IRS Notice of Deficiency Explained
Understanding the IRS 90-Day Letter and Your Right to Petition the U.S. Tax Court
An IRS Notice of Deficiency—often called the 90-Day Letter —is one of the most significant notices the IRS issues during an examination. It formally notifies a taxpayer that the IRS has determined additional tax is owed and explains the taxpayer's right to challenge that determination by filing a petition with the United States Tax Court before the IRS assesses the proposed deficiency.
Unlike earlier examination correspondence, a Notice of Deficiency is a statutory notice. The deadline for filing a Tax Court petition is established by law. If a petition is not timely filed, the IRS generally may assess the proposed tax and begin the collection process.
Receiving a Notice of Deficiency does not automatically mean you owe the proposed amount. It does mean you should carefully review the notice, understand the deadline shown in the letter, and determine whether you wish to challenge the IRS's determination.
Key Takeaways
- A Notice of Deficiency is often called the IRS 90-Day Letter.
- It explains the IRS's proposed deficiency and your right to petition the United States Tax Court.
- The filing deadline is generally 90 days from the date the notice is mailed (or 150 days in certain circumstances involving addresses outside the United States).
- If no timely petition is filed, the IRS generally may assess the proposed tax and begin normal collection procedures.
- The deadline is extremely important and should be verified directly from the notice.
What Is an IRS Notice of Deficiency?
A Notice of Deficiency is the formal notice required by Internal Revenue Code § 6212 before the IRS may assess certain proposed income tax deficiencies. The notice explains the adjustments proposed by the IRS and informs the taxpayer of the right to seek review by the United States Tax Court without first paying the disputed tax.
The notice is frequently issued after an examination remains unresolved following earlier correspondence such as Letter 525 or other examination letters. Although the examination process has generally concluded, the taxpayer still has an opportunity to obtain judicial review if a timely petition is filed.
Because the Notice of Deficiency creates important legal rights, taxpayers should review the notice carefully, retain a complete copy of every enclosure, and confirm the filing deadline shown in the notice.
Why Did You Receive a Notice of Deficiency?
A Notice of Deficiency generally means the IRS completed its examination or review and determined that additional tax is due, but the taxpayer did not fully agree with the proposed adjustments during the administrative examination process.
Unresolved Audit Issues
The IRS and taxpayer were unable to resolve one or more examination adjustments.
Appeals Was Not Requested or Did Not Resolve the Case
Administrative review concluded without a complete resolution.
Proposed Tax Remains in Dispute
The IRS continues to believe additional tax is owed and is preserving its right to assess the deficiency if no timely Tax Court petition is filed.
Do Not Ignore a Notice of Deficiency
Unlike many earlier IRS notices, a Notice of Deficiency carries a statutory deadline for filing a petition with the United States Tax Court. If the petition is not filed on time, the IRS generally may assess the proposed tax, penalties, and interest and begin normal collection procedures.
Because Tax Court filing deadlines are governed by law, taxpayers should review the notice immediately and verify the petition deadline shown in the notice.
How to Review a Notice of Deficiency
The Notice of Deficiency should be reviewed carefully and completely. In addition to the notice itself, examine every attachment explaining the proposed adjustments, tax calculations, penalties, and supporting schedules. The filing deadline for a Tax Court petition is one of the most important dates on the notice and should be verified immediately.
Before deciding whether to petition the United States Tax Court, compare the IRS's proposed adjustments with your original tax return, supporting records, prior examination correspondence, and any discussions that occurred during the audit or Appeals process.
Six Steps After Receiving a Notice of Deficiency
Verify the Petition Deadline
Determine the deadline shown on the Notice of Deficiency. In most situations the taxpayer has 90 days from the mailing date to file a petition with the United States Tax Court (150 days in certain cases involving taxpayers outside the United States). Missing this deadline can eliminate the opportunity for prepayment judicial review.
Read Every Proposed Adjustment
Review each adjustment individually. Determine precisely what income, deductions, credits, penalties, or other items the IRS changed and why those changes were proposed.
Gather Supporting Documentation
Collect accounting records, receipts, contracts, brokerage statements, depreciation schedules, bank records, and any other documents supporting your position.
Evaluate Your Options
Consider whether you agree with the proposed adjustments, whether additional discussions with the IRS are appropriate, or whether filing a petition with the United States Tax Court should be considered.
