Addressing a Notice of Deficiency: A Guide to Crafting Your Response

Has the IRS sent a “90-day letter” to your doorstep? Well, that is a Notice of Deficiency indicating that there has been a discrepancy in your reported income, leading to a proposed tax adjustment.

This notice, sent by mail, kickstarts a countdown for taxpayers to correct the supposed imbalance before being hit by legal implications.

Receiving such a letter (IRS deficiency letter) can be quite disconcerting for many. It shows IRS’s formal declaration that you owe additional taxes. Well, it also means that the discrepancy was discovered during the IRS’s assessment of your tax return.

The IRS Notice of Deficiency contains detailed information about the proposed tax adjustments, including:

  • The tax year in question
  • The additional amount owed
  • A brief explanation of your legal rights

But, here’s the deal: It doesn’t mean that they’re demanding an immediate payment. You can also challenge the IRS’s determination in the Tax Court before making any payment.
Understanding how to respond to IRS Notice of Deficiency is paramount. For that, consult a tax professional to ensure your response is timely and appropriate. Regardless of how you choose to proceed, note that the clock starts ticking as soon as the Notice of Deficiency is issued. Meaning, a lack of response within 90 days could lead to a definitive tax assessment by the IRS.

So, here’s the question, have you responded to the notice?

Which Form is Used for the Statutory Notice of Deficiency?

Understanding IRS forms and notices can be terrifying, especially when it involves a discrepancy in your tax records. Among the many notifications you may receive from the IRS, the Statutory Notice of Deficiency is one that needs your attention at all costs.

Usually called the IRS Notice of Deficiency, this communication is a formal declaration from the IRS that there’s a mismatch between the tax you reported and what the IRS believes you owe. By any means, take this notice seriously, as it is the IRS’s final notice before legal action is put up against you!

The IRS Deficiency Letter is usually issued in the form of IRS Form CP3219A, also known as the Statutory Notice of Deficiency. This is a document that outlines the changes proposed by the IRS. It explains how the IRS arrived at the proposed amount due.

“What is a Notice of Deficiency from the IRS? you might ask. Well, it’s the IRS’s way of communicating with taxpayers about the potential underpayment of taxes, based on what they found. The notice will explain why the IRS thinks you owe additional tax and provide you with a detailed breakdown of the calculation.

Receiving an IRS final notice in the form of a Notice of Deficiency can be scary, but remember, you have options. Taxpayers have the right to contest the IRS’s findings before the U.S. Tax Court. It’s crucial, however, to act promptly and consult with a tax professional to make sure you understand your rights and responsibilities.

What Constitutes a Tax Deficiency?

In taxation, certain terms and concepts play critical roles, one of which is tax deficiency. For the uninitiated, understanding the nuances of what constitutes a tax deficiency can be pivotal in effective tax management.

Simply, tax deficiency, also known as IRS Notice of Deficiency, is the difference between the tax liability reported by the taxpayer and the amount evaluated by the IRS. It represents the additional tax that the IRS believes you owe for a specific tax year.

But, what does a tax deficiency constitute?


  • Making a mathematical error
  • Overclaiming deductions or credits
  • Underreporting income

The discovery of a potential tax deficiency arises from an IRS audit. In these cases, an IRS agent would have scrutinized the tax return in question, spotting discrepancies or underreported income that leads to a higher tax liability than initially reported. 

An IRS Notice of Deficiency is then issued, serving as the IRS’s official declaration of the tax amount they believe is due. This notice provides the taxpayer with a summary of the calculated deficiency and a window of 90 days to challenge the determination in Tax Court, if they disagree.

It’s essential to remember that receiving an IRS notice of deficiency doesn’t automatically mean wrongdoing. Mistakes and misunderstandings happen, especially in things as complex as taxes. 

However, being informed about what a tax deficiency is can assist taxpayers to face these challenges, ensuring they meet their tax responsibilities while preserving their rights. This is where getting guidance from a former IRS agent can come in handy. It’s because they know the ins and outs of tax laws.

