The IRS cannot engage in collections activities against you without an assessed tax in place first. Before an IRS tax assessment occurs, you, the taxpayer, have a right to be informed of any pending assessment. To facilitate your awareness of a pending IRS tax assessment, the IRS has a statutory system that issues you a Notice of Deficiency delivered by certified or registered mail. The Statutory Notice of Deficiency details what is being assessed and how it was calculated.
The IRS Statutory Notice of Deficiency is a vital due process function that plays a critical role in many IRS activities, such as appeals and tax litigation, and is a significant catalyst for enabling IRS collection activities to engage. If you receive an IRS Statutory Notice of Deficiency, it is critical to immediately assess and take action, especially while all appeal and rebuttal venues remain at your disposal. Getting a tax professional to help you initially may be your best option.
What is an IRS Statutory Notice of Deficiency?
A Statutory Notice of Deficiency is a legal determination by the IRS of a taxpayer’s tax deficiency. It is an official written claim that a taxpayer owes additional income tax (and additional penalties and interest). It is issued when the IRS proposes a change to a tax return because they found that the information reported on a return does not match their records. The IRS’s requirement to issue a notice of deficiency is stated in Internal Revenue Sections 6212 and 6213. These sections promulgate the rule that unless the IRS sends out a timely and valid notice of deficiency, any tax liability assessed by the IRS is invalid.
What Triggers the IRS to Issue a Notice of Deficiency?
External parties, such as employers, financial institutions, and brokers, report taxable transitions to the IRS. For example, when an employer issues a 1099-NEC form to a contractor, the employer also issues this information to the IRS. The same generally holds for when a broker issues you a 1099-B which reflects investment activities, it also has issued this information to the IRS. When these records are either missing or do not match what has been reported in your tax return, IRS will initiate a correction and or addition, which gets listed within the deficiency notice. To help avoid having the IRS make adjustments to your tax return, it’s crucial to double-check for any 3rd party omissions or misreporting of your tax return before filing.
The IRS Statutory Notice of Deficiency Comes in What Forms?
The official name for a Statutory Notice of Deficiency is the IRS Notice CP2319A (or CP2319N): Notice of Deficiency and Increase in Tax. A Statutory Notice of Deficiency is often called an IRS 90-Day Letter, a Notice of Deficiency, or a Statutory Notice.
Depending up how the IRS determines the tax deficiency will determine whether a CP3219A Notice or a CP3291N Notice is used. Here are some clarifications the IRS uses to determine which form is applicable to use:
- CP3291N If the IRS did not receive your tax return and then prepared your return based on wages (W2s) and other income (1099s) reported by third parties, the IRS will issue the CP3291N. When the IRS prepares your tax return, this is referred to as a Substitute For Return (SFR). Although it may seem convenient that the IRS would do this for you, the outcome will not be in your favor since the IRS will not include any allowable credits or deductions during the processing of your return resulting in a higher tax than if you had it prepared. There are additional drawbacks to taxpayers when SFR returns are prepared. Also, the IRS will not prepare an SFR if you are due a refund. For more information, please see this blog, “The IRS May Prepare a Substitute for Return in Place of an Unfiled Tax Return“
- CP3219A If the IRS receives information that is different from what you reported on your tax return, the IRS will issue this notice. The change may result in an increase or decrease in tax. An omission of a form listed on your tax return will trigger this notice type.
What Information Is Provided within an IRS Statutory Notice of Deficiency?
The notice will provide the applicable tax year in question and the amounts of the proposed adjustments. There will be a listing portraying how the amounts were calculated. It is essential to verify the accuracy and validity of any proposed adjustments. It often comes down to providing missing information that could clear everything up. For example, if you were to receive a notice that states you owed taxes from a capital gain from the sale of your home, which was not reported on your tax return. The IRS had a 1099S which lists the amount of the proceeds from the home sale, as reported by the broker; however, it did not either list the basis of the property or any potential capital gain exclusion amounts you may be entitled to. Now, you are faced with a tax debt, penalties, and interest, none of which you would owe if correct information were provided.
In addition, there may be an accompanying IRS Form 5564, Notice of Deficiency Waiver. If you agree with the tax amounts listed within the deficiency notice, IRS provides this form for you to sign off on and send to IRS. Both spouses must sign if the deficiency notice is for a jointly filed return. Most importantly, do not sign this form if you disagree with the Notice of Deficiency! Make sure to understand what is being assessed. Just like in the example mentioned, there could be a solution to alter the outcome significantly. You have options to appeal! More on that later in this article.
When Is the IRS Not Required to Issue a Statutory Notice of Deficiency?
The IRS is not required to issue a Statutory Notice of Deficiencies under the following circumstances:
- When you file your tax return, the amount listed on the tax return is assessed by you; therefore, the IRS does not have to issue a Notice of Deficiency.
