What is an IRS Notice of Deficiency?

If you've never received correspondence from the IRS, it's not always clear what action you need to take when you suddenly get a notice. And while there are many different types of IRS letters you might get, the Notice of Deficiency can be particularly important to pay attention to. Also known as CP3219A, the Notice of Deficiency is sent to you when the IRS detects a reporting error.

Such an error may occur when a third party, such as an employer or your financial institution, provides information to the IRS that doesn't match what you've submitted. It's possible that you failed to report income, or perhaps submitted information that was incorrect. The Notice of Deficiency is not a bill, but depending on the accuracy of their information, the next letter you receive could be to inform you of a balance due.

What to Look For On Your Notice

The Notice of Deficiency will indicate a difference between what you paid in taxes vs. what you should have paid. This doesn't always lead to a tax debt, as you may have over-reported your income and the IRS has determined that they owe you money. Alternatively, you may have not reported or paid the correct amount; the notice will provide you with an estimated total that you owe or you're due. You'll be given a deadline to respond, which is unable to be extended.

What Action You Need to Take

You may or may not agree with the information the IRS has. After you review your records, you may find that the variance on the notice is correct. If this is the case, you will be asked to sign Form 5564, Notice of Deficiency, and send it back to the address you're provided. If you think that your notice incorrect, you have a couple of options. First, you can challenge their position by filing a petition to the United States Tax Court. You can also submit documentation that supports your argument, or ask the third party – such as your employer – to send an amended record that reflects the correct amount of income. No matter which way you go, just remember to take action before the deadline; the IRS will not grant you additional time and will not consider your argument past the deadline.

What Not to Do

No matter what, you never want to simply discard or ignore a notice from the IRS. If you receive a Notice of Deficiency, regardless of what it says, you should respond by the due date. Remember, the information the IRS is reporting may not be accurate. In order to get this corrected, you'll need to provide the necessary documentation by the deadline or they will not accept it. Failing to pay an assessed balance on any follow-up notice can result in penalties, interest and even collection action.

What Happens If You Can't Pay an Assessed Balance?

It's entirely possible that you won't be able to immediately pay back an assessed balance, assuming that it's correct. Don't panic. In most cases, the IRS will allow you to pay your liability over a period of months, or even years. However, it's important that you select a plan that will fit within your budget and that will offer you the most benefits. Before committing to any IRS payment plan, consult with a licensed tax professional. You may be entitled to an agreement that the IRS did not initially present you with, and a seasoned tax professional will quickly make that determination.

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