How to Handle an IRS Notice of Deficiency

Receiving any kind of notice from the IRS is usually scary, for most people. A letter from everyone’s favorite tax agency is not a letter most people are looking to get in their mailbox; and usually it’s not good news when that kind of letter shows up. One such letter that no one ever wants to receive is a notice of deficiency. When the IRS sends taxpayers one of those letters, people tend to get a little worried to say the least. However, as with any notice from the IRS, you shouldn’t panic. Instead you should follow the instructions exactly as they are given to you and comply with what the IRS is asking; but that does not mean that you should simply pay up without asking any questions. You do have rights and the IRS does make mistakes. So what exactly should you do if you get a notice of deficiency?

What Is a Notice of Deficiency?

First off, a notice of deficiency is a letter from the IRS that states you owe the government more taxes. When you file your tax return and you pay your bill, sometimes mistakes are made, either by you or by the IRS, which can cause an outstanding balance. When that happens the IRS formally informs you of this outstanding balance with an official letter. It will also let you know that you do have the right to contest the IRS’s claims and show that you do not owe any more in taxes. Typically, when a taxpayer receives such a letter he or she will have three months, or 90 days, to reply to the IRS. However, read the notice carefully because it could be less and you can’t appeal after the deadline has passed. Basically, you have two options, initially: either you pay the outstanding balance or you contest it, with evidence showing that the IRS has made a mistake.

What Should You Do?

• Pay it – If you realize that the IRS is right and you do indeed owe more taxes, then you should just go ahead and pay the balance right away. The reason for that is that interest will start accruing and that means you will have to pay even more if you wait to pay it off. If you can’t afford to pay the balance all at once, then you need to contact the IRS and set up a payment plan.
• Fight it – Your other option is to fight the bill. If you think you have a good case and that the IRS has made a mistake then you should inform the agency that you intend to appeal the deficiency. You should notify the IRS with a written statement and explanation of your appeal. You should also strongly consider seeking the help of a tax attorney or tax expert before you make the choice to appeal. This can save you time and money in the end because if it turns out you do owe the balance, a tax professional will likely be able to help you discover that before you appeal. Additionally, if you are correct, a tax professional can help you prepare your appeal more effectively.

It’s Up to You

If you do ever receive a notice of deficiency then ultimately the choice to appeal, or not, is up to you. However, if you choose to appeal then make sure you have detailed and sufficient evidence to prove your case. On the other hand, if you realize that the IRS is right then your best option is to simply swallow your pride and pay off your liabilitys. Fighting with the IRS is never fun, but it’s much worse when you’re wrong.