Legal Definitions - ninety-day letter

A ninety-day letter, also commonly referred to as a notice of deficiency, is a formal document sent by the Internal Revenue Service (IRS) to a taxpayer. This letter serves as an official notification that the IRS has determined there is an additional amount of tax owed, known as a tax deficiency, after reviewing the taxpayer's return or conducting an audit.

The ninety-day letter is a critical communication because it initiates a strict 90-day period during which the taxpayer must decide how to respond. During this time, the taxpayer has two main options:

• They can agree with the IRS's assessment and pay the additional taxes and any associated penalties. Even if they pay, they still retain the right to later file a claim for a refund if they believe the assessment was incorrect.
• Alternatively, they can formally dispute the IRS's findings by filing a petition with the U.S. Tax Court. This allows them to challenge the deficiency without having to pay the disputed amount upfront. If the taxpayer does not respond within the 90-day window by either paying or filing a petition, the IRS can then proceed with collection actions.

Here are some examples of how a ninety-day letter might apply:

• Example 1: Disputed Business Expenses

  A freelance software developer, Sarah, is audited by the IRS. The IRS disallows several of her claimed business deductions, arguing they were personal expenses. After a preliminary discussion (often involving a "thirty-day letter" which precedes this), Sarah and the IRS cannot agree. Consequently, Sarah receives a ninety-day letter. This letter informs her of the specific additional tax the IRS believes she owes due to the disallowed deductions and gives her 90 days to either pay the deficiency or file a petition with the U.S. Tax Court to argue for her deductions.

• Example 2: Unreported Income from Investments

  David, an investor, inadvertently failed to report a significant amount of capital gains from stock sales on his tax return. The IRS identifies this discrepancy through data matching. After initial correspondence, the IRS sends David a ninety-day letter, detailing the unreported income and the resulting tax deficiency. David now has 90 days to either accept the IRS's calculation and pay the additional tax or challenge the assessment in Tax Court, perhaps arguing there was a basis adjustment he overlooked.

• Example 3: Estate Tax Valuation Dispute

  The executor of an estate, Maria, files an estate tax return. The IRS audits the return and disputes the valuation of a rare antique car collection included in the estate, asserting it is worth significantly more than reported. This higher valuation leads to a substantial increase in the estate tax liability. After negotiations fail, Maria receives a ninety-day letter from the IRS. This letter gives her 90 days to either agree to the IRS's higher valuation and pay the increased estate tax or file a petition with the U.S. Tax Court to dispute the valuation of the antique collection.