DEFINITION of '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.

BREAKING DOWN 'Notice Of Deficiency'

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 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-A 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 not 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 409-A 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.

RELATED TERMS
  1. Deficiency

    A deficiency is the numerical difference between the amount of ...
  2. Deficiency Agreement

    A deficiency agreement is an arrangement in which a party provides ...
  3. Deficiency Judgment

    A deficiency judgment is a court ruling against a debtor in default ...
  4. Deficiency Balance

    A deficiency balance is the amount owed to a creditor when collateral ...
  5. Substitute Return

    A substitute return is a tax filing that the IRS will create ...
  6. Correction Notice

    Correction notices announce that a process or application contains ...
Related Articles
  1. Taxes

    Form 9465: Don't Pay Your Back Taxes Without It

    This form can lighten your tax load if you owe Uncle Sam. And you can often apply online.
  2. Taxes

    Tax Withholding: Good For Government, Bad For Taxpayers

    It's important to understand where that money coming out of your paycheck goes and why - after all, you earned it.
  3. Investing

    A Rollover Mulligan for Your 401(k) Distribution

    The IRS announced that it has established a sort of Mulligan designed to help recipients of retirement plan distributions.
  4. Investing

    The 6 Phases Of A Foreclosure

    For many, foreclosure is still a real possibility. Make sure you're prepared and know the steps.
  5. Taxes

    How the GOP Tax Bill Affects You

    Here's how the new tax bill changes the taxes you file in 2018.
  6. Taxes

    How Obamacare Is Raising Your Taxes

    There are literally dozens of new, amended or broadened tax provisions under the Obamacare legislation. Find out how your taxes will be affected in the years to come.
  7. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  8. Taxes

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  9. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  10. Taxes

    How To Appeal Your IRS Audit

    The auditor's review isn't always the last word. Many taxpayers who are audited can successfully appeal their audits and save thousands of dollars.
RELATED FAQS
  1. Can the IRS audit you after a refund?

    Learn how the U.S. Internal Revenue Service (IRS) can conduct a tax audit even after a taxpayer was issued a tax refund in ... Read Answer >>
  2. What's the difference between a tax rate and a tax bracket?

    These two terms are often incorrectly used interchangeably. Find out the difference between your tax rate and your tax bracket. ... Read Answer >>
Hot Definitions
  1. Business Cycle

    The business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles ...
  2. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  3. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  4. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
Trading Center