Understanding a Notice of Deficiency
If you're dealing with taxes, you need to know what a notice of deficiency means. It's an official IRS document that tells you about a proposed increase in your tax liability because of differences between what you reported on your tax return and what the IRS has in their records.
What Exactly Is a Notice of Deficiency?
Let me break it down for you. A notice of deficiency is the IRS's legal determination of your tax deficiency. It's their official written claim that you owe more income tax, often including interest and penalties. They issue it when they propose changes to your return because the info doesn't match their records. You might hear it called a statutory notice, statutory notice of deficiency, or IRS 90-day letter. The formal name is IRS Notice CP2319A: Notice of Deficiency and Increase in Tax.
Tax laws mandate that the IRS sends this notice before assessing extra income tax, estate tax, gift tax, or certain excise taxes, unless you agree to the assessment. Even though the notice says it's proposing a change, it's a legal determination that's presumptively correct.
Key Takeaways
- A notice of deficiency is the IRS's legal determination of your tax deficiency; the official form is IRS Notice CP2319A: Notice of Deficiency and Increase in Tax.
- It's issued when the IRS proposes changes to your tax return due to mismatched information with their records.
- Typically, it's triggered by tax info from third parties like employers or financial institutions that doesn't align with what you reported.
How a Notice of Deficiency Works
Here's how this process unfolds. A notice of deficiency often starts with tax information from a third party, such as your employer or a bank, that doesn't match what you put on your return. It can also come from not responding in time or failing to appeal a pre-assessment letter called a 30-day letter.
When an IRS examination finds a proposed deficiency, they first send you a 30-day letter. You have 30 days to respond before they process the changes.
The notice itself explains the adjustments and how they calculated the deficiency. It lays out your options: agree to the extra liability by signing Waiver Form 4089 or challenge it in U.S. Tax Court.
It's called a 90-day letter because you get 90 days to dispute the assessment in Tax Court. This period is set by law and can't be extended. It starts from the mailing date to your last known address, and the IRS must include the exact last day to file on the notice. Until those 90 days pass or a Tax Court decision is final—whichever comes later—the IRS can't assess or collect.
Remember, this isn't a tax bill yet. But if you don't sign the waiver or file a petition within 90 days, the IRS will assess the tax, penalties, and interest from the notice and send you a bill. That's what kicks off their collection actions.
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