day letter or a notice of deficiency, when they believe there is a discrepancy in the taxpayer’s reported income, deductions, or failure to comply with tax laws in some other way.

This notice states the IRS’s proposed adjustments to the taxpayer’s return. It is issued under the authority of Internal Revenue Code Section 6212 and provides the taxpayer with an opportunity to dispute the proposed adjustments before the IRS assesses additional taxes.

Why Did I Get a Deficiency Notice?

Common reasons for receiving a deficiency notice include:

  • Mathematical errors
  • Discrepancies in reported income
  • Failure to report certain income
  • Inconsistencies in deductions or credits claimed

Bear in mind that receiving a deficiency notice does not necessarily imply intentional wrongdoing on your part; it may simply be the result of oversight or misunderstanding.

Receiving a Deficiency Notice: What to Do Next

Upon getting a deficiency notice from the IRS, the recipient should take immediate action to address the situation. Here are the steps to follow: 

Step 1: Review the Notice Carefully 

The notice will specify the tax year in question, outline the adjustments made by the IRS, and provide a detailed explanation of the changes. Additionally, it will include instructions on how to respond, along with important deadlines for taking action.

Carefully read the deficiency notice to understand the proposed adjustments and the IRS’s reasoning behind them. Pay close attention to the tax year in question, the specific items being adjusted, and any deadlines mentioned in the notice.

Step 2: Seek Professional Assistance 

It goes without saying that dealing with a deficiency notice can be a complex undertaking, especially if the proposed adjustments are substantial or the taxpayer is unfamiliar with tax laws and procedures. A certified public accountant (CPA) or a tax attorney can provide valuable guidance and representation throughout the process.

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Step 3: Gather Documentation 

Collect any relevant documentation to support your position and refute the IRS’s proposed adjustments. This may include copies of W-2 forms, 1099 forms, bank statements, receipts, and other financial records substantiating your reported income, deductions, and credits.

Step 4: Respond Promptly

The deficiency notice may include a deadline, usually within 90 days from the date of the notice. Failing to respond within the specified timeframe can result in the IRS assessing the proposed adjustments without further consideration of the taxpayer’s objections.

Step 5: Consider Your Options

As a taxpayer, you have rights when dealing with the IRS, including the right to challenge the proposed adjustments outlined in the deficiency notice. Take time to understand these rights and how they apply to your specific situation. The IRS provides resources, such as Publication 1, “Your Rights as a Taxpayer,” which outlines these rights in detail.

The most common approaches for responding to a deficiency notice include:

  • Agreeing with the Adjustments: You can simply sign the response form included with the notice and return it to the IRS. Doing so indicates your acceptance of the changes and willingness to pay any additional tax owed.
  • Disagreeing with the Adjustments: If you believe that the IRS has made an error or that the adjustments are unjustified, you have the right to dispute the deficiency notice. In this case, you must provide supporting documentation and a clear explanation of why you disagree with the IRS’s assessment.
  • Requesting an Appeal: If you cannot reach a resolution with the IRS, you can request an appeal. This involves presenting your case to an appeals officer, who will review the facts and evidence presented by both parties and make a decision.

Step 6: Consider Settlement Options 

In some cases, taxpayers may be able to resolve the dispute with the IRS through settlement negotiations. This may involve reaching a compromise on the proposed adjustments or entering into an installment agreement to pay any additional taxes owed over time.

Best Practices in Responding to a Deficiency Notice

  • Be Thorough: Provide detailed explanations and supporting documentation to support your position. Clearly outline any errors or discrepancies you believe the IRS has made and present evidence to substantiate your claims.
  • Be Timely: Meet the deadlines specified in the deficiency notice. Otherwise, the IRS may assess additional penalties and interest charges.
  • Be Professional: Maintain a respectful and professional tone in all communications with the IRS. Refrain from making baseless accusations or engaging in confrontational language, which can undermine your credibility and the resolution process.

The Bottomline

Receiving an IRS deficiency notice can be a stressful experience, but always remember that you have rights as a taxpayer and options for addressing the situation. By understanding the notice’s contents, assessing your options, and responding promptly and professionally, you can effectively resolve the issue and achieve a fair outcome.

If you’re unsure how to proceed or need assistance, don’t hesitate to seek guidance from one of our qualified tax professionals at NCH. With diligence and patience, you can successfully resolve any discrepancies and move forward with confidence.

Call us at 1-800-508-1729 to book your FREE consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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