90-Day Letter

90-Day Letter IRS Audit Tax Deficiency U.S. Tax Court Tax Assessment Tax Dispute Notice of Deficiency Income Tax
A formal notice issued by the IRS after an audit indicating that a proposed deficiency will be assessed unless the taxpayer files a petition with the U.S. Tax Court within a specified time.
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Definition

A 90-Day Letter, formally known as a Notice of Deficiency, is a formal notice issued by the Internal Revenue Service (IRS) after an audit. This letter indicates that the IRS believes there is a deficiency in the taxpayer’s return and proposes an additional tax assessment. The taxpayer has 90 days (150 days if addressed outside the U.S.) from the date of the letter to either pay the proposed amount or file a petition with the U.S. Tax Court to contest the proposed deficiency.

Examples

  1. Individual Taxpayer: After an audit of John’s 2020 tax return, the IRS found discrepancies in his reported income and issued a 90-Day Letter proposing an additional tax liability of $5,000. John has 90 days to respond either by paying the amount or disputing it in Tax Court.
  2. Small Business: XYZ LLC undergoes an IRS audit for its 2019 tax return. The IRS determines that the company underreported its income by $50,000 and issues a 90-Day Letter proposing a tax due of $15,000. XYZ LLC must respond within the 90-day period to contest the deficiency.

Frequently Asked Questions (FAQ)

Q1: What happens if I do not respond to the 90-Day Letter?

  • A1: If you do not respond within the 90-day period, the IRS will assess the proposed deficiency, and you will be required to pay the additional tax. Ignoring the letter can also lead to additional penalties and interest.

Q2: Can I request an extension beyond the 90 days?

  • A2: No, there are no extensions available for the 90-day deadline. You must either pay the amount or file a petition with the U.S. Tax Court within this period.

Q3: What should I do if I disagree with the proposed deficiency?

  • A3: If you disagree with the proposed deficiency, you should file a petition with the U.S. Tax Court within the 90-day period. This allows you to contest the IRS’s findings before the deficiency is formally assessed.

Q4: Is there a fee to file a petition with the U.S. Tax Court?

  • A4: Yes, there is a filing fee to submit a petition. The fee is generally modest and must be submitted along with the petition.

Q5: Can I negotiate with the IRS directly instead of going to Tax Court?

  • A5: Yes, you can communicate with the IRS directly to try and resolve the issue before it reaches the petition stage. However, if an agreement is not feasible, your formal option is to file a petition with the U.S. Tax Court.
  • IRS Audit: An examination of a taxpayer’s account and financial information to ensure accuracy and compliance with tax laws.
  • Tax Deficiency: The amount by which a taxpayer’s reported tax is less than the correct tax owed.
  • U.S. Tax Court: A federal court where taxpayers can dispute IRS determinations regarding income tax deficiencies.
  • Notice of Assessment: A notification from the IRS indicating the amount of tax a taxpayer owes.

Online Resources

Suggested Books for Further Studies

  • Stand Up to the IRS by Frederick W. Daily
  • Representation Before the Collection Division of the IRS by Robert Schriebman
  • Tax Savvy for Small Business by Frederick W. Daily
  • IRS Practice and Procedure by Michael Saltzman

Fundamentals of 90-Day Letter: Taxation Basics Quiz

### If a taxpayer receives a 90-Day Letter, how many days do they have to respond? - [ ] 30 days - [ ] 60 days - [x] 90 days - [ ] 120 days > **Explanation:** The 90-Day Letter, also known as a Notice of Deficiency, provides the taxpayer with a 90-day period to respond by paying the amount or filing a petition with the U.S. Tax Court. ### What is the formal name for a 90-Day Letter? - [x] Notice of Deficiency - [ ] Summary of Audit - [ ] Tax Adjustment Notice - [ ] IRS Final Notice > **Explanation:** The formal name for a 90-Day Letter is Notice of Deficiency, indicating that the IRS has determined there is a deficiency in the taxpayer’s return. ### What happens if a taxpayer does not respond to a 90-Day Letter? - [ ] The IRS closes the case - [ ] The proposed deficiency is nullified - [ ] The taxpayer will face criminal charges - [x] The IRS assesses the proposed deficiency > **Explanation:** If the taxpayer does not respond within the 90-day period, the IRS will assess the proposed deficiency, and the taxpayer will be required to pay the additional tax. ### Can a taxpayer request an extension on the 90-day deadline? - [ ] Yes, a 30-day extension can be granted - [ ] Only in extreme circumstances - [x] No, extensions are not available - [ ] Yes, but only for 10 days > **Explanation:** The 90-day period is strict with no extensions available. The taxpayer must either pay the amount or file a petition with the U.S. Tax Court within this period. ### Where must a taxpayer file a petition if they want to dispute a 90-Day Letter? - [ ] Local IRS office - [ ] U.S. District Court - [x] U.S. Tax Court - [ ] Department of Treasury > **Explanation:** A taxpayer must file a petition with the U.S. Tax Court if they wish to dispute the determination in the 90-Day Letter. ### What type of tax liability is indicated in a 90-Day Letter? - [ ] Tax Credit - [x] Tax Deficiency - [ ] Tax Refund - [ ] Tax Adjustment > **Explanation:** A 90-Day Letter indicates a tax deficiency, meaning the IRS believes the taxpayer owes additional tax. ### What is included in a 90-Day Letter? - [ ] A refund check - [x] A proposed tax assessment - [ ] A new tax bracket - [ ] Criminal charges > **Explanation:** The 90-Day Letter includes a proposed tax assessment that the IRS believes the taxpayer should pay due to discrepancies found in the audit. ### What fee must accompany the petition filed to the U.S. Tax Court? - [ ] There is no fee - [x] A modest filing fee - [ ] The full amount of the tax liability - [ ] A fee equivalent to ten percent of the tax deficiency > **Explanation:** A modest filing fee must accompany the petition submitted to the U.S. Tax Court when disputing a 90-Day Letter. ### What might be a first step for a taxpayer who disagrees with the IRS determination indicated in a 90-Day Letter? - [ ] Ignore the letter - [ ] Immediately file for bankruptcy - [x] Communicate with the IRS to resolve the issue - [ ] Sell assets to cover the proposed amount > **Explanation:** A taxpayer can communicate with the IRS directly to seek a resolution before escalating the issue to the U.S. Tax Court. ### What could occur if a petition is not filed and the amount proposed in the 90-Day Letter is not paid? - [ ] The IRS issues an arrest warrant - [x] Additional penalties and interest accrue - [ ] IRS grants an automatic extension - [ ] The taxpayer receives a commendation > **Explanation:** If neither payment nor petition occurs within the 90-day period, additional penalties and interest may accrue on the proposed amount.

Thank you for exploring the intricate subject of the 90-Day Letter and for testing your understanding through our detailed quiz. Continue to delve deeper into tax law concepts for comprehensive knowledge!

Wednesday, August 7, 2024
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