Before a taxpayer receives a formal notice of deficiency, the IRS needs to determine a need for the notice and also notify the taxpayer. The IRS will start the process if:
The IRS believes a taxpayer owes more tax than the taxpayer reported on their tax return. If a taxpayer does not file a tax return and the IRS determines the taxpayer nevertheless has a tax liability.
If one of the above factors is determined to be true, the IRS will begin sending letters and notices to the taxpayer. In general, these initial communications either instruct the taxpayer to file the missing tax return, request the taxpayer provide the IRS with documentation to support positions taken on their tax return, or inform the taxpayer that their return has been selected for an audit. If the taxpayer does not file a tax return or otherwise satisfy the IRS’ inquiries, the IRS will eventually make its own determination of the taxpayer’s liability for the year and send the taxpayer a notice of deficiency.
Example of a Notice of Deficiency
If you receive a notice of deficiency, you have a few options. First, decide if you agree with the amount of tax the IRS has determined you owe, or if you disagree. If you agree, you can sign the notice of deficiency waiver provided by the IRS and pay the taxes you owe. If you think the IRS has incorrect information, or you disagree with the amount the IRS has determined you owe, you can do one of the following:
Provide more information to the IRS in an attempt to resolve the dispute Petition the United States Tax Court within 90 days of the date stamped on the notice of deficiency
Petitioning the Tax Court gives you an opportunity to legally challenge the IRS’ deficiency determination, as well as prevent the IRS from assessing the tax and taking collection action until after the Tax Court has made its determination. If you don’t respond to the notice of deficiency or petition the Tax Court by the deadline, the IRS will send you a tax bill that will include any penalties or interest you owe. It will begin collection activity if necessary.
Types of Notices of Deficiency
The IRS sends different notices of deficiency to taxpayers depending on their situation. A business and a person would receive different types of notices, for example.
IRS Letter 3219
The IRS sends letter 3219 as a notice of deficiency to taxpayers with whom it conducted a correspondence audit—a request for additional information about a specific issue or item on the taxpayer’s tax return—that did not result in an agreement with the taxpayer.
IRS Notice CP3219A
The IRS sends notice CP3219A as a notice of deficiency to taxpayers whom it determined underreported their tax liability on their tax return. This is based on information the IRS received on tax documents prepared by third parties such as employers, including W-2s and 1099s.
IRS Letter CP3219b
The IRS sends letter CP3219b as a notice of deficiency to business taxpayers whom it determined underreported their tax liabilities on their tax returns.
IRS Letter CP3219C
If the IRS believes the amount of a taxpayer’s withholding or refundable credits reported on their tax return may be inaccurate or falsified, the IRS sends the taxpayer letter 4800C. If the taxpayer does not respond at all or does not respond adequately to letter 4800C, the IRS may send CP3219C as a notice of deficiency to the taxpayer.
IRS Notice CP3219N
The IRS generally sends CP3219N as a notice of deficiency to individuals who did not file a tax return but for whom the IRS determined owe a tax liability based on information provided by third parties.
Letter 531
The IRS sends letter 531 as a notice of deficiency to taxpayers with whom it conducted an in-person audit that did not result in an agreement between the IRS and the taxpayer.
Letter 902
The IRS sends letter 902 as a notice of deficiency for estate or gift taxes. In the case of an estate, the fiduciary may petition the Tax Court.
Criticism of Notices of Deficiency
The Taxpayer Advocate Service is an independent service within the IRS whose mission is to ensure taxpayers are fairly treated. As part of its 2018 Annual Report to Congress, the Taxpayer Advocate Service identified lack of clarity in notices of deficiency as one of the “most serious” problems with the IRS. Notices of deficiency are crucial to many low-income and middle-income taxpayers, giving them the chance to dispute any issues with their tax return before they reach federal district court. The 90-day letter is also the only prepayment judicial forum where a taxpayer can appeal a decision made by the IRS. According to its 2018 Annual Report to Congress, the Taxpayer Advocate Service determined that the process does not sufficiently do the following:
Notify taxpayers of their rights right away Ensure all persons understand their rights through clear and concise language Provide accurate information about where taxpayers can get help from their Local Taxpayer Advocate
About 59% of individuals who receive a SNOD make less than $50,000 per year. On top of that, low-income taxpayers are also less likely to petition the Tax Court. To make SNODs more beneficial to all taxpayers, including low- and middle-income individuals, the Taxpayer Advocate Service recommended a redesign of all notices of deficiency.
