Understanding the Statutory Notice of Deficiency: Your Guide
Okay, so let’s talk about the Statutory Notice of Deficiency, which is a mouthful, so many people just call it a “Notice of Deficiency” or even just a “90-day letter”. This letter is a big deal in the world of taxes and is usually not a good sign to receive.
What Triggers a Notice of Deficiency?
Usually, you’ll get a Notice of Deficiency after the IRS has taken a close look at your tax return. This could happen for a few different reasons:
- Audit: If your tax return was selected for a full audit, and the IRS finds that you owe more money, they’ll send a Notice of Deficiency. Think of an audit like the IRS looking at your taxes with a fine-tooth comb.
- Discrepancies: Sometimes, the IRS will send you the notice after finding differences between what you reported and what they have on record, like mismatched income information.
- Underreported Income: If the IRS believes you haven’t reported all your income, like from a side hustle or investments, they may issue this notice.
- Disallowed Deductions or Credits: The IRS might disagree with certain deductions or tax credits you claimed. For example, they might disagree that your side hustle is a real business or with the amount you claimed for charitable contributions.
It’s important to note that the IRS usually sends you other notices before a Notice of Deficiency. Often, you’ll get a notice proposing changes (like a CP2000 notice) and an opportunity to respond. The Statutory Notice of Deficiency is like the final word from the IRS before they can begin collecting what they believe you owe.
What Information Does the Notice Contain?
When you receive the Statutory Notice of Deficiency, you will find all kinds of information. The main things it tells you include:
- The Amount of Deficiency: The letter will clearly state how much additional tax the IRS believes you owe.
- Explanation of Adjustments: It will outline the specific adjustments or changes the IRS made to your return to arrive at the amount of deficiency. For example, the notice may specify what items, deductions, or credits were disallowed.
- Tax Year Involved: The letter will clearly identify which tax year the deficiency pertains to.
- The 90-Day Deadline: This is very important. The letter will state that you have 90 days (or 150 days if you live outside the United States) from the date of the notice to either pay the additional taxes, reach an agreement with the IRS, or file a petition with the U.S. Tax Court if you disagree with their assessment.
- Your Rights: The notice should also describe your rights as a taxpayer. This includes your right to challenge the deficiency in Tax Court and the timeline for doing so.
The notice will be very detailed. Take the time to fully understand it before making a decision on how to respond. It is an important and very specific document.
What Happens After I Receive the Notice?
When you get a Notice of Deficiency, you have a few options you can consider. These options involve accepting the adjustments, paying the additional tax, or disagreeing with the IRS assessment and fighting it. Your actions now will dictate the outcome of this situation. Here is a summary of the next steps:
- Do Nothing: If you fail to respond to a Notice of Deficiency or pay the taxes owed within the allotted 90 days, the IRS can start collection activities. This might include levying your bank account or wages, filing a federal tax lien, or taking other enforcement actions.
- Pay the Deficiency: If you agree with the IRS’s adjustments and owe the additional taxes, you can pay the amount listed in the Notice of Deficiency. You will also have to pay any related interest and penalties.
- Reach an Agreement: If you agree with some of the IRS adjustments, you might be able to reach an agreement with the IRS on a final amount you owe. Sometimes you can negotiate the penalties or set up a payment plan.
- File a Petition with U.S. Tax Court: If you disagree with the adjustments and believe the IRS made a mistake, you can file a petition with the U.S. Tax Court within the 90-day window. By filing a petition, you are officially appealing the IRS’s determination and asking the Tax Court to review your case.
Understanding the 90-Day Deadline
The 90-day deadline (or 150 days if you’re outside the U.S.) is crucial. Missing this deadline has big consequences. If you do not respond within the 90-day period, you can no longer challenge the IRS’s findings in Tax Court. The IRS can then immediately begin collecting what they believe you owe, even if you disagree.
If you want to file a petition, you must do it within the 90-day timeframe! You may be able to work with the IRS even after the 90 days but if you would like to go to Tax Court then it’s essential to adhere to this deadline. The date of the postmark on the envelope will determine if the petition was filed on time.
The U.S. Tax Court: Your Venue for Appeal
The Tax Court is a special court specifically set up to handle tax disputes. If you file a petition, the court will review your case, consider the IRS’s findings, and make a decision. This whole process is more involved than just working with the IRS and you may want to seek tax professional advice before making this decision.
Tax Court cases can be complex and you may need to gather your documentation and arguments. Many people choose to be represented by a tax attorney or other tax professionals during the Tax Court process.
Related Concepts and Terms
- IRS Audit: A formal examination of your tax return by the IRS. It is often, but not always, a precursor to receiving a Notice of Deficiency.
- CP2000 Notice: This is an IRS notice proposing changes to your tax return. It usually comes before the Statutory Notice of Deficiency.
- Tax Court Petition: A document you file with the Tax Court when you disagree with the IRS’s assessment of additional taxes.
- Tax Lien: A legal claim the government can put on your property if you owe back taxes. This can happen after receiving a Notice of Deficiency and failing to respond.
- Tax Levy: This is a legal seizure of your property (like a bank account or wages) to collect outstanding taxes. This can happen after receiving a Notice of Deficiency and failing to respond.
Tips for Handling a Notice of Deficiency
Here are a few tips to keep in mind if you receive a Notice of Deficiency:
- Read the Notice Carefully: Don’t just put it aside; understand what it says and note the deadlines.
- Gather Your Records: Collect all relevant documents that can help support your claims. This can include receipts, tax documents, and other supporting documentation.
- Seek Professional Advice: Don’t hesitate to get help from a tax professional. They can guide you on the best course of action and represent you in negotiations with the IRS or in Tax Court if needed.
- Act Quickly: The 90-day deadline comes faster than you think. Don’t wait until the last minute to decide what to do.
Common Mistakes and Misconceptions
- Ignoring the Notice: Don’t ignore it! It won’t go away, and ignoring it will only make things worse.
- Thinking It’s Just a Bill: It’s not just a bill. It is a formal legal notice that can lead to collection actions by the IRS.
- Trying to Handle It Alone When You Are Overwhelmed: If you’re not comfortable with tax matters, it’s best to get help from a qualified tax professional.
Receiving a Statutory Notice of Deficiency can be stressful, but understanding what it is and what your options are is the first step to resolving the issue. Be sure to read all documents carefully, respond promptly, and seek professional help if you need it.