IRS Notice of Deficiency: What to Do Before the 90-Day Deadline

An IRS Notice of Deficiency is often called a 90-day letter. It may arrive after an audit, a dispute involving unreported income, or a Substitute for Return prepared by the IRS. Receiving this notice does not mean the IRS has already won the dispute. It means the agency has formally determined that you owe additional tax and is giving you an opportunity to challenge that decision in the United States Tax Court.

The deadline printed on the notice requires immediate attention.

What Is an IRS Notice of Deficiency?

A Notice of Deficiency is a legal notice explaining the additional tax, penalties, or other adjustments the IRS has determined you owe. Common versions include Letter 3219, which is often issued after a correspondence audit, and Letter 531, which may follow an in-person examination. Taxpayers who did not file a return may receive Notice CP3219N after the IRS calculates the tax using information reported by employers, banks, and other third parties.

The notice should identify the tax years involved, explain the IRS’s changes, and state the last day you can file a petition with the United States Tax Court. This date is important. Missing it can take away your opportunity to challenge the proposed tax in Tax Court before paying it.

Why Is It Called a 90-Day Letter?

You generally have 90 days from the date the IRS mails the notice to file a Tax Court petition. The period is generally 150 days when the notice is addressed to a person outside the United States. Use the exact deadline printed on the notice. Do not start counting from the day you received or opened it.

If the deadline falls on a Saturday, Sunday, or legal holiday in the District of Columbia, a petition filed on the next business day may still be considered timely. However, it is safer to prepare and file the petition well before the last day.

The IRS cannot extend this deadline. Calling the IRS, mailing additional documents, or asking the agency to review new information does not stop the 90-day period from running.

What Should You Review First?

Begin by comparing the Notice of Deficiency with your tax return, audit report, and earlier IRS correspondence.

You will need to identify the following key information from the Notice:

• The tax years involved
• Each proposed adjustment
• Income the IRS says was omitted
• Deductions or credits the IRS disallowed
• Penalties being proposed
• Payments or withholding that may be missing
• The last day to file a Tax Court petition

You should also gather copies of everything you previously sent to the IRS. This can help determine if the dispute involves missing records, incorrect third-party reporting, a difference in legal interpretation, or an IRS processing error.

Do not assume the IRS considered every document you submitted. Compare the explanation in the notice with your records and look closely at how the agency calculated the proposed balance.

What If You Agree With the Notice?

If you agree with the proposed changes, the notice will generally include a form you can sign and return. This may be Form 5564, Notice of Deficiency Waiver. Signing the waiver allows the IRS to assess the proposed amount without waiting for the Tax Court petition period to end. Before signing, confirm that the tax, penalties, withholding, credits, and prior payments are correct.

You should also understand that signing the waiver normally gives up your opportunity to challenge the proposed deficiency in Tax Court before paying it.

If you agree with the amount but cannot pay it in full, payment options may still be available. Depending on your circumstances, those options may include an installment agreement, Currently Not Collectible status, or an Offer in Compromise.

Agreeing with the tax does not necessarily mean you must pay the full balance immediately. However, penalties and interest may continue to increase until the account is resolved.

What If You Disagree With the Notice?

You may be able to send additional information to the IRS and ask it to correct the proposed changes. For example, you might provide proof that income was reported twice, documentation supporting a disallowed deduction, or records showing that withholding was left off the calculation. If the notice resulted from an unfiled return, you may need to prepare and submit the missing return. A return prepared by the taxpayer may include deductions, credits, filing status information, or other items that the IRS did not include when preparing a Substitute for Return.

Respond as soon as possible. The IRS may review the new information during the 90-day period, but there is no guarantee that it will finish before your deadline. Communicating with the IRS does not extend the time to petition the Tax Court. If the matter remains unresolved as the deadline approaches, filing a timely petition may be necessary to protect your rights.

Why Might You File a Tax Court Petition?

The United States Tax Court allows taxpayers to dispute a proposed deficiency before paying it. This is one of the most important rights provided by a Notice of Deficiency. A petition should identify the IRS determinations you dispute and explain why you believe they are incorrect. A copy of the Notice of Deficiency should also be included.

The petition must be filed with the United States Tax Court, not mailed to the IRS office shown on the notice. Taxpayers may generally file electronically through the Tax Court’s DAWSON system or follow the court’s instructions for filing by mail. But filing a petition does not necessarily mean the case will go to trial. Many disputes are resolved through discussions with IRS Appeals or IRS counsel before a trial takes place.

What Happens After You File a Petition?

After the petition is accepted, the Tax Court assigns the case a docket number. The IRS will then have an opportunity to respond. An IRS representative may contact you to discuss the disputed issues and review your supporting records. This gives both sides an opportunity to settle some or all of the case without a trial.

If an agreement cannot be reached, the case may proceed to trial. You will need to present evidence supporting your position and respond to the IRS’s arguments. Taxpayers disputing $50,000 or less for any one tax year may be able to elect simplified small tax case procedures. These cases are commonly called S cases.

The procedures are generally less formal, but the Tax Court’s decision in an S case cannot be appealed. That consequence should be considered before making the election.

What Happens If You Miss the Deadline?

If you do not file a timely petition, the IRS may assess the proposed tax, penalties, and interest. The agency can then send a bill and begin the collection process if the balance is not paid or otherwise resolved. You may still have options, but they are usually more limited.

For example, you may be able to request audit reconsideration if you have information the IRS did not previously consider. Another possible path is to pay the required tax and file a claim for a refund. If the refund claim is denied, you may be able to pursue the matter in another federal court.

These procedures do not always provide the same ability to dispute the tax before payment. This is why the Tax Court deadline should be protected even when you are still communicating with the IRS.

Final Thoughts

A Notice of Deficiency should not be set aside while you wait for the IRS to return a call or review additional documents. The 90-day deadline continues to run during those discussions.

You can start by reviewing every proposed change and gathering the records that support your position. If the dispute cannot be resolved quickly, filing a timely Tax Court petition may preserve your ability to challenge the assessment before paying it.

The Law Office of Steven N. Klitzner provides IRS audit representation, Appeals assistance, and United States Tax Court representation. Contact us if you received a Notice of Deficiency and need help understanding the proposed changes or deciding how to respond.

This article is provided for informational purposes only and does not constitute legal or tax advice. Reading this article does not create an attorney-client relationship. Every tax matter is different, and you should speak with a qualified tax professional about your specific circumstances.