Receiving a notice in the mail from the IRS can be worrisome, especially if it is a letter of deficiency that indicates that you may have underpaid taxes in a previous year. Understanding what the letter means and the options available will help you navigate the issue successfully.

What Is a Letter of Deficiency?

A letter of deficiency is also commonly called a 90-day letter, because as the taxpayer you have only 90 days to respond to the IRS once you have received the notice. The letter rarely comes without warning, as you should have received a previous pre-assessment letter. Failure to respond to the pre-assessment letter results in the letter of deficiency.

Audit Report

The letter of deficiency will include an audit report. This must be read carefully and understood thoroughly, as it details the changes to your filing made by the IRS. The audit report will also show the adjusted amounts owed, along with any fines or fees assessed by the IRS. It's your responsibility to make sure the report is accurate.

Waiver

A waiver will also be included with the notice, but don't sign it too quickly. Once signed and sent in you have agreed to the proposed changes on the audit report, meaning you are responsible for the adjusted tax payment due. The waiver should be set aside until you have a chance to fully research the tax filing changes being proposed by the IRS.

How Does One Respond to the IRS?

All responses to a letter of deficiency must be received by the IRS in writing. You have the option to agree or to disagree with the audit report and adjustments provided with the letter.

Agreement Expectations

If after review of the audit report you agree with the changes made by the IRS, then you will need to sign and return the waiver. Your next step is to file an amended return that includes the changes proposed in the audit report. An amended return ensures that the correct tax information is in your permanent IRS file, which can simplify future year's filings.

Disagreement Process

If you disagree with the assessment then you must officially file a petition to challenge the audit report with the tax court. The process for filing the petition and the current fee schedule for doing so will be provided in the letter of deficiency. You have 90 days to file your disagreement. Failure to respond within 90 days means you have forfeited your right to challenge and accepted the results of the audit report.

What Happens Next?

The next steps depend on whether you agreed to pay the tax debt or disagree with the assessment. Failure to follow through afterward can result in repercussions like a tax lien on your property and wages, or a levy that allows the IRS to seize property.

Payment Options

Once you choose to sign the waiver, then payment of any deficient amounts will be due. There are a couple of options if you owe the IRS. You can either pay the full amount, including any penalties or fees, immediately, or you can request a payment plan from the IRS. You will not owe any payments while the IRS is reviewing your request for a payment plan. 

Tax Court

You must provide your reasons for disagreement, including all evidence you have to support your case. This can include everything from receipts to personal statement letters detailing why you think the tax assessment is in error. You will not owe any payments until the tax court has reviewed your challenge petition and made a decision.

Contact IRS Trouble Solvers, LLC if you receive a letter of deficiency so that you can have professional assistance as you navigate the IRS process.