A notice of deficiency is a legal notice the IRS sends to taxpayers informing them that the IRS has determined the taxpayers owe additional income tax. If they choose to do so, the taxpayers have 90 days from the date of the notice to petition the United States Tax Court and challenge the determination from the IRS.
Learn why the IRS sends notices of deficiency and how they impact taxpayers.
Definition and Example of a Notice of Deficiency
A notice of deficiency is an IRS notice informing a taxpayer that the IRS has determined the taxpayer owes additional income tax. This occurs when information on a tax return does not match the information the IRS has in its records.
For example, if a taxpayer does not file a tax return for a given year but the IRS believes they owe tax for that year, the IRS will send warnings to the taxpayer telling them to file a tax return.
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.
- Alternate names: Statutory notice of deficiency, 90-day letter
- Acronym: SNOD
How Does a Notice of Deficiency Work?
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 these initial attempts to resolve the issue are not successful or if the taxpayer does not respond to these communications by the IRS, the IRS will determine the amount of tax owed by the taxpayer and send them a notice of deficiency.
The taxpayer then has to decide if they agree with the amount of tax the IRS has determined they owe, or if they disagree. If the taxpayer agrees, they can sign the notice of deficiency waiver provided by the IRS and pay the tax.
The notice of deficiency waiver—formally known as Form 5564—is separate from the notice of deficiency. If you do agree with the amount of tax owed according to the IRS, you would fill out Form 5564 and mail or fax it to the address or fax number listed on the notice.
If the taxpayer does not agree with the amount of tax the IRS has determined they owe, they 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 the taxpayer 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 the taxpayer does not respond to the notice of deficiency or petition the Tax Court within 90 days, the IRS will assess the determined tax and begin collection activity if necessary.
In the case of disagreeing with the IRS’ determined amount of tax per a notice of deficiency, taxpayers who live outside the U.S. have 150 days rather than 90 days to petition the Tax Court.
Types of Notices of Deficiency
The IRS sends different notices of deficiency to taxpayers depending on their situation. Below are specifics about each type of notice of deficiency.
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.
A taxpayer must respond to Letter 4800C within 30 days of receiving it to avoid a notice of deficiency, specifically CP3219C.
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.
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.
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.
As it stands, 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.
- A notice of deficiency is a legal notice sent by the IRS to a taxpayer informing them that the taxpayer owes a certain amount of tax, as the taxpayer’s tax return does not match the IRS’ records.
- When a taxpayer receives a notice of deficiency, they can choose to either agree to the notice and pay the tax, attempt to resolve the dispute with the IRS, or petition the United States Tax Court.
- If a taxpayer wants to petition the Tax Court to legally challenge the IRS’ determination of tax due, they must do so within 90 days of the date of the notice of deficiency.
- The IRS sends different types of notices of deficiency to taxpayers depending on their situation.