A Notice of Deficiency from the IRS, or a “90-day letter,” is an important notice telling you that the IRS thinks you owe more taxes than you reported. If you’re a landlord in the U.S. and get this notice, it means the IRS has found discrepancies in your tax return. Ignoring the notice or not responding correctly can lead to serious consequences like fines, interest charges, or even liens on your property.

In this article, we’ll explain what landlords should do when they receive a Notice of Deficiency.

What is a Notice of Deficiency?

A Notice of Deficiency is sent by the IRS when they find that the income you reported on your tax return doesn’t match their records. This could be because you missed some income, claimed incorrect deductions, or used the wrong tax credits. Basically, it means the IRS thinks you owe more taxes.

Key Points to Know:

• You have 90 days to respond to the notice. 
• The notice explains what the IRS found, including how much tax you owe. 
• If you don’t act within 90 days, the IRS may charge you the proposed tax and start collecting the payment.

Step 1: Understand the Notice and Confirm its Accuracy

When you get a Notice of Deficiency, the first thing to do is carefully check the information it provides. The IRS will point out what they believe was reported wrong and how they plan to change it. This could include:

• Unreported rental income – The IRS may have found income you didn’t report, using third-party data (like Form 1099s).
• Incorrect deductions – The IRS might have disallowed deductions for things like property repairs or depreciation.
• Tax credits or benefits – The IRS could have questioned credits you claimed, like the Low-Income Housing Credit.

What to do:

• Double-check the details – Compare the IRS’s claims with your own records, including tax returns, accounting paperwork, and supporting documents.
• Make sure your filings are correct – Ensure there are no mistakes or missed income.

Step 2: Consult with a Tax Professional

If you’re unsure about the notice or how to respond, it’s important to talk to a tax professional. A tax accountant or lawyer with experience in real estate can help you through the process.

What to do:

• Gather your documents – Collect everything you might need, like rent receipts, bank statements, tax returns, and any past communication with the IRS.
• Get professional help – A tax advisor can help you decide whether to dispute the IRS’s claim, fix your tax return, or set up a payment plan.

Step 3: Respond Within 90 Days

It’s important to respond within the 90 days to avoid penalties and prevent the IRS from automatically adding more taxes. You have a few options:

• If the IRS is correct, you can accept their findings and pay the extra taxes.
• If you think the IRS is wrong, you can challenge their claim by filing a petition with the U.S. Tax Court.

What to do:

• File a Tax Court Petition – If you dispute the notice, file a petition with the U.S. Tax Court. This must be done before the 90-day deadline.
• Contact the IRS – You can also request an extension for more time to review or resolve the issue. This is done by calling the IRS at the number provided on the notice.

Step 4: Consider Payment Plans or Other Resolution Options

If you owe taxes but can’t afford to pay the full amount, you can negotiate with the IRS. The IRS is now more flexible and offers options like payment plans and Offers in Compromise (OIC) to help taxpayers settle their debts.

What to do:

• Instalment Agreements – You can set up a payment plan with the IRS to pay off the debt in smaller amounts over time.
• Offer in Compromise – If you can’t pay the full amount, you might be able to settle for a lower amount through an OIC. This option is available if you can’t afford to pay or if paying would cause financial hardship.
• Currently Not Collectible Status – If paying the debt would leave you in a bad financial situation, you may qualify for Currently Not Collectible (CNC) status, which temporarily stops the IRS from collecting the debt.

Step 5: Review Your Recordkeeping and Tax Strategy for Future Returns

Once you’ve resolved the immediate issue, it’s important to review your tax strategy to prevent similar problems later. For landlords, taxes can be complicated because of the many deductions (like mortgage interest, depreciation, and repair costs) and different types of income (such as rental income and 1031 exchanges).

What to do:

• Improve recordkeeping – Consider using accounting software made for landlords, like QuickBooks or real estate tools like Stessa. This will help ensure all your income and expenses are properly documented.
• Plan your taxes – A real estate tax advisor can help you set up a better tax strategy, maximizing deductions for things like repairs, depreciation, and possible tax credits.
• Stay informed – Tax laws change often, so keeping up with updates—such as those affecting rental property deductions or IRS audit areas—can help you avoid mistakes in the future.

Step 6: Appeal the Decision if Necessary

If you disagree with the IRS’s findings and the Tax Court petition doesn’t work out, you can appeal within the IRS. An IRS appeals officer will review your case on their own, which might lead to a better outcome.

What to do:

• Get ready for an appeal – If you want to appeal, your tax professional can help you gather more documents and make your case stronger.
• Know the consequences – IRS appeals decisions are final unless a court changes them. The process can take time, so you’ll need to be patient.

Conclusion

Receiving a Notice of Deficiency from the IRS is a serious issue for landlords, but with expert advice and quick action, it can be handled well. Whether you agree with the IRS’s findings, want to challenge them, or need a payment plan, have a clear plan in place.

The key is acting quickly. Ignoring the notice or missing the 90-day deadline will only make things worse. By following the steps outlined, landlords can resolve the issue, stay compliant with the IRS, and protect their real estate business from future problems.