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What is an IRS Notice of Tax Deficiency?

Mark Steber Chief Tax Officer, Jackson Hewitt Published On May 22, 2019

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Deficiency is a common issue associated with tax returns. A tax deficiency occurs when there’s a difference in the amount of tax you report on your return and the amount the IRS calculates you owe – and the IRS will inform you of this discrepancy with a notice.

A tax deficiency can easily throw a wrench into your finances, but there are some simple steps you can take to resolve it. 

What Triggers a Notice of Tax Deficiency?

A tax deficiency is usually identified when IRS computers compare the documents they received with the tax return submitted for the taxpayer. This includes the information obtained from employers, banks, and other businesses. When the tax you owe on your income – as determined by the IRS using information reported by these third parties – is higher than what you reported on your return, there’s a tax deficiency.

For instance, let’s say you’ve forgotten to include some income, but your employer submitted a W-2 for it - that’s a deficiency.

How to Respond to a Tax Deficiency Notice

A notice of deficiency is a CP3219N or a 90-day letter. The notice will detail the discrepancies that have been documented, and you have 90 days to respond. It is important to act quickly if you have received a tax deficiency notice because the IRS can include court charges in the balance you owe, and interest and penalties continue to accrue. If you agree with the notice, you must sign the included form and send it back. There is no need to file an amended return. If you disagree, you can contest it. For this, you will have to get back to the IRS with an explanation and contact the third party (bank, employer, etc.) to correct any incorrectly reported income.

Are There Penalties if I Don’t Respond?

Failing to pay taxes on time can result in tax liens on your bank accounts or wages. In the worst case scenario, the IRS can seize your property and other assets. If a criminal investigation is initiated, it can also lead to jail time.

While that sounds dire, most tax discrepancies occur as the results of honest errors by a taxpayer, and can be resolved in short order. If the tax deficiency occurred as a result of identity theft or fraud, you will not be liable for paying tax on income you did not earn, like if someone works at a job and earns an income by using your name and Social Security number. If you suspect identity theft, report it to the IRS immediately.

Being aware of the nuances of tax notices and the right way to handle them can save you valuable time and money.

Learn more about tax debt

How to Settle Tax Debt With the IRS for Less

You might have heard about how it is possible to settle your IRS tax debt for less than the actual amount you owe. While it is not possible to get the IRS to let you off easily, there are some circumstances where you might be able to work out an Offer in Compromise (OIC).

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What Is the Statute of Limitations for an IRS Audit?

Being audited is not pleasant. However, tax audits are conducted at the discretion of the IRS, and there is only so much you can do to steer clear of those. But IRS audits are subject to a statute of limitations; this means the IRS cannot initiate an audit after a specific number of years have passed since filing the tax return. By being aware of the statute of limitations for an IRS audit, you can save yourself trouble and money.

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Will My Tax Return Trigger an Audit?

Contrary to popular belief, the chances of being subjected to an IRS audit are quite low – 0.54% if we go by the figures for 2017. However small the chances, though, you likely want to avoid being audited by the IRS, period. Here are some tips to help you figure out if your return is likely to spark an inquiry.

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