If you’re a property owner in the United States and you’ve received a Notice of Deficiency from the IRS, it can feel like a big deal. But don’t panic. Understanding what this notice means, how to respond, and what options are available to you can help you deal with it properly.
This article will walk you through the essentials in simple terms, so you know exactly what steps to take next.
What Is a Notice of Deficiency?
A Notice of Deficiency is a formal letter sent by the IRS to inform you they believe you owe more taxes than what you reported on your tax return. It’s sometimes called a “90-day letter” because it gives you 90 days to respond. The IRS sends this notice when they believe there are discrepancies in your tax filings such as unreported income, incorrect deductions, or missed tax credits.
If you ignore the notice or don’t respond within 90 days, the IRS will go ahead with their proposed changes. This could mean they will add more taxes you owe and start the process of collecting that money.
Why Do Property Owners Receive a Notice of Deficiency?
As a property owner, there are a few reasons why you might receive a Notice of Deficiency:
1. Unreported Rental Income
The IRS may find income you didn’t report like rent payments or money from a property sale. They could have received this info from other sources like banks or property managers through forms like 1099s.
2. Incorrect Deductions
Property owners often claim deductions for things like mortgage interest, repairs, or depreciation. If the IRS thinks those deductions are wrong, they may challenge them.
3. Unqualified Tax Credits
Some property owners claim tax credits for things like energy-efficient upgrades or low-income housing. If the IRS believes you don’t qualify for those credits, they may send a notice.
What to Do When You Receive a Notice of Deficiency
1. Read the Notice Carefully
First, carefully read the notice. The IRS will explain what they think is wrong with your tax return and how much extra tax they believe you owe. Make sure to compare their details with your own records to see if you agree with them.
2. Verify the IRS’s Claims
Go through your tax records and documents to check if the IRS’s claims are correct. Look over your income statements, property-related expenses, and other relevant papers. If you find a mistake in your filing, you may need to fix your return.
3. Consult a Tax Professional
If you’re unsure about the notice or how to respond, it’s a good idea to talk to a tax professional like a certified public accountant (CPA) or tax lawyer. They can help you understand the notice, figure out your options, and create a plan to fix the problem.
What Are Your Options After Receiving a Notice of Deficiency?
Once you’ve reviewed the notice, you have a few options for how to respond:
1. Agree with the IRS
If you agree with the IRS’s findings, you can accept their proposed changes and pay the extra tax. Follow the instructions in the notice to make the payment, either all at once or through a payment plan if available.
2. Disagree with the IRS
If you think the IRS is wrong, you can challenge their findings. You can file a petition with the U.S. Tax Court to present your case and provide any evidence showing the IRS is incorrect.
3. Request an Extension
If you need more time to respond or fix the issue, you can ask the IRS for an extension. However, keep in mind this won’t give you more time to pay any taxes owed, so you’ll still need to arrange payment to avoid penalties.
What Happens If You Don’t Respond?
If you don’t respond within 90 days, the IRS will assume you agree with their proposed changes. They may then add the extra taxes you owe and start collecting the money, which could include taking money from your paycheck, placing liens on your property, or other actions to get the debt.
It’s important not to ignore the notice. The longer you wait to respond, the harder it will be to fix the issue without facing penalties or other financial problems.
Can You Negotiate With the IRS?
If you owe taxes but can’t afford to pay the full amount, you may be able to set up a payment plan with the IRS or settle for a lower amount through an Offer in Compromise (OIC). An OIC is an agreement where you pay less than what you owe, based on what you can afford. You might also qualify for Currently Not Collectible status, which temporarily stops the IRS from trying to collect if you can’t pay because of financial struggles.
How to Avoid Future Issues
After handling the Notice of Deficiency, it’s important to take steps to prevent future issues:
1. Keep Good Records
Always keep detailed records of your rental income and expenses. This includes rent receipts, mortgage interest statements, repair bills, and other important documents. Having good records makes it easier to file accurate tax returns and defend yourself if you’re audited.
2. Work with a Tax Professional
Consider hiring a tax expert who specializes in real estate taxes. They can help you understand complex tax rules, claim the right deductions, and ensure your tax filings are accurate.
3. Stay Informed About Tax Laws
Tax laws, especially for real estate, can change each year. Make sure you’re aware of any new rules that could affect your taxes. Staying updated can help you avoid mistakes and take advantage of all available tax benefits.
Conclusion
Getting a Notice of Deficiency from the IRS is serious, but it doesn’t have to be too stressful. By carefully reviewing the notice, checking if the IRS is correct, getting help from a tax professional, and responding within 90 days, you can fix the issue and avoid penalties. The most important thing is to act quickly and address any mistakes.
