An IRS Notice of Deficiency, often referred to as a “90-Day Letter,” is one of the most critical federal tax documents a taxpayer can receive. It is a formal, legally binding notice that the IRS intends to assess additional taxes, penalties, and interest. This letter is a clear warning that the IRS believes you have underpaid your taxes and is prepared to proceed with enforced collection if you do not respond appropriately. Failing to act within the 90-day window can lead to aggressive IRS collection actions, including liens, levies, and, in the most severe cases, a life-altering criminal tax prosecution.
To date, we have never lost in tax court, largely because we have always been able to prove that the facts and the law were clearly on our client’s side. We have consistently secured a reduction in the tax, penalties, and interest at issue sufficient to handsomely justify the costs of litigation. We have literally saved our client’s tens of millions of dollars over the firm’s history through our tax litigation prowess. If we do not believe we can do the same for you, we will not recommend that you litigate.
Pro Tip: The IRS gets the law and or the facts wrong in audits more often than you might expect. Moreover, this behemoth bureaucracy is supported by federal case law that holds that they are not financially responsible for their own negligence. If you do not file a tax court petition within the 90 days stated in the notice of deficiency, they win, and you lose! It does not matter if they are right or wrong if you do not contest the results of an audit.
Why Did You Receive a Notice of Deficiency?
The IRS issues Notices of Deficiency after it unilaterally determines, based on an audit or automated review, that you owe more tax than you reported. Common triggers include:
- Unreported Income: Failing to report earnings from side gigs, investments, cryptocurrency transactions, or self-employment revenue.
- Disallowed Deductions or Credits: Taking deductions or credits without proper documentation, such as charitable donations, business expenses, or education credits.
- Mismatched Information: Discrepancies between the income you reported and what third parties (like employers and banks) reported to the IRS.
- Unsubstantiated Claims: Claiming tax benefits without supporting evidence, like overstated business losses, inflated medical expenses, or fabricated expenses.
- Mathematical Errors: Simple calculation mistakes or incorrect application of tax rates.
The 90-Day Deadline – Act or Face Aggressive IRS Collection Actions
The IRS Notice of Deficiency gives you exactly 90 days from the date on the letter (150 days if you are outside the United States) to either:
- File a Petition with the U.S. Tax Court: This is the only way to formally challenge the proposed assessment without first paying the disputed tax amount. Filing a petition stops the IRS from proceeding with enforced collection until the court resolves your case.
- Pay the Proposed Assessment: Accepting the IRS’s determination and avoiding further civil and criminal tax penalties and interest.
Failing to respond within this critical window allows the IRS to proceed with aggressive enforcement collection actions, including:
- Bank Levies and Wage Garnishments: Freezing your bank accounts and seizing a portion of your paycheck.
- Federal Tax Liens: Placing a public claim against your property, damaging your credit, and severely restricting your financial options.
- Asset Seizures: Forcing the sale of your property to satisfy the debt.
- Potential Criminal Tax Referral: If the IRS believes the deficiency resulted from intentional/wilfully cheating, you could face criminal tax prosecution under 26 U.S.C. § 7201 or § 7206.
How to Respond to an IRS Notice of Deficiency
Responding effectively to a Notice of Deficiency requires a coordinated, strategic defense. At the tax law offices of David W. Klasing, our dual-licensed Tax Attorneys and CPAs can help:
- Immediate, Comprehensive Document Review: We carefully analyze the Notice and your underlying tax filings to identify weaknesses in the IRS’s claims, protecting you from the costly consequences of unsupported assessments. I.E. Where did the IRS get the law and or facts wrong in attempting to assess additional tax penalties and interest.
- Filing a Timely Petition: We prepare and file a well-drafted petition with the U.S. Tax Court within the 90-day window, blocking the IRS from proceeding with enforced collection until the case is resolved. Our tax court petitions are drafted to be as clear, concise and persuasive as possible in the hopes of resolving your issues with an appeals officer based on the petition and supporting evidence we assemble that supports your case.
- Preserving Critical Privileges: We ensure that all communications are shielded by attorney-client and work product privileges, protecting you from self-incrimination and preventing your statements from being used against you as evidence. We are very experienced with potential criminal tax exposure that may underly your original audit. We have never had a client that we represented in tax court criminally prosecuted for tax fraud.
- Negotiating Favorable Resolutions: Where appropriate, we negotiate settlements, offers in compromise, or installment agreements to resolve the dispute without protracted litigation.
- Building a Strong Defense: We challenge the IRS’s assertions, frame potential discrepancies as negligence rather than willfulness, and our dual-licensed tax litigations attorney & CPAs are always prepared for a potential trial if necessary.
Additional Response Options for Taxpayers
Taxpayers can also utilize other options, depending on their financial situation and the specifics of the tax dispute:
- Requesting a Rescission of the Notice: Taxpayers who believe the IRS issued the notice in error can request a rescission using Form 8626. However, this request must be made within the 90-day window, and the IRS is not obligated to accept it. Therefore, we generally do not recommend this approach.
- Paying the Tax and Filing for a Refund: If you choose to pay the full amount, you can still challenge the assessment by filing a refund claim using Form 1040X, Amended U.S. Individual Income Tax Return, or by filing a lawsuit for a refund in the U.S. District Court or the U.S. Court of Federal Claims.
- Audit Reconsideration: If you missed the 90-day window, you may still request an audit reconsideration, which potentially allows you to present additional evidence to dispute the assessment. We do not recommend this approach as you lose the power to have the tax court force the IRS to do the right thing.
Protect Your Attorney-Client Privilege – Do Not Go It Alone
Communicating directly with the IRS or relying on your original tax preparer can be a costly mistake. Unlike conversations with CPAs or enrolled agents, your communications with a tax attorney are protected by attorney-client and work product privileges, shielding your discussions and documents from discovery in criminal tax proceedings.
At the Tax Law Offices of David W. Klasing, we provide the highest level of legal protection and strategic defense, ensuring that every move you make is calculated to minimize your risk. Our dual-licensed tax attorneys and CPAs have nearly three decades of combined experience in high-stakes tax disputes. We provide proactive, personalized defense strategies designed to keep cases civil and avoid criminal tax referrals.
If you’ve received an IRS Notice of Deficiency, time is not on your side. Call the Tax Law Offices of David W. Klasing at (888) 904-4096 or schedule a reduced-rate initial consultation through our encrypted online portal today HERE. Protect your financial future before the IRS escalates your case to full tax enforcement.
