How to Respond to a Notice of Deficiency

respond to an IRS notice of deficiency

You probably found this page because you received a statutory notice of deficiency from the IRS.

You are likely wondering what does the IRS notice of deficiency mean? And you probably want to know how to respond to the IRS notice of deficiency?

You can find answers to these questions on this page.

About the IRS Notice of Deficiency

The IRS notice of deficiency is a critical document when it comes to IRS audits and appeals and tax litigation.

The IRS has to mail this notice to the taxpayer before it can “assess” a tax. The tax has to be “assessed” before the IRS can attempt to collect it. The term “assess” refers to the IRS recording the tax liability on its books and records.

So you can see that absent a valid notice of deficiency, you do not owe the IRS.

What Form is the Statutory Notice of Deficiency?

The statutory notice of deficiency may be a CP3219A Notice or a CP3291N Notice.

It may also include a Form 5564 for you to sign and return to signify that you agree that you owe the tax set out in the notice. Do not sign and return Form 5564 if you disagree with the IRS’s determination!

The requirement that the IRS issue a notice of deficiency is set out in Section 6212 and Section 6213.

These code sections say that any tax liability assessed by the IRS is invalid if the IRS fails to send a timely and valid notice of deficiency.

What is a Tax Deficiency?

The term “deficiency” means the amount in excess of the current tax recorded on the IRS’s books.

Taxpayers usually self-assess tax by filing tax returns to report their taxes. If a taxpayer files a tax return and self-assessed $100 of tax, the IRS may conduct an audit and attempt to assess an additional $20 of tax. The IRS auditor has to issue a notice of deficiency to assess the $20 of additional tax.

When Does the IRS Not Have to Issue a Notice of Deficiency?

IRS notice of deficiency

There are several circumstances when the IRS does not have to issue a notice of deficiency.

For example, the IRS does not have to issue a notice of deficiency to assess taxes that you self-assessed by filing a tax return. The amount you listed on your tax return is assessed by you, so no notice of the assessment is required.

The IRS can assess certain penalties without issuing a notice of deficiency. This includes the trust fund recovery penalty, the failure to file penalty, and the reportable transaction penalties, among others.

The IRS’s correction of a math error is one of these other situations. If the IRS determines a deficiency that resulted from a mathematical or clerical error, the IRS may follow either deficiency procedures and issue a notice of deficiency or the math error procedures. The authority for this is found I.R.C. § 6213(g)(2). It also defines what constitutes a mathematical or clerical error. The definitions are generally limited to situations where it is clear you made a mistake and the IRS’s correction of that mistake is almost certainly to be valid.

How Long Does the IRS Have to Issue a Notice of Deficiency?

The IRS can issue a notice of deficiency at any time before the assessment period expires.

The assessment period is generally three years from the date the tax return in question was filed.

If no tax return was filed or a fraudulent tax return was filed, there is no assessment period.

There are other events that extend the three year period:

  1. If the taxpayer signs a waiver and consent to extend the assessment period (by signing Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overpayment) (this is referred to as a “notice of deficiency waiver“).
  2. If the taxpayer files a bankruptcy petition.
  3. If the taxpayer files an offer in compromise.
  4. If the taxpayer requests a collection due process hearing.

The assessment period can be extended from three to six years if the tax return filed by the taxpayer significantly understates the true tax.

How Do I Respond to a Notice of Deficiency?

You have several options for responding to a notice of deficiency. You can:

  1. Pay the tax in the notice and end the matter.
  2. Pay the tax in the notice and file a refund claim.
  3. Submit an offer in compromise.
  4. File a petition with the U.S. Tax Court.
  5. Ask the IRS to rescind or withdraw the notice of deficiency.

The notice of deficiency usually gives you 90 days from the date on the notice to file a petition with the U.S. Tax Court. This is why it is often referred to as a 90 day letter.

This is 90 days after the notice is mailed. It is not 90 days after the notice is received. As unfair as it is, the notice does not have to ever be received. The IRS just has to show that it mailed the notice to the taxpayer’s last known address. This is usually the address on the most recently filed and processed tax return you filed.

The courts will invalidate a notice of deficiency if it is not properly mailed by the IRS. There are several court cases that help explain when taxpayers should challenge invalid notices.

The 90 day period is extended to 150 days if it is addressed to a person outside of the United States.

Only the party listed in the notice of deficiency can file the tax court petition. This can be a problem in some cases, such as a deceased individual or a dissolved corporation.

What Happens When I File a Tax Court Petition?

The U.S. Tax Court notifies the IRS that you responded to the statutory notice of deficiency.

The IRS will then put your case on hold. It is barred from issuing additional assessments for the same tax and same period.

The IRS attorneys will then file an Answer in the tax court and, in most cases, forward your case to the IRS Office of Appeals. Taxpayers usually have a right to an administrative appeal with IRS Appeals. The IRS Office of Appeals is tasked with trying to settle cases. If the case is assigned to Appeals, the appeals officer will send you a letter explaining the settlement process.

Experienced Tax Attorneys

We are tax attorneys in Houston, Texas. We help clients respond to IRS’s notice of deficiencies.

If you received a notice of deficiency, we want to hear from you. Call us at (713) 909-4906.

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