Responding to Common IRS Notices: 90-Day Letters, First-Time Penalty Abatement, and Reasonable Cause Relief

Every IRS notice received contains potential penalties and a required response date. Responding appropriately and effectively can provide relief from penalties and often undeserved additional tax liability for clients. One of the most common notices issued by the IRS Automated Underreporter Program (AUR) is the Notice CP 2000. This notice is sent to propose a tax assessment for underreported income. This is often the result of a mismatch of information, the difference between what was reported to the IRS and what was included on a taxpayer's return.

More alarming is Notice CP 3219A, a Statutory Notice of Deficiency, better known as a 90-day letter or a ticket to tax court. This notice is sent as a follow-up to the CP 2000. Responding timely and adequately is critical. Or, better yet, take steps to avoid this notice altogether.

In addition to a proposed tax assessment arising in underreported income cases, IRS will propose an assessment of the Substantial Understatement penalty in cases involving significant tax underreporting. In these penalty cases, there may be reasonable cause, reliance on a professional, or facts and circumstances that allow penalty relief. Knowing how to respond to AUR notices correctly and the proper steps to take for penalty abatement is critical for practicing tax professionals.

Additionally, IRS assesses failure-to-file (delinquency) and failure-to-pay penalties in cases in which tax returns are filed late or tax payments are made late. Understanding these notices, including both the first-time penalty abatement procedures and reasonable cause defenses, greatly enhances the prospect of a successful resolution for tax professionals representing taxpayers in these disputes.

Listen as our panel of seasoned experts explains the different types of IRS notices, the appropriate responses to each, and how to mitigate penalties charged to taxpayers.