What Is a Notice Of Deficiency?

A notice of deficiency is also known as a statutory notice or a statutory notice of deficiency because tax laws require the Internal Revenue Service (IRS) to issue a notice of deficiency before assessing additional income tax, estate tax, gift tax, and certain excise taxes unless the taxpayer agrees to the additional assessment. Although its language says the IRS is proposing a change, the notice of deficiency is a legal determination of tax deficiency that is presumptively correct.

Notice Of Deficiency Explained

A notice of deficiency is issued when the IRS proposes a change to a tax return because they found that the information reported on a return does not match their records. A notice of deficiency is usually triggered by tax information received from a third party filer such as an employer or a financial institution that does not match the information reported by the taxpayer.

A notice of deficiency is triggered by a taxpayer’s failure to timely respond to or to successfully appeal a pre-assessment letter known as a 30-day letter. 

Notice CP2319A and a 90-day Letter 

A notice of deficiency is also known as an IRS Notice CP2319A - Notice of Deficiency & Increase in Tax. It explains any adjustments and how the amount of any deficiency was calculated. It explains the taxpayer’s options to either 1) agree to the additional tax liability by signing a Waiver Form 4089 or 2) challenge it in U.S. Tax Court.

A notice of deficiency is sometimes referred to as a 90-day letter because it gives the taxpayer 90 days to dispute the tax assessment in the Tax Court. The 90-day period within which a petition may be filed is prescribed by statute and cannot be extended. The 90-day period is counted from the date the notice of deficiency is mailed to the taxpayer’s last known address. The IRS is required by law to include the last day a petition may be filed directly on the notice of deficiency. Until 90 days expire or a Tax Court decision is final, whichever is later, the IRS is barred from any assessment or collection activity.

An Ignored Notice of Deficiency Triggers IRS Assessment and Collection Efforts

A notice of deficiency is not a tax bill. However, if the taxpayer has not signed a Waiver Form 4089 agreeing to the changes or timely filed a petition with the Tax Court within the 90-day period, the IRS will assess the tax, penalties, and interest shown on the notice of deficiency and send a bill. This is one of the events that precedes and triggers IRS collection efforts.