What is a Notice of Deficiency?

A Notice of Deficiency is a letter the IRS sends after it audits a taxpayer’s return and concludes that they have paid less than the full amount of tax owed or failed to declare all sources of income; hence there is a “deficiency.” The notice gives the taxpayer 90 days to appeal the IRS’s conclusion about the deficiency and tax owed to the U.S. Tax Court. Therefore, it is sometimes called a “Ticket to Tax Court.”

If you are facing a high-stakes tax problem, our team at Ayar Law can help you protect your property and your freedom from unreasonable IRS and state tax collections.

Why did I get a Notice of Deficiency?

A Notice of Deficiency often dubbed a “90-Day Letter,” can occur when the IRS believes you have not declared all of your taxable income on your return. Sometimes there’s a mismatch between the information the IRS receives from financial institutions, employers, and others and the information the taxpayer has. For example, a financial institution sends a report of dividends to the IRS and the taxpayer. However, the taxpayer loses or overlooks that report when preparing their tax return.

A taxpayer also may receive a Notice of Deficiency if they have unfiled tax returns. This can happen if the IRS gets information indicating you had income during a tax period that warranted the filing of a return. When that occurs, the IRS calculates the tax it believes you owe and demands payment of that amount in a Notice of Deficiency. The IRS also will impose a penalty and interest on the tax relating to the unfiled return.

What is The “90-Day” Rule?

The 90-Day Rule refers to the time the taxpayer has to challenge the IRS’s conclusions about their unreported income. The IRS provides a form along with the 90-Day letter called Form 5564 and it provides a way to respond to them. During a 90-day time frame, if the taxpayer disagrees with the IRS, they may:

  • Submit Form 5564 by Fax
  • Submit Form 5564 by Mail
  • Communicate by phone with the IRS

The IRS will consider additional information you provide, such as forms or documents explaining your position and a signed statement. For example, a business may have submitted incorrect information to the IRS. This can be explained along with a corrected submission from the business. Whatever the problem, it’s essential to take action and not ignore it.

A taxpayer also may appeal to the U.S. Tax Court. They have 90 calendar days from the date of the letter to file a petition with the Tax Court. The IRS does not grant extensions, but there is one exception. If it is addressed to you while you are living outside of the United States, the deadline to file a petition is 150 days.

Further, if you received a 90-Day Letter because you failed to file a tax return, filing the return after receiving it will not extend your time to appeal the deficiency to the Tax Court.

Options Beyond Tax Court

Not everyone is up for taking on the IRS in Tax Court. You may be inclined to challenge the IRS deficiency determination but wish to avoid a formal proceeding. The 90-Day Notice encourages some tax relief options as an alternative to Tax Court, such as arranging a payment plan for back taxes. In addition, you may be able to ask for a penalty abatement, though such relief is not guaranteed and is always at the discretion of IRS personnel.

The notice advises that you can speak with an IRS employee. If this is daunting, you can also write to the IRS using Form 5564. However, when a substantial sum is at stake, the IRS often has less discretion to compromise. In such cases, having experienced tax attorneys at Ayar Law can be the surest way to secure satisfactory results. Moreover, the IRS will consider information about your circumstances; this is the all-important opportunity to argue the unfairness of a deficiency in your tax return.

Contact Us for a free, no-obligation consultation

At Ayar Law, we focus exclusively on tax law. We have an in-depth knowledge of how the IRS works, so we can get things done for our clients. Don’t face your tax problems alone. Our team will resolve your tax problems with the urgency, personal attention, and confidentiality you deserve—contact us to learn more or for a free, no obligation consultation on your tax issues.