Receiving a notice of deficiency from the IRS can be a stressful experience. It means that the IRS has examined your tax return and found discrepancies, which may result in additional tax, penalties, and interest. However, receiving a notice of deficiency does not necessarily mean that you owe more taxes. You have the right to respond and contest the IRS’s findings. In this post, we will discuss how to respond to an IRS notice of deficiency in detail.
Understand the Notice of Deficiency
The first step in responding to an IRS notice of deficiency is to understand what it means. The notice of deficiency is an official document that the IRS sends to inform you that they have found a discrepancy in your tax return. The notice will contain a detailed explanation of the IRS’s findings, the additional taxes, penalties, and interest owed, and the deadline to contest the notice.
Review Your Tax Return
The next step is to review your tax return to determine if the IRS’s findings are accurate. If you find that the IRS’s calculations are incorrect, you can challenge the notice of deficiency. If you agree with the IRS’s findings, you can pay the additional taxes, penalties, and interest, or you can request an installment agreement to pay the amount over time.
Consider Seeking Professional Help
Responding to an IRS notice of deficiency can be a complicated process, especially if you are not familiar with tax laws and regulations. Therefore, it is advisable to seek professional help from a tax attorney, certified public accountant (CPA), or enrolled agent. These professionals and other tax resolution/consultation services can review your tax return, explain the IRS’s findings, and help you develop a strategy to contest the notice.
File a Petition in Tax Court
If you disagree with the IRS’s findings, you can file a petition in tax court to contest the notice of deficiency. You must file the petition within 90 days of the date on the notice of deficiency or within 150 days if the notice is addressed to you outside the United States. The tax court is an independent judicial body that will review the evidence and make a decision based on the facts of the case.
Request an Extension
If you require additional time to reply to the notice of deficiency, you can ask the IRS for an extension. This can be done using Form 5564, Notice of Deficiency – Relief and Extension of Time to File. If the notification is sent to you outside of the United States, you have 150 days from the date of the notice of deficiency to file this form.
Consider an Offer in Compromise
A procedure known as an “offer in compromise” enables taxpayers to settle their tax liability for a lower sum than what is entirely owed. You have the right to ask the IRS for an offer in compromise if you are unable to pay the full amount of your taxes, fines, and interest. Your financial position will be examined by the IRS to see if you qualify for the program.
Seek Penalty Relief
If you agree with the IRS’s findings but are unable to pay the additional taxes, penalties, and interest, you can request penalty relief. The IRS may grant penalty relief if you can demonstrate that you had reasonable cause for the underpayment or failure to file. Examples of reasonable cause may include a serious illness, a natural disaster, or a mistake made by a tax professional.
Provide Supporting Documentation
When responding to an IRS notice of deficiency, it is essential to provide supporting documentation to contest the IRS’s findings. This may include receipts, bank statements, canceled checks, and other financial records that demonstrate that the IRS’s calculations are incorrect. You should also include a cover letter that explains your position and provides any additional information that may support your case.
It is essential to keep accurate records of your interactions with the IRS throughout the process of responding to a notice of deficiency. This includes keeping a copy of all correspondence, including letters, emails, and phone calls, as well as any supporting documentation that you provide. Keeping accurate records will help you track the progress of your case and ensure that all of the necessary information is submitted on time.
Be Patient and Persistent
Responding to an IRS notice of deficiency can be a lengthy process, and it may take several months or even years to resolve. Therefore, it is essential to be patient and persistent throughout the process. Keep in mind that the IRS receives thousands of notices of deficiency each year, and it may take time for them to review and respond to your case. However, by staying persistent and following up regularly, you can ensure that your case is being handled appropriately.
Receiving a notice of deficiency from the IRS can be a stressful experience, but it does not have to be. By following the steps outlined above, you can respond to the notice of deficiency and contest the IRS’s findings. Remember to review your tax return, seek professional help if necessary, file a petition in tax court if you disagree with the IRS’s findings, and keep accurate records of your interactions with the IRS. With patience and persistence, you can resolve your tax issues and get back to focusing on your business and personal life.