- When the IRS issues specific reportable transactional penalties such as Failure to File Penalty, Failure to Pay Penalty, and Trust Fund Recovery Penalty, among others.
- An IRS correction of a math error is where the IRS determines a tax deficiency resulting from a clear mathematical or clerical error reported on your tax return and then makes the correction without sending a deficiency notice. The IRS still has to notify you of the mathematical or clerical changes. If a taxpayer contests a math error notice within 60 days, IRC § 6213(b)(2)(A) provides that the IRS must abate the assessment. If the IRS abates the assessment, it must follow deficiency procedures before reassessing the tax. Taxpayers who do not contest a math error notice within 60 days lose the right to do so in court before paying. The IRS can use a Notice of Deficiency route for clerical and mathematical errors if it chooses to.
How Long Can the IRS Take to Issue a Statutory Notice of Deficiency?
The IRS can typically only issue a Statutory Notice of Deficiency during a tax assessment period for a particular tax. The tax assessment period the IRS uses is based of the Assessment Statute Expiration Date (ASED). The ASED occurs at the end of the period when the IRS can assess tax concerning a particular tax year. The ASED is calculated on the basis that an assessment of tax must be made within three years from the received date of an original tax return or three years from the due date of the original return, whichever is later. However, there is no assessment period if no tax return was filed or a fraudulent tax return was filed.
The three-year assessment period can be extended by:
- You request a Collection Due Process Hearing.
- You file a Bankruptcy Petition.
- You have applied for an Offer in Compromise.
- If you sign 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 called a “Notice of Deficiency Waiver “).
If you have significantly understated the tax on a return, the assessment period can be extended from three to six years.
How Should I Respond to an IRS Notice of Deficiency?
You have several options for responding to an IRS Notice of Deficiency. These options include:
- Pay the tax in the notice and close the matter.
- Pay the tax in the notice and submit a refund claim.
- File an offer in compromise.
- Submit a petition with the U.S. Tax Court.
- Petition the IRS to withdraw or rescind the notice of deficiency.
The IRS Statutory Notice of Deficiency, also known as the 90-Day Letter, gives you 90 days from the date listed on the notice to file a petition with the U.S. Tax Court.
It’s important to note that the 90 days begins as of the date listed on the notice, which represents when it was mailed and not the day you received it in your mailbox. If you petition for tax court, you must do so within 90 days of the notice date.
The 90 days are extended to 150 days if your address is outside the United States.
What Happens If I Did Not Receive My IRS Notice of Deficiency?
The IRS must send a statutory notice of deficiency to a taxpayer’s last known address by certified or registered mail. The last known address is generally the address that appears on your most recently filed and properly processed tax return unless the IRS is given clear and concise notification of a different
The courts will invalidate the notice if the IRS does not properly Notice of Deficiency.
For my IRS Deficiency Notice, Who Can File a Petition to Go to Tax Court?
You can file the tax court petition if you are listed on the Deficiency Notice.
What Happens When I File a Tax Court Petition?
Once the U.S. Tax Court receives your court petition, they will notify the IRS of your response to the IRS Notice of Deficiency. The IRS will place a hold on the assessment case and is prevented from issuing additional assessments for the same tax and period.
The IRS counsel will then file an Answer to your petition with the U.S. Tax Court. Often your case will get forwarded to the IRS Office of Appeals. If the case can be solved without going to tax court, the IRS will review the case and schedule a conference with you. The conferences are informal and are conducted by correspondence, telephone, video, or in-person conference.
On average, the IRS settles 70% of cases that go to appeals. Filing for U.S. Tax Court can have significant advantages. Knowing your taxpayer rights and the relative’s time frames to enact these rights is imperative. Do not let your rights expire do to non-action!
There may be some other settlement options available.
For additional information, please refer to the following blogs:
- “The Ins & Outs of Audit Reconsideration“
- “When You Can Pursue a Collection Due Process Hearing“
- “Appealing IRS Tax Determinations“
- “What Should I Do If I Receive an IRS Notice“
Get Trusted Representation For Your IRS Notice of Deficiency
To ensure that you align yourself with the best possible outcome, whether dealing with a challenging IRS Statutory Notice of Deficiency situation or seeking other forms tax debt relief, have an experienced tax attorney-CPA-EA provide the expert guidance to get you there. Call today (772-418-0949), or complete an online inquiry form for a free consultation with experienced IRS Notice of Deficiency Tax Attorney-CPA-EA, Will Harmon of Harmon Tax Resolution, LLC. He will handle your IRS Notice of Deficiency and any other IRS issue so that you can put this behind you and get on to doing the things that matter most.
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