90-Day Letter

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

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