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What is a Tax Deficiency? 4 Must-know Things for Every Taxpayer

what is a tax deficiency

Receiving a notice from the IRS can be a pain, especially if it’s about additional payments you have to make, like a Tax Deficiency Notice. But what is tax deficiency, and why do you need to know it?

The IRS considers it a tax deficiency if you owe more taxes than what’s stated on your return. This tax debt can balloon by incurring penalties and interests, so you must settle it before the agency escalates the situation.

The IRS typically notifies tax-deficient individuals via the IRS Notice CP3219A: Notice of Deficiency and Increase in Tax, also known as the 90-day letter or statutory notice. Once you receive this letter, remember to keep calm and read the document thoroughly to understand your situation better. 

If you’re unsure what to do, read more below to know what a tax deficiency is to prepare you should you receive one.

Why Did I Get a Tax Deficiency Notice?

You may receive a notice from the IRS for various reasons, the most common of which is a discrepancy in your reported taxes and the information supplied to the IRS. During a tax audit, the IRS can crosscheck your returns with information from third parties—such as employers, banks, and businesses—and easily determine if you haven’t filed your returns correctly.

Getting a Notice of Deficiency can result from many scenarios. For example, your employer may have submitted a Form W-2 that indicates a higher income tax than what you’ve written on Form 1040, prompting the IRS to flag the inconsistent data. 

For the record, this notice is not a tax bill. It only informs you about the discrepancy, and the amount may change depending on the IRS’s assessment and your response.

How Much Time Do I Have to Respond to the Notice?

Generally, you’ll have 90 days to respond to the letter using Form 5564: Notice of Deficiency Waiver.

However, failure to respond within the allotted time may prompt the IRS to assess the tax and send a demand for full payment. In that case, you can no longer appeal the decision to the Tax Court and must pay total taxes, penalties, and interest.

What are the Consequences if I Don’t Respond to the Tax Deficiency Notice?

Like any other IRS notice, you must stay on top of this notice as you may run into problems later on if left unaddressed. Here are some consequences you may face if you don’t respond to the notice.

  1. An additional failure-to-pay penalty will be slapped onto your bill

Each time you pay your taxes after the deadline, the IRS imposes the failure-to-pay penalty. Since tax deficiencies are considered late payments, you’ll be charged with this penalty each month you don’t pay.  

The penalty starts from the day after the April 15 tax filing deadline or on the first day your taxes are past due. 

  1. Your tax bill will increase with interest

On top of the failure-to-pay penalty, you will have to pay interest. Like the penalty, interest will continue to accrue on outstanding balances.

  1. Your wages will be garnished

The IRS has different methods of securing payments for back taxes, especially if you don’t show signs of settling them. For one, they can put a levy on your assets. And one of the most common tax levies they can impose is wage garnishment. 

Here, employers withhold a certain percentage of your salary as payment to the IRS. The deductions will continue until you’ve paid the entire tax amount. First-time offenders are protected from lay-offs under the Consumer Credit Protection Act.

How to Respond to a Notice of Deficiency

Whether you agree or disagree with the notice, you should respond to the IRS and acknowledge the notice. Read the notice thoroughly and carefully before communicating with the IRS to get a clear picture of the situation and prevent it from escalating. 

The notice will have Form 5564 enclosed in the envelope. If you agree with the IRS’s findings and proposed new tax amount, you must sign the form and send it back to the agency. Then pay the tax and other fees as soon as possible.

However, you have the right to contest the notice if you disagree with the proposed changes. You may even provide additional information to support your claims. Check out Peace of Mind Tax Help’s article entitled “How to Respond to an IRS Notice of Deficiency: Your First Steps” for more detailed instructions on this process or hire a tax resolution professional such as Peace of Mind Tax Help.

Understanding the Tax Deficiency Notice

You could receive an IRS notice anytime for several reasons, including a Tax Deficiency Notice, which can be challenging to navigate if you don’t know what it is or what it entails. However, learning everything there is to know about this notice can better prepare you if you ever receive one. 

If you’re faced with a tax problem and need an expert to help you settle the issue, reach out to us at Peace of Mind Tax Help. Our team of experts in tax negotiation services can help you minimize your tax liability. Consult with us today and get peace of mind about your taxes.

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