How To Respond To An IRS Notice Of Deficiency
An IRS notice of deficiency is a formal letter stating that the agency believes you owe additional federal income tax, penalties, and possibly interest. It is often called a “90-day letter” because it gives the taxpayer a limited period to challenge the proposed assessment in the United States Tax Court.
This notice usually follows an examination, an information mismatch, or a disagreement over deductions, credits, income, filing status, or another reported item. It is more serious than a routine request for information, but receiving it does not mean the IRS’s position is automatically correct.
The response should be deliberate and deadline-driven. Review the notice promptly, preserve the envelope and attachments, gather supporting records, and consider advice from a tax attorney before contacting the IRS or signing an agreement.
Identify the notice and its deadline
Look for language such as “Notice of Deficiency,” “Statutory Notice of Deficiency,” or “90-Day Letter.” The notice should identify the tax year, proposed adjustments, additional tax, penalties, interest, and the deadline for filing a Tax Court petition. The date printed on the notice controls the response period, so do not assume the deadline begins when the letter reaches your mailbox.
Most taxpayers have 90 days from the notice date to file a petition with the Tax Court. Individuals whose legal address is outside the United States generally receive 150 days. Weekends and federal holidays can affect how the deadline is calculated, but relying on a last-minute interpretation creates unnecessary risk.
A notice of deficiency is different from a collection notice demanding immediate payment. The IRS generally cannot assess and collect the disputed deficiency until the Tax Court opportunity has expired or the case has been resolved. Still, penalties and interest may continue to grow while the dispute remains open.
Check the proposed tax adjustments
Read every page, including schedules and explanations of changes. Compare the IRS figures with your filed return, Forms W-2 and 1099, brokerage statements, business records, charitable receipts, medical expense documentation, and correspondence from the audit. An apparent error may involve a missing document rather than an incorrect tax position.
Pay close attention to whether the IRS changed income, disallowed a deduction, removed a credit, altered your filing status, or applied a different basis calculation. For a business owner, the adjustments may involve expenses, payroll reporting, depreciation, worker classification, or sales connected to pass-through income.
Create a written issue list. For each adjustment, record the IRS position, your response, the supporting evidence, and any unresolved factual or legal question. This makes it easier to determine whether the matter can be corrected administratively or requires litigation in Tax Court.
Choose between Tax Court and payment options
Filing a Tax Court petition is usually the primary way to contest a deficiency before paying the disputed amount. The petition must be filed with the United States Tax Court, not sent to the IRS address printed on the notice. The filing fee and procedural requirements should be verified through current Tax Court instructions.
A timely petition can give the court jurisdiction and may allow the dispute to proceed without immediate payment of the proposed deficiency. The IRS may assign the case to its Office of Chief Counsel, and settlement discussions can occur during the litigation process. A taxpayer may represent themselves, but procedural rules and evidentiary requirements can make professional representation valuable.
If the amount is correct or the taxpayer decides not to challenge it, payment and collection planning become the focus. The IRS may consider an installment agreement, an offer in compromise, or another resolution depending on income, assets, equity, and ability to pay. Guidance on IRS payment demands can help distinguish a proposed liability from an enforceable collection balance.
| Situation | Practical response | Main concern |
|---|---|---|
| You disagree with the adjustments | Gather records and consider filing a Tax Court petition | Missing the filing deadline |
| The IRS omitted documents from its review | Request audit reconsideration or present the evidence through the appropriate channel | Assuming a phone call automatically pauses the deadline |
| You agree that tax is owed but cannot pay | Evaluate an installment agreement or offer in compromise | Liens, levies, penalties, and interest |
| The notice involves a joint return | Review allocation of liability and possible relief options | Remaining liable for a spouse’s or former spouse’s tax |
| The deadline has already passed | Seek immediate advice about available alternatives | Losing regular Tax Court jurisdiction |
Communicate carefully with the IRS
Do not ignore the notice, but avoid making unsupported admissions or sending incomplete explanations. A casual telephone conversation generally does not replace a formal petition and does not preserve the 90-day deadline. If you contact the IRS, keep notes of the date, representative’s name, identification number when available, and substance of the discussion.
Send documents through a trackable method or an approved electronic channel when available. Keep complete copies of everything submitted, including cover letters and proof of delivery. Organize records by tax year and issue so that a representative or tax professional can quickly understand the facts.
If the proposed deficiency arises from a joint return, examine whether the liability should be allocated between spouses. In some circumstances, a taxpayer may qualify for separation of liability, equitable relief, or another form of innocent spouse relief. Eligibility depends on the return, the circumstances surrounding the understatement, knowledge of the tax problem, and whether holding the taxpayer responsible would be unfair.
Preserve evidence and evaluate defenses
The best response often depends on records that were not available, organized, or considered during the original examination. Bank statements, invoices, mileage logs, contracts, emails, accounting files, appraisals, proof of payment, and contemporaneous business records may support a corrected tax position.
Some disputes involve legal interpretation rather than missing paperwork. Questions may concern whether an expense was ordinary and necessary, whether an asset was placed in service, whether income belongs to a particular taxpayer, or whether a penalty should be removed because of reasonable cause. A tax attorney can help separate factual defenses from arguments requiring legal analysis.
Do not alter, recreate, or backdate records. If documentation is incomplete, explain what exists and identify corroborating evidence. Your CPA or accountant may help assemble financial information, while an attorney can address privilege, litigation strategy, settlement, and communications with the IRS.
Take these steps promptly
- Record the notice date, tax year, proposed balance, and exact petition deadline.
- Compare every adjustment with the filed return and supporting financial records.
- Separate issues you accept from issues you intend to dispute.
- Consult a tax controversy attorney before the deadline, especially if the amount is substantial or the case involves a business.
- Preserve the original notice, envelope, correspondence, and proof of every submission.
The right response depends on both the merits of the IRS adjustments and the procedural deadline. Pridgeon & Zoss, PLLC represents individuals and businesses in IRS examinations, Tax Court disputes, collection matters, installment agreements, offers in compromise, and related federal and Minnesota tax issues. Contact the firm promptly for an evaluation of the notice, available defenses, and the most appropriate path forward.