Have you ever opened your mailbox to find a Notice of Deficiency from the IRS and felt a wave of uncertainty wash over you? It's a typical response, but grasping this document is vital for handling your taxes well. Let's delve into what a Notice of Deficiency entails and what steps you can take if you receive one. From unraveling its purpose to exploring your options, here's everything you need to know to navigate the complexities of tax disputes with confidence.
What Is a Notice of Deficiency?
A Notice of Deficiency, also known as a 90-day letter, is an official notice sent by the IRS. It tells a taxpayer about any mistakes or shortages found in their tax return. It notifies the taxpayer of the proposed changes to their tax return and the resulting increase in tax liability.
Understanding the Purpose
The primary purpose of a Notice of Deficiency is to ensure fairness and transparency in the tax assessment process. When the IRS identifies discrepancies or deficiencies in a taxpayer's return, they send out this notice to inform the taxpayer about the proposed changes. This notification serves as a crucial step in the tax dispute resolution process.
Here's a breakdown of its purpose:
Opportunity to Dispute
The Notice of Deficiency provides the taxpayer with an opportunity to dispute the proposed changes before the IRS finalizes the assessment. This means that the taxpayer has a chance to review the IRS's findings, provide additional information or explanations if necessary, and present their case to contest the adjustments.
Prevention of Automatic Assessment
Without the Notice of Deficiency, the IRS could automatically assess additional taxes, penalties, and interest based on their findings. However, by issuing this notice, the IRS gives the taxpayer the chance to address any discrepancies and potentially avoid or reduce the additional tax liability.
Formal Notification
The Notice of Deficiency serves as a formal notification from the IRS regarding the proposed changes to the taxpayer's return. It outlines the adjustments made by the IRS, provides detailed explanations for those adjustments, and specifies the legal basis for the proposed tax deficiency.
Protection of Taxpayer Rights
By receiving a Notice of Deficiency, the taxpayer is made aware of the IRS's intentions and has the opportunity to exercise their rights under the tax laws. This means you can go to court to challenge the problem if needed, making sure your rights are protected while resolving the disagreement.
Why Do Taxpayers Receive a Notice of Deficiency?
There are several reasons why a taxpayer may receive a Notice of Deficiency. Some common scenarios include:
Underreported Income: The IRS may discover unreported income that was not included in the taxpayer's original return.
Disallowed Deductions: Certain deductions claimed on the tax return may be disallowed by the IRS due to lack of substantiation or eligibility.
Math Errors: Errors in calculations or mathematical mistakes on the tax return can lead to discrepancies identified by the IRS.
Mismatched Information: Discrepancies between the information reported by the taxpayer and the information provided by third parties, such as employers or financial institutions, can trigger a Notice of Deficiency.
Overstated Deductions: Taxpayers may mistakenly claim deductions they're not eligible for, leading to discrepancies when compared to IRS guidelines. These mistakes, whether on purpose or not, can lead the IRS to send a Notice of Deficiency to correct the tax amount owed.
Failure to Report Taxable Events: Taxpayers are obligated to report taxable events like capital gains, rental income, or self-employment earnings accurately. If they fail to do so, whether by oversight or intent, it can lead to discrepancies noticed by the IRS, potentially resulting in the issuance of a Notice of Deficiency.
What to Do If You Receive a Notice of Deficiency
Receiving a Notice of Deficiency can be unsettling, but it's essential to take action promptly. Here are steps you can take if you receive one:
Review the Notice
Take your time to go through the Notice of Deficiency to grasp the suggested adjustments and the reasons behind them. Make a note of the deadline for responding to the notice, usually 90 days from the date of the notice.
Consider Your Options
You have several options for responding to a Notice of Deficiency:
Agree: If you agree with the proposed changes, you can sign the notice and return it to the IRS, along with payment for any additional taxes owed.
Disagree: If you disagree with the proposed changes, you can file a petition in the United States Tax Court to challenge the IRS's findings. It's crucial to act within the 90-day window to preserve your rights to contest the deficiency in court.
Request an Extension: If you need more time to gather information or prepare your response, you can request an extension from the IRS. Be sure to submit your request before the deadline specified in the notice.
Provide Additional Documentation
If you believe that the discrepancies identified in the Notice of Deficiency are due to missing or incomplete information, gather any relevant documentation to support your position. This could include receipts, invoices, bank statements, or other records that clarify your tax situation.
Consider Settlement Options
In some cases, it may be possible to settle with the IRS outside of the formal dispute process. This could involve negotiating with the IRS to agree on a compromise regarding the proposed changes or exploring alternative resolution options, such as an offer in compromise or installment agreement.
Seek Professional Help
If you're unsure how to proceed or need assistance in responding to the Notice of Deficiency, consider consulting a tax professional or attorney with experience in tax controversy matters. They can provide guidance and representation throughout the process.
Conclusion
Receiving a Notice of Deficiency can be a stressful experience, but it's essential to address it promptly and take appropriate action. Whether you agree or disagree with the proposed changes, understanding your rights and options is key to resolving the matter effectively. By staying informed and seeking assistance when needed, you can navigate the process with confidence and ensure a fair outcome for your tax situation.