Preserve Your Rights
If you intend to challenge the Notice of Deficiency in Tax Court, ensure that the petition is properly prepared and timely filed. Filing deadlines established by statute are strictly enforced.
Keep Complete Records
Maintain complete copies of the Notice of Deficiency, prior examination correspondence, supporting documentation, and everything submitted to the IRS or the Tax Court.
General Options After Receiving a Notice of Deficiency
| Option | General Description |
|---|---|
| Accept the Proposed Changes | A taxpayer who agrees with the IRS determination may follow the instructions provided in the notice regarding payment or other resolution procedures. |
| Petition the United States Tax Court | A timely Tax Court petition generally allows judicial review of the proposed deficiency before the IRS assesses the tax. |
| Allow the Deadline to Expire | If no timely petition is filed, the IRS generally may assess the proposed tax and continue with normal collection procedures. |
Documents Commonly Reviewed
Review every page of the notice and every attachment.
Review the proposed adjustments supporting the deficiency.
Compare each adjustment with the originally filed return.
Accounting records, receipts, contracts, financial statements, and other documentation supporting your position.
The Petition Deadline Is Critical
The deadline printed on the Notice of Deficiency is established by statute. Unlike many IRS administrative deadlines, the Tax Court generally cannot hear a deficiency case if the petition is filed late. Carefully verify the deadline shown in your notice and act well before that date.
Even if you are still evaluating your options, do not assume the deadline can be extended. Preserving your rights often depends upon timely action.
What Happens After a Notice of Deficiency?
After issuing a Notice of Deficiency, the IRS generally cannot assess the proposed deficiency until the statutory petition period expires or, if a timely petition is filed, until the Tax Court case is resolved. This allows taxpayers to obtain judicial review before paying the disputed tax.
What happens next depends largely on whether the taxpayer files a timely petition with the United States Tax Court. The two paths are very different and may significantly affect the taxpayer's rights and available options.
Possible Outcomes
- A timely Tax Court petition is filed and the case proceeds through the Tax Court process.
- The taxpayer and the IRS resolve the dispute before trial.
- The Tax Court issues its decision after considering the evidence.
- No petition is filed, allowing the IRS to assess the proposed deficiency and continue with normal collection procedures.
What Happens Next?
The Notice of Deficiency is generally the final administrative step before judicial review becomes available.
Common Mistakes After Receiving a Notice of Deficiency
Ignoring the Notice
A Notice of Deficiency should never be ignored. The petition deadline is established by law.
Waiting Until the Last Minute
Preparing a Tax Court petition often requires time to evaluate the issues and assemble supporting information.
Assuming the IRS Is Automatically Correct
Many disputes involve factual disagreements, documentation, valuation issues, or differing interpretations of the tax law.
Assuming Tax Court Means a Trial
Many Tax Court cases are resolved through settlement discussions before reaching trial.
Not Preserving Records
Maintain complete copies of the Notice of Deficiency, examination reports, correspondence, and supporting documentation.
Believing the Deadline Can Be Extended
The statutory filing deadline is generally strict. Waiting too long can permanently affect your right to seek Tax Court review.
Frequently Asked Questions
Is a Notice of Deficiency the same as a tax bill?
No. A Notice of Deficiency generally advises that the IRS proposes additional tax and informs you of your right to petition the United States Tax Court before the IRS assesses that deficiency.
Do I have to pay before going to Tax Court?
Generally, no. One of the primary purposes of the Notice of Deficiency is to allow taxpayers to seek Tax Court review before paying the disputed deficiency.
Can I still settle after filing a Tax Court petition?
Yes. Many Tax Court cases are resolved through settlement discussions before trial.
Can I represent myself in Tax Court?
Taxpayers may represent themselves. Depending on the complexity of the issues, some taxpayers choose to retain a CPA, attorney, or other qualified representative.
What happens if I miss the petition deadline?
Missing the statutory deadline may allow the IRS to assess the proposed deficiency and generally eliminates the opportunity for prepayment review by the United States Tax Court.
Does filing a Tax Court petition stop IRS collection?
Generally, the IRS cannot assess the disputed deficiency while a timely Tax Court case is pending, although other circumstances may affect collection activities depending on the issues involved.
Received an IRS Notice of Deficiency?
A Notice of Deficiency is one of the most important notices issued during an IRS examination. Understanding your petition rights, preserving statutory deadlines, and evaluating the proposed adjustments promptly can have a significant impact on the outcome of your case.
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