La Quinta, CA
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Tuesday, May 5, 2015

The IRS Auditing Process Chart for Notice of Deficiency

Your income tax return is examined via computer or auditor to see whether there is a deficiency (an amount underpaid) plus amounts previously assessed. This chart represents the process that will proceed in the event in an IRS audit or computerized examination. 

IRS Auditing Process Chart

 When Does This Typically Happen? 

In general, the statute of limitations for assessment of a deficiency is 3 years from when the tax return in question was due or the date is was filed, whichever is later. If you filed the return before the due date, it will be treated as if it was filed on the due date.

If you under reported gross income by 25% or more, the statute of limitations is extended from 3 years to 6 years. This only applies to gross income which was completely omitted on the tax return.

What If I Never Filed A Tax Return?

If you do not file a tax return, the IRS is free to send a 30-Day letter without any statute of limitations. This usually happens in the form of applying average income for your industry/area for the years not filed.


Dear Ms. Jane: 

The average hairstylist makes $40,000. You have a hairstyle business registered in your town, CA, therefore we are going assume that you made $40,000 unless you file a tax return to prove otherwise. 


Receiving a 30-Day Letter

If the IRS has preformed a computerized examination or an audit relating to you, you may receive a letter proposing additional tax amounts. You will receive this letter in the mail, the IRS will never call you, fax your, or email you.

Receiving a 90-Day Letter Notice of Deficiency

If you've received a 30-Day letter and the examiner has not reached an agreement with their supervisor or administrative appeal, you will have a 90-Day letter Notice of Appeal mailed to you.

You should not receive this letter within 30 days of receiving the 30-Day letter. The IRS will only send it out after 30 days from sending you the 30-Day letter.

Notice of Deficiency Letter 30 day rule does not apply to tax shown on a return filed by the taxpayer that hasn't been paid, errors in calculations, overstatement of credits, or tax for which assessment is waived.

Taking the Matter to Tax Court

you have 90 days from receiving the Notice of Deficiency to take the matter to tax court. If you do not receive a Notice of Default (90-Day Letter), you cannot take the matter to tax court. You do not need to pay the deficiency before going to tax court. Filing a petition with the U.S. tax court suspends the 90-Day period before the assessment is made.

If you pay the amount on the 90-Day Letter (notice of default), you forfeit your ability to go to tax court. You can file a claim for refund. If the claim for refund is denied with the IRS, you can take the matter to U.S. District Court or U.S. Court of Federal Claims. You will not get a jury with the U.S. Court of Federal Claims.

Receiving the Assessment Notice of Tax Due

 Receiving the assessment Notice of tax Due and Demand for Payment in the mail states that you have 10 days to make payment of the taxes owed. This letter will come from the IRS service center.

If you are unable to pay the bill in full, the IRS will expect you to pay as much as possible and contact them for assistance. They will attempt to determine the best method of payment based on your current financial condition.

You have 4 options at this point if you cannot pay the full amount within 10 days:

Paying Taxes Owed Via Installment Payments 

They may enter into a written agreement with you to make installment payments. The downside to making installment payments is that interest and penalties continue to accrue. If you miss a payment, the agreement may be terminated and the total amount will be due. The IRS must notify you 30 days in advance before making changes to an installment agreement.

Guaranteed Installment Agreements:

If you owe less than $10,000, have filed all your tax returns, have failed to pay any income tax, and have not entered into any installment agreements for paying income tax, the IRS is obligated to enter into a guaranteed installment agreement with you.

Offer in Compromise

You can suggest an offer in compromise to settle the unpaid tax accounts for less than the full amount of the balance due if facts point towards you not being able to pay the full amount of the debt. The amount you offer must reflect the maximum you are able to pay, considering present and future earning capacity. You can make an offer in compromise if it is doubtful that this is your tax liability, doubtful that you are able to pay the debt in full, or if there is an economic hardship. Another words, the IRS just wants to make you hurt, but they don't want to kill you.

The IRS has 10 years to collect  from the date of the assessment through levy or court proceedings. An extension can be granted if agreed upon by you and the IRS.