What Does ‘Notice of Deficiency’ Mean in Business?

When you’re running a business, you don’t want any surprises – and unfortunately, if you receive a notice of deficiency from the IRS, that’s the exact opposite of what’s in store for you.

But don’t panic – while notices of deficiency can be intimidating, understanding what notice of deficiency means and what you should do if you receive one is a key part of properly managing your business finances.

What Is a Notice of Deficiency?

A notice of deficiency – also known as a statutory notice of deficiency or a 90-day letter – is a notification provided by the U.S. Internal Revenue Service (IRS) informing you that you owe additional tax, or that the deduction/credit listed on your return has been disallowed or adjusted. In the notice the IRS also provides the details concerning the proposed additional tax or changes to your return.

The IRS assigns each notice a specific period of time (usually 90 days) in which you can file a petition with the District Tax Court or pay the deficiency in full. This time period is important, and is known as the ‘window of opportunity’.

What Can You Do if You Receive a Notice of Deficiency?

Once you receive a notice of deficiency, you have two primary options to choose from: file a petition with the IRS Tax Court, or make a payment in full to the IRS. Your decision will depend on the specifics of the notice, and which decision works best for your business’s finances.

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Whichever direction you choose, it’s important to act quickly and within the 90-day window of opportunity. If you don’t complete the demanded action, the IRS is entitled to levy tax on you, and can take further legal action as well.

To ensure that you’re making the best decision for your business, it’s helpful to work with an experienced tax adviser. A tax adviser can review the details in your notice of deficiency and provide the guidance you need to make a decision that’s right for you.

Related Legal Concepts

Understanding notice of deficiency often goes hand in hand with broader concepts like deficiency itself, which refers to any shortfall or insufficiency in legal obligations. Tax-related notices frequently involve notice of tax lien procedures when unpaid deficiencies lead to property encumbrances. The general principles of notice requirements in legal proceedings also apply, ensuring proper notification methods are followed. Additionally, deficiency judgment concepts from other areas of law share similar themes of addressing shortfalls in payments or obligations.

The Bottom Line

A notice of deficiency is a critical tax document that requires immediate attention and action within the specified timeframe, typically 90 days. Whether you choose to contest the deficiency in Tax Court or pay the amount owed, prompt response is essential to avoid additional penalties and enforcement actions. For guidance specific to your situation, always consult a qualified, licensed attorney.