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How to Respond to IRS Notice of Deficiency

Receiving an IRS Statutory Notice of Deficiency can be an overwhelming experience and with a strict 90-day response window, we recommend you resolve the issue swiftly by consulting a tax attorney. Here, at Dallo Law Group, we are prepared to guide you through the process, ensuring you understand your options and rights.

What is a Tax Deficiency?

The IRS calculates the amount you owe based on information that is sent to them from various sources, such as your employer, brokerage accounts, or even gambling winnings. Using this information, the IRS calculates the amount of tax they believe you owe. If the reported amounts on your tax return are lower than the amount that they believe are owed, this constitutes a tax deficiency. Common deficiency issues include understated income, overstated expenses/deductions, or incorrect tax credits.

What is a Notice of Deficiency from the IRS?

The Notice of Deficiency, also known as a “90-Day Letter” or “Ticket to Tax Court,” is issued by the IRS to inform you of a tax deficiency, as well as the IRS’s intention to assess additional taxes owed, penalties, and interest. The Notice of Deficiency acts as legal notice that the IRS is required by law to provide you before they can proceed with any collection actions.

How to Respond to IRS Notice of Deficiency

When responding to an IRS Notice of deficiency, read the notice carefully. Understand the reason for the deficiency and the proposed amount. Pay close attention to the tax year at issue, reason for deficiency, and any penalties proposed. Here is a list of actions you can take once you receive an IRS Notice of Deficiency:

  • File a Petition: If you disagree with the assessment of tax deficiency, you have 90 days to file a petition with the Tax Court. The petition form and rules for filing are available for download at www.usataxcourt.gov. The completed form can be eFiled at http://www.ustaxcourt.gov/dawson.html.
  • Ask for a Notice Withdrawal: If you believe the notice was issued in error, contact the IRS to request its withdrawal.
  • Pay the Adjustment: If you agree with the notice, you can sign Form 5564 and pay the proposed amount.
  • Submit an Offer in Compromise: If you agree with the assessment and are unable to pay, you may submit an Offer in Compromise Form 656 and attempt to settle with the IRS for a lesser amount.

Sending in IRS Form 5564 Notice of Deficiency Waiver

IRS Form 5564 is known as the “Notice of Deficiency – Waiver.” You may complete a Form 5564 when you agree with the IRS assessment and wish to pay the assessment amount. By submitting this form, you will agree to the additional tax assessment and waive your right to contest the deficiency in Tax Court.

How to Fill Out Form 5564

It is important to approach Form 5564 with care because signing this form means you are agreeing to the IRS’s findings and waiving your right to contest the deficiency in Tax Court. Here are the general steps you should follow:

Review the Notice of Deficiency: Before anything else, thoroughly review the Notice of Deficiency sent by the IRS to understand why the IRS believes you owe additional taxes. This notice will detail the tax period(s) in question, the amount of tax the IRS believes you owe, and reasoning.

Understand What You’re Agreeing To: By filling out and signing Form 5564, you are agreeing to the tax assessment as outlined in the Notice of Deficiency. Make sure you understand the implications, including any additional tax, penalties, interest, and the waiver of rights.

Complete the Form: Before submitting Form 5564, it is wise to consult with a tax professional or a tax attorney. They can help you understand the notice’s implications, verify the accuracy of the IRS’s findings, and advise on whether agreeing to the deficiency is in your best interest or if you should consider contesting the notice. If you decide to submit the form, here are some relevant instructions:

  • Taxpayer Information: Fill in your name, address, and taxpayer identification number (usually your Social Security Number or Employer Identification Number).
  • Tax Year and Amount: Indicate the tax year(s) and the amount of the deficiency you’re agreeing to. This information should align with what’s detailed in the Notice of Deficiency.
  • Signature and Date: Sign and date the form to validate your agreement. If you’re filing jointly, both spouses must sign if the notice relates to a joint return.
  • Submit the Form: Follow the instructions provided with the Notice of Deficiency for returning Form 5564. It’s important to meet any deadlines specified in the notice to avoid further penalties or legal actions.
  • Keep a Copy: Retain a copy of the signed form and any correspondence with the IRS for your records.

What is a Notice of Deficiency Waiver from the IRS?

This document signifies your agreement with the IRS regarding the suggested tax adjustment. To minimize accruing interest on the owed amount, promptly mail Form 5564 using certified mail and request a return receipt. Interest accrues from the original due date of your return, typically April 15, because taxes were expected to be paid by then. By law, interest charges are mandatory and generally cannot be reduced or waived. Upon receipt of the filled-out form, the IRS will issue a bill for the outstanding tax, which will include any accrued interest and penalties before receipt of Form 5564.

If You Disagree with the Tax Deficiency Notice: Make an IRS Notice of Deficiency Appeal

Filing an appeal with the IRS is how you can fight against the Notice of Deficiency letter. Here are some tips regarding an appeal:

  • File a Petition to the Tax Court: A petition is a legal formal document that challenges the IRS assessment of deficiency and is used to request the court to correct the error.
  • Request a Collection Due Process Hearing: Another tool at your disposal is to file a Request for a Collection Due Process Hearing. At this hearing, you can present your case and argue against the unjust increase in taxes due. You may also negotiate with the IRS for collection alternatives. Additionally, this hearing will force the IRS to stop interest accumulation and IRS collections until the conclusion of the hearing.
  • Include any support documents: If you disagree with the findings of the IRS, you should include any documents to show why the IRS is incorrect in their assessment of your tax deficiency. This step can increase your chances of winning the appeal.
  • Pay a 6603 Deposit: Under IRC 6603, you can make a cash deposit to pay certain taxes. This payment suspends the tax interest accumulation on potential underpayments allowing you more time to strategize your response. Because these payments only work for some categories of taxes, it is important to speak to an attorney to ensure you qualify.

A general strategy will be to file the petition to a Tax Court and request a Collection Due Process Hearing. As they have a similar timeline, you do not want to miss your window to conserve your right to appeal. By filing both a petition and a request for a hearing, you will have at least two opportunities to fight against the IRS. That is why it is important you contact a tax attorney immediately.

What Can You Do If the Proposed IRS Tax Deficiency Is Not Resolved in 90 Days?

If you do not respond within 90 days, the IRS can begin collecting on the tax owed. The IRS may try to collect the tax by filing a tax lien, wage garnishments, or asset seizures. Even if you reach this point, there may still be some options for relief.

  • File for audit reconsideration. An audit reconsideration allows the taxpayer to submit additional information to have the tax reassessed.
  • Pay the tax under protest and file a claim of refund. This allows the tax to stop accruing interest and penalties. You will have to file a Form 1040X.
  • File suit in federal court. Like Form 1040X, you pay the tax but instead file a suit for refund. You would file the suit in the US District Court or Court of Federal Claims. You should consult a tax attorney before filing suit to follow the proper procedure.

Form 1040X is used to amend your tax returns to correct errors or make changes, in this case the reason would be to amend the amount of tax you owed. Furthermore, there will be some advantages in either filing in the U.S. District Court versus the Court of Federal Claims. U.S. District Court handles a variety of cases, while the Court of Federal Claims deals with monetary damages against the U.S. government. Based on each person’s case, there will be advantages to filing in different courts, and an attorney at Dallo Law Group can help you make the right decision.

Seeking Legal Help with a Statutory Notice of Deficiency IRS Appeal

Getting a Notice of Deficiency from the IRS can be nerve racking. But the expert attorneys and staff members at Dallo Law Group are ready to help you fight the Notice of Deficiency efficiently and swiftly. So do not wait until the 90th day to speak with a tax expert, call Dallo Law Group today.