How Do I Respond to an IRS Notice of Deficiency?

When you receive an IRS Notice of Deficiency (often called a “90-day letter”), you have 90 days to either agree and pay the proposed tax or formally challenge the IRS by filing a petition with the United States Tax Court. Ignoring this notice can lead to immediate tax assessment, additional penalties, and enforced IRS collection actions such as levies or liens.

What Is an IRS Notice of Deficiency and Why Did I Get One?

• The IRS issues a Notice of Deficiency when it believes you owe more taxes than reported, often due to audit findings or missing returns.
• The notice outlines proposed adjustments, the amount owed, and a strict response deadline.
• If you do not respond within 90 days (150 days if sent internationally), the IRS will assess and try to collect the tax.

Common Reasons for Receiving a Notice

• Unreported income (such as from a side job or investments)
• Disallowed deductions or credits
• Not filing a required tax return

What Should I Do When I Receive a Notice?

1.      Read the Notice Carefully

• Check the tax year and the IRS's proposed changes.
• Look at the stated deadline—mark your calendar!

2.      Decide if You Agree or Disagree

• If you agree: Sign and return IRS Form 5564 (Waiver) and pay the tax or set up a payment arrangement.
• If you disagree: Prepare your evidence and file a petition with the U.S. Tax Court before the 90-day deadline.

3.      Gather Your Documentation

• Income documents (W-2s, 1099s)
• Receipts for deductions or credits
• Any correspondence with the IRS

4.      Respond Before the Deadline

• File a Tax Court petition within 90 days if you want to contest the IRS’s findings.
• If you miss the deadline, you lose the right to challenge the tax in Tax Court before paying it.

What if I Can’t Pay?

• Installment Agreement: Arrange monthly payments if you can’t pay in full (especially if under $50,000).
• Offer in Compromise: Request to settle for less if you can prove paying would create financial hardship.
• Penalty Abatement: Request removal of penalties for reasonable cause.

Who Can Help?

• Tax Lawyers: Consider contacting a reputable tax law firm in San Francisco or a tax lawyer in San Jose who is experienced in IRS disputes and negotiations.
• Professional assistance can help protect your rights and potentially minimize penalties.

Summary Table: Key Facts About IRS Notice of Deficiency

FAQ

Q: What happens if I ignore the Notice?

A: The IRS will assess the additional tax, add penalties/interest, and may take collection actions like liens or levies.

Q: Can I call the IRS to resolve the issue?

A: You can, but only formal responses within the deadline (like Tax Court petition) protect your rights.

1.      Q: Can I pay later if I can’t pay now?

A: Yes, payment plans or offers in compromise are available if you qualify.

2.      Q: Will this affect my credit?

A: While IRS actions themselves may not appear on credit reports, liens can damage your credit score.

Final Words

If you receive an IRS Notice of Deficiency, review it immediately. Either agree by signing and paying, or file a Tax Court petition within 90 days to dispute the IRS’s claims—don’t delay, as missing the deadline removes your right to challenge before paying. Consulting with a qualified tax lawyer in San Jose or a tax law firm in San Francisco can help you understand your options and respond effectively.

Author Bio:

Jessica Morgan, J.D., is a tax attorney and financial educator based in California, assisting individuals and businesses with complex IRS matters and audit defense since 2010. She regularly partners with leading tax law firms in San Francisco and acts as a referral resource for clients seeking a tax lawyer in San Jose.