When a taxpayer receives a notice of deficiency, confusion often arises. By knowing what the notice really is, a taxpayer may avoid making mistakes. Read on to learn all about it.
A Step-by-Step Solution To Resolve A Notice of Deficiency
1. Understand What Is a Notice of Delinquency
After filing a tax return, a taxpayer may receive a CP3219A Notice, also known as a Notice of Deficiency. In return, the taxpayer may need to send an amended tax return to correct information or even another tax bill.
No one should ignore a Notice of Delinquency. A taxpayer can get a lot of unwanted consequences.
Noncompliance or reply may lead to an IRS tax audit. A tax audit can take massive amounts of time and resources, which are better spent on other important stuff like retirement or paying loans.
When a taxpayer does not reply to the Notice of Deficiency, he or she basically accepts the terms of the IRS. Since most notices attach a tax bill, the taxpayer is in danger of getting late penalties and fees.
Also, when the timeframe of 90 days passes, the taxpayer can no longer question the amounts in the notice. A taxpayer should act quickly to cover his or her bases.
2. Figure out How the IRS Formulates a Notice of Deficiency
Know how an employer files a W-2 regarding the wages of an employee? How about when freelancers and small businesses reporting expenses and income?
The IRS will use all the data on hand to sort out any discrepancies. Using their algorithms and automated system, the IRS will fact check names, social security or tax identification numbers with income and expenses.
This automated process, together with a large amount of data to be investigated, means the IRS may send the notice much later than April 15, the usual tax deadline. This late schedule means most taxpayers will respond with shock and surprise, and sometimes confusion and dread as they do not have the necessary information at hand.
Knowledge of how the IRS formulates the Notice of Deficiency can really aid taxpayers.
For one, making sure what the employer and the taxpayer report to the IRS match virtually cancels any chance of the IRS filing a Notice of Deficiency.
Sometimes, like all automated processes, the Notice of Deficiency can itself be deficient. Some information might be incorrect, by which the taxpayer can answer the IRS and cancel the Notice right away.
Lastly, sometimes employers, knowingly or unknowingly, report inaccurate data to save expenses. These rare occasions can lead to serious proceedings like employee misclassification, in which case a taxpayer may want to talk to a tax advocate service professional.
3. Study Your Options After You Receive an IRS Notice of Delinquency
Basically, a taxpayer has three options upon receiving the CP3219A.
First, he or she accepts the terms and the amount found in the notice of deficiency. The taxpayer fills out the attached Form 5564, Notice of Deficiency – Waiver.
If the taxpayer has additional income that he or she did not report in the original tax return, then he or she must send Form 1040-X.
Second option: Let the period of 90 days lapse. By doing so, the taxpayer automatically accepts the terms in the notice, and if there is any kind of tax debt, interest and penalties start accruing.
Third, you have the option to reject the terms and information stated in the CP3219A. For taxpayers who do not remember how they answered the tax return, they should file IRS Form 4506.
For those who do not agree with the new information in the notice, the taxpayer can call the IRS or mail or send a written letter stating why they reject the notice.
After the communication, the IRS usually advises the timeframe for the appeal. However, once the appeal is rejected, the taxpayer has to pay the tax debt or face consequences.
If the taxpayer still has an issue with the rejected tax appeal decision, he or she can appeal to the federal court of appeals or the United States Tax Court. Of course, this also means additional legal fees, so making sure that everything is in order should be a priority.
Important: The IRS no longer needs you to file an amended tax return since the IRS filed it on behalf of the taxpayer. However, if there is missing information or new developments, the taxpayer may want to file an amended tax return.
Most of the time, the IRS Form 1044-X is enough to cover the lacking or inconsistent income. Together with the IRS Form 5564 to waive possible late fees, the taxpayer can make the notice of deficiency easier and faster to process.
Lastly, due to the often unexpected tax bill, a taxpayer may not have funds ready to cover the deficiency. A taxpayer can:
- Apply for an IRS installment payment plan to minimize their monthly payments into reasonable chunks,
- Negotiate an Offer In Compromise to lower the total tax amount,
- Take out a loan from a financial institution. Oftentimes, the IRS penalties and fees are considerably larger compared to bank loan payments, and
- Dispose of some assets to cover the deficiency.
4. Respond to IRS Notice of Deficiency (CP3219A Notice) Properly
A taxpayer may notice that technically, there is no form to answer the CP3219A Notice of Deficiency directly. All attached forms, specifically Form 5564 and 1044-X, are to add, edit, or confirm information.
The correct way to respond to the notice is to 1) call the IRS or 2) send a handwritten letter to the IRS containing:
- Name, mailing address, and tax status,
- Social Security Number or tax identification number,
- The original tax amount and the IRS recommended or updated amount,
- Other information that may have changed,
- Reasons as to why the changes occurred,
- Why the IRS did not receive the information,
- Acceptance or denial of the information in the notice,
- Other requests or inquiries.
Sometimes, calling the IRS may take quite a long time, but may work best for taxpayers who do not want to send information via mail.
What taxpayers can also do is visit their local IRS branch to talk to a revenue officer. If the taxpayer prefers to respond via call, make sure to ask for a reference number to easily locate the call.
5. Avoid Getting a CP3219A or Notice of Deficiency in the Future
- The taxpayer must make sure that all information sent to the IRS matches with what third parties will send. For example, both reports must have the same SSN, income amounts as well as the same personal identifying information.
- To protect from the risk of a long audit or not sending an appeal within 90 days, the taxpayer should collect and organize all pertinent documents. Examples include payslips, receipts, and IDs.
- Before sending the tax return, ask for copies of the records from the employer, bank or other third parties who are likely to report similar information to the IRS.
- Follow the IRS forms by the letter to avoid any confusion.
Whenever a taxpayer receives a Notice of Deficiency, it can often lead to a stressful situation if not handled well. Lessen the chances of getting a CP3219A by preparing tax reports honestly, properly, and punctually.
Do you have other questions about the Notice of Deficiency? Do you know someone who received a CP3219A and has gone through the deficiency process? Let us discuss in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.