Friday, August 8, 2014


The IRS sends out a lot of mail.  Any letter from the IRS should be taken seriously, but some have more legal ramifications than others.  Here is one of the most important IRS letters – what it mean, and how to respond:
1.     Notice of Deficiency.  The IRS sends this letter out as the final notification they are going to make changes to your tax return.  It is usually sent out to conclude an audit, but can also be used to create a liability for you if you have not filed a tax return.  The notice of deficiency will list the changes the IRS proposes to make to your taxes – for example, disallowing your home office deduction, or business use of your car, or increasing your income from a retirement distribution that you overlooked – and calculate a new tax due, along with interest and penalties.
The notice of deficiency is also known as a “90 day letter” or ” statutory notice of deficiency,” and is authorized in Internal Revenue Code section 6212.
The notice of deficiency gives you 90 days to file a complaint to U.S. Tax Court to dispute the proposed changes to your tax return.  Focus on the use of the word “proposed” – nothing is final until the notice of deficiency is sent and you are notified of your Tax Court rights.  In Tax Court, you will be like a Plaintiff, and the dispute will be over the IRS auditor’s findings.  You will have an opportunity to go before a Federal judge, bring witnesses, and state your case that the IRS audit is wrong.  If you did not have the opportunity for IRS appeals to review the audit, you will have that opportunity to settle the case with the IRS appeals before trial.
If you do not file a complaint to Tax Court in 90 days, the audit becomes final, and the IRS will send you a bill and start collection efforts.   Before the 90th day, the audit is proposed; after the 90th day, the audit becomes legally binding if a Tax Court petition is not filed.
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