The IRS sends a notice of deficiency when it believes a taxpayer owes additional taxes. This letter, also called a “90-day letter,” gives the recipient 90 days to respond before the IRS assesses the tax. Ignoring this notice can lead to penalties, interest, and collection actions. Understanding the options available can help taxpayers resolve the issue quickly and avoid further problems.
Review the notice carefully
The first step is to read the notice of deficiency thoroughly. The IRS outlines the changes it made to the tax return, the amount owed, and the reason for the adjustment. Some notices may include errors, so checking for mistakes is essential. Compare the notice to tax records, receipts, and past returns to verify the accuracy of the IRS’s claims.
Decide whether to agree or dispute
If the IRS made a correct adjustment, the taxpayer can accept the changes and pay the balance. Payment plans and other resolution options exist for those unable to pay in full. If the taxpayer disagrees with the notice, they have the right to challenge it. Filing a petition with the U.S. Tax Court before the 90-day deadline prevents the IRS from collecting the disputed amount until the case is resolved.
Gather supporting documents
Taxpayers disputing the notice should collect evidence that supports their case. This includes bank statements, receipts, W-2s, 1099s, or any relevant documents proving the reported income and deductions were correct. Strong documentation increases the chances of a favorable outcome.
Seek professional assistance
A tax attorney, CPA, or enrolled agent can provide guidance and representation when dealing with a notice of deficiency. Professionals understand tax laws and can help taxpayers negotiate settlements or present cases in tax court.
Take action before the deadline
The IRS does not grant extensions on deficiency notices. Responding within 90 days is crucial to avoid enforced collections. Understanding rights and options can help taxpayers resolve the issue effectively and prevent future tax disputes.