What is a Notice of Deficiency?
This is also known as a 90 day letter. It’s sometimes a called a “ticket,” to the tax court. It’s the last letter that the IRS has to send to all taxpayers in income, and estate, tax cases before the IRS can start collecting tax. Once this is sent, you have 90 days left to file a petition with the US tax court.
If you file a petition, then the IRS may not collect any money from you until a Tax Court judge hears your case, or unless you have agreed with the IRS on the amount you actually owe. If you fail to file a petition with the Tax Court, it’ll result in the loss of very important rights. If you fail – it’s a bad idea. Non-lawyers like CPAs have to be careful about advising their clients NOT to file a petition with the Tax Court. Petitions should always be filed if there is any dispute that the taxes in the Notice of Deficiency aren’t correct. If you don’t file a petition and later decide that you disagree with the IRS’s assessment, you will be unable to have a judge hear your case until you first pay the entire amount of tax that the IRS claims is due – even if the IRS is wrong. You will then to have file a claim for refund, usually a Form 1040X, 1120X, or sometimes IRS Form 843. Once you’ve filed the claim, you still won’t have an opportunity to get to court until the IRS has denied your claim, or six months have passed from the date you filed the claim. Even then, you’re limited to the argument in the claim.
Just because you file a petition doesn’t mean you have to go to trial, and have your case heard by a judge. The first thing that’ll happen, after you successfully file your petition with the court, is the IRS will submit an answer. The IRS has 60 days to file an answer with the court. You are then served a copy of the answer that the IRS files with the tax court. Usually, the IRS’s answer isn’t terribly informative about its position.
The answer will usually deny the majority of things you’ve said in your petition. The IRS could raise new issues, as well. If the new issues aren’t raised in the answer, then the IRS must get the permission of the tax court to raise them later. If the IRS believes you’ve committed tax fraud when you file your tax return, the answer will lay out all the facts that the IRS is alleging. You will then have an opportunity to file a reply.
After the IRS has filed its answer, and you file a reply, then you’ll be contacted by the IRS’ appeal office to give you a chance to settle the case. The IRS appeal office is a great place to try, and settle, your case. Settlements can mean a full concession by the IRS. On the other hand, the IRS may not be willing to budger and settle. A settlement with the IRS appeal is not like a settlement with a private party. The appeals officer assigned will only settle if he/she is convinced that the IRS has hazards of litigation. That means, the IRS will only settle if it believes that it’s uncertain if certain evidence will be admissible, or if there is some questions about the interpretation of the law. The appeals office doesn’t settle simply for the sake of getting paid more quickly because it’ll be expensive for the IRS to litigate the case.
If you get a notice of deficiency, you should immediately contact a tax litigation lawyer. Your CPA, or an enrolled agent, cannot a file petition in Tax Court unless you’ve passed a special exam given by the Tax Court.