Legal Definitions - 90-day letter

A 90-day letter, also formally known as a Notice of Deficiency, is a critical legal document sent by the Internal Revenue Service (IRS) to a taxpayer. It represents the IRS's final determination of additional taxes, penalties, and interest that it believes a taxpayer owes after an audit.

This letter is typically issued when the IRS concludes that a taxpayer either:

• Failed to file a required tax return.
• Filed a tax return that contained errors, omissions, or incorrect deductions, leading to an underpayment of tax.

Before a 90-day letter is sent, the IRS usually issues a "30-day letter," which proposes changes to the taxpayer's return and gives them 30 days to agree with the proposed adjustments or appeal them through the IRS's administrative process. If the taxpayer does not respond to the 30-day letter, or if they disagree with the IRS's findings and cannot reach an administrative resolution, the IRS will then issue the 90-day letter.

The 90-day letter is extremely important because it sets a strict deadline for the taxpayer to legally challenge the IRS's assessment. Upon receiving this notice, the taxpayer has 90 days (or 150 days if they are located outside the United States) to take action. They generally have two main options:

• File a petition with the U.S. Tax Court: This allows the taxpayer to dispute the IRS's findings in court before paying the additional tax. This is often the preferred route for those who strongly believe the IRS's assessment is incorrect.
• Pay the assessed amount and then seek a refund: The taxpayer can pay the full amount demanded by the IRS and then file a claim for a refund. If the refund claim is denied, they can then sue the IRS in a U.S. District Court or the U.S. Court of Federal Claims to recover the money.

If a taxpayer fails to exercise either of these options within the specified 90-day (or 150-day) period, they forfeit their right to challenge the IRS's assessment in Tax Court, and the IRS can then proceed with collection efforts for the determined amount.

Examples of a 90-Day Letter in Action:

• Unreported Income from a Side Business: Maria, a full-time employee, also ran a small online craft business on the side. One year, she inadvertently forgot to report a significant portion of her craft business income on her tax return. The IRS, having received income reports from her payment processor, identified this discrepancy during an audit. After sending a 30-day letter proposing additional taxes and penalties, which Maria did not respond to, she received a 90-day letter. This letter formally stated the IRS's final calculation of her tax liability due to the unreported income and informed her that she had 90 days to either pay the amount or file a petition with the U.S. Tax Court if she wished to dispute their assessment.

  Explanation: This illustrates a 90-day letter being issued when a taxpayer has underreported income, leading to an IRS-calculated liability and the subsequent notification of legal options to challenge it.

• Disputed Business Expense Deductions: A small consulting firm, owned by Mr. Chen, filed its tax return claiming various business expenses, including significant travel and entertainment costs. During an IRS audit, the agent disallowed a substantial portion of these deductions, arguing they lacked proper documentation or were personal in nature. Mr. Chen disagreed with the IRS's interpretation and, after receiving a 30-day letter, was unable to reach an agreement with the IRS appeals office. Consequently, he received a 90-day letter, which served as the IRS's final decision on the disallowed deductions and the resulting increase in his firm's tax liability. The letter clearly outlined his right to challenge this decision in the U.S. Tax Court within 90 days without first paying the additional tax.

  Explanation: This example demonstrates a 90-day letter resulting from a "deficient" return where specific deductions were disputed, and the taxpayer chose not to agree with the 30-day letter, leading to the final IRS determination and the Tax Court option.

• Failure to File a Required Return: John, a retiree, received income from several sources, including a pension and investments. Due to a misunderstanding, he believed his income was below the filing threshold for a particular year and did not submit a tax return. The IRS, receiving information from his pension administrator and financial institutions, determined he did, in fact, owe taxes. After sending a 30-day letter that went unanswered, the IRS issued a 90-day letter. This letter detailed the IRS's calculation of his unpaid taxes, including penalties for failure to file and pay, and informed John of his 90-day window to either pay the assessed amount or file a petition with the U.S. Tax Court if he wished to contest the IRS's assessment.

  Explanation: This scenario highlights a 90-day letter being sent due to a complete failure to file a tax return, leading to the IRS independently calculating the tax liability and providing the taxpayer with their final opportunity to dispute it in court.