90-Day Letter

Introduction

A 90-Day Letter, also referred to as a Notice of Deficiency, is a significant document issued by the Internal Revenue Service (IRS) in the United States. It represents a formal notification that the IRS believes you owe additional taxes. This letter is a crucial part of the tax assessment and dispute process, giving the taxpayer a 90-day window to contest the IRS’s determination in the U.S. Tax Court before the IRS can proceed with collecting the alleged deficiency.

What is a 90-Day Letter?

A 90-Day Letter is a document sent by the IRS to taxpayers indicating a deficiency in their tax return. The IRS issues this letter after conducting an audit and determining that the taxpayer owes more money than initially reported.

Key Aspects of a 90-Day Letter

1. Formal Notice: The 90-Day Letter serves as an official notice, starting a legal countdown for taxpayers to respond.
2. Deficiency Details: The letter includes detailed information on the perceived deficiency, reasons why the IRS believes additional taxes are owed, and the exact amount.
3. Legal Right to Dispute: This letter informs the taxpayer of their right to petition the U.S. Tax Court within 90 days to contest the IRS’s findings.
4. Statutory Notice: It acts as a statutory notice of deficiency under Section 6212 of the Internal Revenue Code.

Process Leading to a 90-Day Letter

1. Tax Return Submission: Taxpayers submit their tax returns annually.
2. IRS Review: The IRS selects certain returns for examination or audit.
3. Audit: During an audit, the IRS reviews the taxpayer’s records and may request additional information.
4. Preliminary Finding: If discrepancies are found, the IRS may propose changes and ask for the taxpayer’s agreement.
5. Notice of Deficiency: If the taxpayer disagrees or fails to respond, the IRS issues a 90-Day Letter.

Common Reasons for Receiving a 90-Day Letter

• Underreported income
• Disallowed deductions or credits
• Mathematical or clerical errors
• Information discrepancies

Actions to Take Upon Receiving a 90-Day Letter

1. Read Carefully: Thoroughly read the letter to understand the alleged deficiency and the IRS’s rationale.
2. Consult a Tax Professional: Seek advice from a tax professional or an attorney specializing in tax law to understand your options and the potential impact.
3. Gather Documentation: Collect and organize all relevant documentation to support your case if you plan to contest the IRS’s findings.
4. Respond Promptly: Take timely action within the 90-day window to either agree, pay, or file a petition with the U.S. Tax Court.

Options for Responding

• Agree and Pay: If you agree with the IRS’s findings, you can pay the deficiency to avoid further penalties and interest.
• Disagree and Petition: If you disagree, you can file a petition with the U.S. Tax Court within the 90-day window.

Petitioning the U.S. Tax Court

Steps to Follow:

1. Prepare the Petition: Carefully prepare the petition, outlining your disagreement with the IRS’s findings.
2. File the Petition: Submit the petition to the U.S. Tax Court within the 90-day period.
3. Litigation or Settlement: Engage in litigation or settlement negotiations with the IRS. During this period, the IRS cannot proceed with collection actions related to the disputed amount.

Benefits of Petitioning

• Delay Collection: Filing a petition delays IRS collection activities until the case is resolved.
• Potential Settlement: Tax Court proceedings might result in a settlement or a reduction of the deficiency.
• Fair Hearing: Provides an opportunity to present your case before an independent judicial body.

Consequences of Inaction

Failing to respond to a 90-Day Letter can have severe financial and legal repercussions. Here are some possible outcomes:

• Assessment of Deficiency: The IRS will assess the proposed deficiency and begin collection actions.
• Liens and Levies: The IRS may place liens on your property or issue levies to seize assets.
• Increased Debt: Additional penalties and interest accrue on the unpaid amount.

Importance of the 90-Day Window

The 90-day timeframe is non-negotiable and strictly enforced. Missing this deadline means losing the right to dispute the deficiency in Tax Court, severely limiting your options.

Conclusion

A 90-Day Letter represents a critical juncture in the tax dispute process. Understanding its significance, the options available, and the necessity of a timely response can help taxpayers navigate this challenge effectively. Seeking professional guidance and taking prompt action can make a considerable difference in resolving tax disputes favorably.