Receiving mail from the Internal Revenue Service is enough to make anyone’s knees quiver. It almost always means you owe more money to Uncle Sam for one reason or another. In the case of a Notice of Deficiency, formally known as CP3219A, it means that the information you provided with a tax return does not match up with the information a third party sent, like a bank for an employer.
What is a Notice of Deficiency, and what should you do about it?
Defining the CP3219A Notice of Deficiency
If you receive a CP3219A Notice of Deficiency from the IRS, you are being notified that there is a discrepancy in your tax return. Something you reported does not jibe with something a third party reported under your name and social security number in support of your tax return.
Your employer or a financial institution has reported a different number for taxes, expenses, or income than what you put down on your tax forms. The IRS then changes the amount you owe in taxes according to the third party information. It’s automatic; they don’t wait to make sure that you agree.
Please note that the notice is not a bill but a “proposal,” according to the IRS website. It also provides you with various options for responding from 'Yes, you agree,” to “No, I don’t, and here’s why you’re wrong.” You also receive information about filing a petition with the U.S. Tax Court.
The notification also is not a formal audit notification. It is just the first step in reconciling the difference between your return and information from another party. Within the notice, you will receive Form 5564 and an envelope for you to fill out and return. You will probably need to provide the stamp.
This year, before receiving the CP3219A, you may have received IRS Notice CP2000, a “pre-notification” the IRS now sends when information from a third party doesn’t match the information you reported on your tax return. You should respond to it because if you don’t, you will then be sent a CP3219A with more details about why you owe more tax money (bad news) or why your taxes are decreasing (good news).
What to Do if You Agree with the Notice
If you receive CP2000 or CP3219A and realize, yes, you made a mistake, and you agree with the IRS that you owe more in taxes, and you have no further changes to make to your return, just sign Form 5564, Notice of Deficiency - Waiver and send it back to the agency. There is no need to amend your tax return unless you discover additional income, credits, or expenses. In that case, fill out Form 1040-X to amend your original return with the new information.
Don’t forget to pay any additional tax as reported in the Notice of Deficiency. By the way, because you are late paying, you will also owe interest and penalties on the unpaid tax debt.
If alternatively, you are notified of a tax decrease, you can consider yourself lucky. Just be sure to send back Form 5564 by the deadline.
“But I Don’t Agree!”
In that case, prepare your supporting information and offer it to the IRS to see if they will accept it.
- Phone the IRS, so they can answer any questions you have, clarify why you received the notice, and tell you what you need to do to resolve the issues. The agency also generally accepts information over the phone for incorrect reporting on your tax return. However, if it isn’t enough, you will still need to respond by mail or fax your signed statement explaining your disagreement.
- Mail or fax Form 5564 back to the address on the notice by the deadline along with the new information you feel disputes the notice.
- Contact the third party that furnished the information that disagrees with your return and ask them to correct it.
- File a petition with the U.S. Tax Court by the deadline, if warranted. Late petitions will not be considered.
Remember, just because you disagree with the notice doesn’t mean the IRS will agree with your opinion. The agency will take your information into consideration. In the meantime, you do not get an extension on the time you have to file a petition with the U.S. Tax Court.
If you’re wondering why it took the IRS so dad-gummed long to let you know about the problem, the agency states “… their computer systems match the information on your tax return with that reported by employers, banks, businesses, and others. The matching may take several months to complete.”
However, you cannot get an extension to the time you are given to respond to the notification. Contact the IRS as soon as possible. If you need a copy of your return, you can request a return transcript, call the automated IRS phone application, or complete Form 4506-T - Request for Transcript of Tax Return.
If a transcript isn’t good enough, request a copy from your tax preparer or send Form 4506 - Request for Copy of Tax Return. There is a fee for tax return copies from the IRS.
A Word about Identity Theft
What if the reason you received a CP2000 or CP5419A was that someone else reported incorrect information using your name and social security number?
The IRS recognizes this may be an issue and has prepared, what else, a form for you to fill out. If you believe your information has been altered in this manner, send Form 14039, Identity Theft Affidavit to the agency. In addition, you can go to the IRS identity theft information web page to learn what more you can do.
If You Cannot Pay In Full
If the resulting tax bill is more than you can pay in one go, contact the IRS to set up a tax debt payment plan. You have several plans at your disposal, depending on what you can pay and how long you need to pay the entire amount.
Remember, you will accrue interest on any unpaid amount until you pay in full. Still, it’s better than having a lien placed on your property and other penalties the IRS can use. Payment plans are available in different lengths of time. At the most extreme, if there is absolutely no way you can ever pay the amount (and you can prove it), you may be eligible for an Offer in Compromise, and decrease your tax bill.
Receiving an IRS Notice of Deficiency isn’t the end of the world. It’s certainly better than an audit notice. Just be sure to respond immediately, whether you agree or not. You are on the clock with no hope of an extension.
Call the IRS if you require clarification or have information acceptable to the agency. Otherwise, file Form 5564 along with supporting documentation if you don’t agree or a note that you will pay the debt if you do.
Just be sure to follow all instructions to the letter and, next year, wait until you get all your income statements before filing your return, and verify all your documentation.