A 90-Day Letter, formally known as a Notice of Deficiency, is an official IRS communication sent to taxpayers after an audit reveals discrepancies or errors in their tax return. This notice indicates that the IRS intends to assess additional tax, penalties, or interest unless the taxpayer files a petition with the United States Tax Court within 90 days.
Key Elements of a 90-Day Letter
Purpose of the 90-Day Letter
The primary purpose of the 90-Day Letter is to inform taxpayers of the IRS’s intention to adjust their tax return and to provide a final opportunity to dispute the findings before assessment and collection actions are enforced.
The Process of Issuance
- Audit Completion: The IRS completes a thorough audit of the taxpayer’s records.
- Drafting the Notice: If discrepancies are found, the IRS prepares the 90-Day Letter, detailing the proposed changes.
- Mailing the Notice: The letter is sent via certified mail to ensure the taxpayer receives it.
Implications for Taxpayers
- Assessment of Tax: The letter specifies additional taxes deemed due by the IRS.
- Penalties and Interest: Penalties and accumulated interest on the unpaid tax may also be included.
- Right to Dispute: The taxpayer has 90 days from the date of the letter to petition the Tax Court to contest any inaccuracies.
How to Respond to a 90-Day Letter
Petitioning the Tax Court
Taxpayers must file a petition with the United States Tax Court within the 90-day timeframe. The petition process includes:
- Filing Fee: Payment of a small filing fee.
- Formal Complaint: A written complaint disputing the IRS findings.
- Legal Representation: Consideration of hiring a tax attorney or expert.
Alternative Responses
- Paying the Amount Due: Accepting the IRS findings and paying the adjusted taxes, penalties, and interest.
- Requesting More Time: In some cases, taxpayers might request additional time to gather further documentation or seek advice.
Common Scenarios and Examples
Example: Understated Income
If an individual underreports their income, the 90-Day Letter will include the recalculated tax based on the corrected income figures, potentially leading to higher tax liability and penalties for understatement.
Example: Improper Deductions
In cases where inappropriate deductions are claimed, the letter will outline the disallowed deductions and the resulting tax impact.
Historical Context and Revisions
The Notice of Deficiency is a long-standing tool used by the IRS to ensure tax compliance and accuracy. Over the years, the process and regulations surrounding it have evolved to provide clearer communication and more robust taxpayer protections.
Comparison with Other IRS Notices
- CP2000 Notice: Unlike the 90-Day Letter, a CP2000 notice suggests adjustments based on third-party information and does not constitute a final determination. It allows taxpayers to respond with agreement or additional information beforehand.
- 30-Day Letter: Precedes the 90-Day Letter, giving taxpayers 30 days to respond to proposed changes before the Notice of Deficiency is issued.
FAQs
What happens if I ignore the 90-Day Letter?
Can the 90-day period be extended?
Is it possible to settle the matter out of court?
References
- IRS Publication 1, “Your Rights as a Taxpayer.”
- Internal Revenue Code Section 6212 - Notice of deficiency.
- United States Tax Court Rules of Practice and Procedure.
Summary
The IRS 90-Day Letter presents a critical juncture for taxpayers, marking the conclusion of an audit and the notification of intended assessments. Understanding its purpose, process, and how to effectively respond is crucial in safeguarding your rights and ensuring compliance. By timely petitioning the Tax Court or addressing the proposed changes, taxpayers can navigate this challenge with confidence and accuracy.
