What is a 90-Day Letter?
A 90-Day Letter, formally known as a Notice of Deficiency, is an official notification issued by the Internal Revenue Service (IRS) to taxpayers indicating that there has been a discrepancy or a potential error in their tax filings. This notice informs the taxpayer of the IRS's intention to reassess their taxes unless challenged. The taxpayer is granted a period of 90 days to file a petition disputing the proposed adjustments. If they fail to do so, the IRS will proceed with its assessment.
Key Aspects of the 90-Day Letter
When you receive a 90-Day Letter, it usually follows an audit or a review process where the IRS identified issues such as unreported income or failure to file tax returns. Here’s a breakdown of essential components regarding this notice:
Response Window
- Standard Timeframe: You have 90 days from the date on the notice to respond.
- Extended Deadline: If you're located outside the United States, this period extends to 150 days.
Filing a Petition
Should you choose to contest the findings outlined in the 90-Day Letter, you must file a petition with the Tax Court. This can be a complex process and may involve presenting additional evidence or supporting documentation to support your position.
Accepting the Findings
If you do not contest the IRS's findings, you typically do not need to amend your return unless you have new income, expenses, or deductions to report. In such cases, you must sign Form 5564, return it with payment to the IRS, and avoid further penalties and interest.
Amending your Tax Return
If you agree with the IRS but need to report additional items, you need to complete Form 1040-X (Amended U.S. Individual Income Tax Return). This can typically be handled via your online tax prep service, by a tax professional, or by you directly.
Disputing the IRS Findings
If you believe the IRS has made an error, it is crucial to gather proof or additional information that supports your dispute. Even during the 90 days that the IRS allows for contesting the notice, federal regulations prevent the agency from assessing taxes or putting your account into collections.
Consider Professional Help
Given the complexities involved, especially in cases of significant tax liabilities, many taxpayers retain the services of tax professionals or attorneys. These experts can navigate the nuances of tax law, prepare your case, and represent you in negotiations or court proceedings as necessary.
Consequences of Not Responding
Failing to respond within the given timeframe has dire implications. If your appeal is unsuccessful, and you do not settle your tax debt:
- The IRS may file a federal tax lien against your assets, which serves as a legal claim to ensure payment of your tax liability.
- This can affect your credit rating and financial standing, impacting your ability to secure loans or mortgages.
- A federal tax levy could follow, where the IRS physically seizes property to settle the tax debt.
Managing Tax Liens and Levies
Taxpayers who find themselves facing a lien or levy have options available to manage their tax liability:
- Payment Plans: You can enter into an installment agreement to payment over time, thereby avoiding immediate financial hardship.
- Offer in Compromise: In certain situations, you might negotiate a settlement for less than the full amount owed if you cannot pay what is owed.
- Currently Not Collectible Status: If you're facing financial hardship, you may qualify for a temporary suspension of collection efforts.
Conclusion
Receiving a 90-Day Letter can be a daunting experience, but understanding your options and the process can help mitigate the stress associated with a tax dispute. It is vital to take timely action and consider seeking assistance from qualified professionals to navigate this complicated landscape, ensuring you protect your financial interests effectively. Always remember, responding promptly and accurately to an IRS Notice of Deficiency is crucial to maintaining good standing with the agency and avoiding serious financial consequences.