IRS Notice of Deficiency (CP3219a)
What is a Notice of Deficiency?
A statutory Notice of Deficiency (also referred to as a “90-day letter”) is issued by the Internal Revenue Service (“IRS”) and serves as final legal notice of additional income tax owed. The notice is generally issued via certified mail to the taxpayer’s last known address after the IRS audits a taxpayer and proposes changes to a federal tax return or amended return, including an individual income tax return, that results in a tax deficiency. An IRS Notice of Deficiency is an important legal document because it allows a taxpayer to challenge the tax assessment in United States Tax Court without having to first pay the additional tax. Of course, there are strings attached, namely the requirement to file a Petition in U.S. Tax Court within 90 days of the date of the notice. A taxpayer who agrees with the assessment can complete a notice of deficiency waiver.
What Does a Notice of Deficiency Look Like?
Despite its legal significance, a Notice of Deficiency (pictured below) looks like an auto-generated tax bill at first glance. Similar to most IRS collections letters, the notice prominently displays an amount of tax due and often contains additional information on payment options, including how to set up a payment plan. However, when carefully reviewed, the notice outlines the general basis for the additional tax assessment and information on how to challenge the deficiency in U.S. Tax Court, including the last day the taxpayer can file a Petition.
Sample Notice of Deficiency (IRS Notice 3219A, IRS Letter 531)
What Happens if a Taxpayer Does Not File a Petition Within 90 Days?
Tax law imposes a strict 90-day window to file a Petition in U.S. Tax Court, measured from the date listed on the Notice of Deficiency. Taxpayers residing outside the United States have 150 days. If a taxpayer does not file a Petition within the 90-day period, the assessment becomes final and the IRS may begin collecting the tax liability. Once the assessment becomes final, the taxpayer loses their right to challenge the assessment in Tax Court and can only seek judicial relief by paying the amount of tax due and filing suit in either U.S. District or the Court of Federal Claims. In other words, if a taxpayer does not timely file a Petition in Tax Court, they lose their right to challenge the assessment in court without having to first pay the tax debt.
Even after losing their right to challenge the assessment in Tax Court, a taxpayer can still challenge the assessment without first paying the tax by filing an administrative claim with the IRS (i.e., audit reconsideration, doubt as to liability offer in compromise). However, the results of these claims cannot be challenged in court.
The Bottom Line
The Notice of Deficiency is more than just tax information in an IRS form. It represents a taxpayer’s ticket to Tax Court where they have the right to challenge the tax assessment in court without first paying the tax. While this right represents a tremendous opportunity, the taxpayer ultimately bears the burden of proving to the court that the IRS assessment is incorrect. It is therefore critical to get help from an experienced tax attorney if you have received a Notice of Deficiency. Learn more about DeWitt Law’s tax litigation practice in U.S. Tax Court.
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Results
We are committed to delivering results and invite you to review a sample of representative matters we have resolved for our clients. Click Here to view all Results. All cases are different and the summaries below should not be interpreted as a prediction or guarantee of success or specific results.
$1,420,838 Tax Liability Reversed to $0
Taxpayer was audited by the IRS after a third-party cryptocurrency exchange reported to the IRS gross proceeds the Taxpayer received from selling cryptocurrency. The IRS proposed additional tax of $1,095,708 plus penalties of $219,142 and interest of $105,988. DeWitt Law represented the Taxpayer and challenged the assessment in U.S. Tax Court. The Court reversed the assessment in full, resulting in $0 of additional tax owed.
Sale of Principal Residence
Taxpayer was audited by the IRS (via Notice CP2000), which resulted in a Notice of Deficiency. The IRS proposed additional tax of $350,685 plus penalties of $70,137 after a third party reported to the IRS proceeds from the sale of Taxpayer’s home. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court. The Court reversed the portion of the assessment related to the sale of the Taxpayer’s principal residence, reducing the total tax liability to only $9,527.
Reduction of Fraud Penalty
Taxpayer was audited by the IRS for tax years 2012 through 2016, resulting in a Notice of Deficiency proposing additional tax plus nearly $400,000 in fraud penalties under I.R.C. § 6663. DeWitt Law represented the Taxpayer and challenged the assessment in U.S. Tax Court. The Court substantially reduced the fraud penalties by approximately 68%.
Sale of Principal Residence
Taxpayer was audited by the IRS (via Notice CP2000), which resulted in a Notice of Deficiency. The IRS proposed additional tax and penalties of $160,164 after a third party reported to the IRS proceeds from the sale of Taxpayer’s home. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court. The Court reversed the assessment, resulting in a total tax liability of $0.
Professional Gambler - $350,000 Tax Assessment Reversed to $0
Taxpayer was audited by the IRS for tax year 2016. The IRS issued a Notice of Deficiency and assessed over $350,000 in taxes, penalties, and interest. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court. The assessment was reversed and the Taxpayer owed $0 in additional tax.
Unfiled Tax Returns
Taxpayer failed to file federal income tax returns for several years despite earning substantial self-employment income. The IRS filed substitutes for return ("SFR") and a Notice of Deficiency, assessing tax. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court. The SFR returns were set aside and the IRS accepted reconstructed tax return filings. The SFR assessment was reversed and the Taxpayer paid the balance due on the reconstructed tax return filings, which was approximately 30% lower than the proposed assessment.
Audit Dispute
Taxpayer and his business were audited by the IRS for tax years 2016, 2017, and 2018. The IRS did not accept the documentation the Taxpayer provided in the audit to substantiate the business income and deductions claimed on the tax returns. A Notice of Deficiency was issued, challenging the Taxpayer's claimed business income and deductions. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court. DeWitt Law challenged the IRS' disallowance and argued that the substantiation provided by the Taxpayer sufficiently proved its claimed income and deductions. The case resulted in a 75% reduction of the assessment.
Barbecue Competition Case
Taxpayer's 2016 federal income tax return was audited. The IRS proposed additional tax and alleged that the Taxpayer earned hobby income from their participation in the Memphis in May Barbecue Festival. Case was administratively appealed and the IRS affirmed the proposed assessment. DeWitt Law represented the Taxpayer and challenged the tax assessment in U.S. Tax Court, arguing that the Taxpayer operated a trade or business and was entitled to ordinary and necessary business deductions. The case resulted in a 90% reduction in the tax assessment.
Equitable Spouse Claim Granted
The Taxpayer's former spouse was self-employed and did not make estimated payments, resulting in a significant tax liability. The Taxpayer had no involvement with the former spouse's business. DeWitt Law represented the Taxpayer before the IRS and filed a claim for equitable spouse relief. The IRS denied the claim and DeWitt Law filed a Petition in U.S. Tax Court. The court granted the Taxpayer's claim for equitable spouse relief and the tax assessment was reversed.