Under What Circumstances is the IRS Exempt from Issuing a Notice of Deficiency?

The IRS is exempt from issuing a notice of deficiency in a few circumstances. These include:

#1 If the taxpayer agrees to the proposed changes to their tax return

Assuming they agree, the IRS does not need to issue a notice of deficiency. The taxpayer can simply sign and return Form 870-AD, which is an agreement to the proposed changes.

#2 If the taxpayer waives their right to receive a notice of deficiency

The taxpayer can waive their right to receive a notice of deficiency by signing and returning Form 870- waiver. This is generally used when the taxpayer is already in agreement with the proposed changes to their tax return and they avoid waiting 90 days for the notice of deficiency to be issued.

#3 If the taxpayer is insolvent

If the taxpayer is insolvent, the IRS is not required to issue a notice of deficiency. Insolvency is simply the inability to pay debts as they become due. If the taxpayer is insolvent, the IRS can assess the deficiency and send the taxpayer a bill.

#4 If the taxpayer is in bankruptcy

If the taxpayer is in bankruptcy, the IRS is not required to issue a notice of deficiency. Bankruptcy proceedings supersede the power of the IRS to assess taxes. The IRS is allowed to assess the taxes after the bankruptcy proceedings are completed

How Should I React to a Notice of Deficiency?

1. Understand the Document

When you receive an IRS notice of deficiency, it’s important to review it carefully. This notice gives an overview of the proposed tax deficiency, alongside a comprehensive summary of changes.

2. Cross-Check Information

After understanding what is a letter of deficiency from IRS, consider comparing the notice details with your tax return. Look for any potential errors or discrepancies to validate if the claimed tax deficiency is accurate.

3. Consult a Tax Professional

Tax issues are usually very complex. Getting help from a former IRS agent or a tax attorney could be beneficial in navigating through the situation. Their advice could be instrumental in deciding your next steps.

4. Decide on Your Response

Now that you’ve analyzed the IRS notice of deficiency, you get two open options: Agree or Disagree. If you concur with the IRS’s claim, proceed with the payment process. If not, consider contesting it in the Tax Court.

5. Negotiate or Contest, if Required

If the claimed tax debt is overwhelming, consider exploring tax debt settlement options with the IRS.Do you think there’s a mistake in the IRS’s determination? You can file a petition in the U.S. Tax Court within the deadline specified in the deficiency notice.

6. Respond Timely

Remember, responding to the letter of deficiency from the IRS on time is crucial. If you don’t respond within 90 days, the IRS might proceed with assessing the tax due, potentially leading to additional interest and penalties.

In dealing with a notice of deficiency from the IRS, timely action and professional help can guide you through this potentially stressful process.

7. Submit an Offer in Compromise

You can settle your debt in less than the original amount through a relief program, called Offer in Compromise. This is an option for those facing financial strain that prevents them from paying the full amount.

8. Pay the tax adjustment and ask refund

You can also respond to the IRS deficiency notice by paying the debt in the notice, and finding for a tax refund in case you disagree with the adjustments.

What Occurs When I Submit a Tax Court Petition?

When you submit a tax court petition, the court can:
  1. Assign your case a docket number.
  2. Send you a notice of docketing.
  3. Serve the IRS with a copy of your petition.
  4. Schedule a conference call with you and the IRS to discuss the case.
  5. Set a trial date.

The conference callcan be an option to discuss the case with the IRS and try to reach an agreement. If you are unable to reach an agreement, the case will proceed to trial.

Bottom Line

Receiving a notice of deficiency can initially seem alarming, but it doesn’t have to spell disaster. The key to addressing this situation lies in understanding what the notice is and taking measured action. 

Whether you’re cross-checking the information provided, consulting with a tax professional, or exploring avenues for contesting the claimed deficiency – every step should be thought about ahead of time. Remember, you have rights and options! At the end of the day, it’s all about ensuring you’re taking the right steps towards a secure tomorrow!

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Joe Hopkins

Joe has 25+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases.