Over the past twelve months, we’ve noticed a concerning rise in IRS deficiency notices (CP3219N) sent to taxpayers. In most cases, these letters result from discrepancies between filed tax returns and the IRS’s records from third-party sources. When the IRS identifies a difference, they send a notice with the following options:

  1. File a Tax Return Within 90 Days – The IRS requires a return within this timeframe, though, ironically, even filing an amended return may not be processed in time.
  2. Accept the Proposed Assessment – Be cautious, as the assessment may not account for all relevant information, potentially leading to overstated taxes.
  3. Challenge the Letter by Filing a Petition with the U.S. Tax Court – This formal option can help dispute the notice if documentation supports a lower tax liability.
  4. Call the IRS – While contacting the IRS is possible, it can be challenging to reach an agent who will address the issue effectively.

We have successfully resolved numerous cases by filing a petition with the U.S. Tax Court during settlement, resulting in no additional taxes owed for the taxpayer. Here are a few examples:

  • Restaurant Case – The IRS increased reported sales based on aggregated 1099-Ks, which showed higher revenue than the restaurant’s actual income. Some of these 1099-Ks were never delivered to the business owner, and the IRS’s assessment overlooked necessary expense deductions like delivery fees, sales tax, merchant fees, and software fees. After adjusting for both increased sales and corresponding expenses, there was no change in net income, resulting in no additional taxes owed.
  • Individual Taxpayer: Securities Sale – In this case, the IRS reported a net gain on the sale of securities but did not account for the cost basis, as it wasn’t accurately noted on the 1099 Brokerage form. Once we provided documentation of the purchase details (cost basis), the assessed taxes were eliminated. We advise clients to carefully review 1099-B forms, especially for older securities, employee stock options, or those affected by brokerage mergers, as cost basis data is sometimes missing.
  • Individual Taxpayer: 1099-K Misclassification – The taxpayer received a 1099-K under their SSN, indicating underreported income. However, the credit card merchant should have issued the 1099-K under the business’s EIN. The business had already reported significantly higher sales than indicated on the 1099-K, so no income was underreported, and no additional taxes were due.

In many of these cases, resolution could have been faster if an IRS agent had contacted the taxpayer directly to review supporting documentation. Instead, many taxpayers feel pressured by the IRS’s approach, which seems to offer an ultimatum: either pay the assessed tax or file a petition with the U.S. Tax Court.

If you receive one of these IRS notices or similar communications from other tax authorities, don’t panic. Reach out to our tax professionals for guidance and support. We’re here to help you navigate these complex situations confidently.

Link IRS – Understanding your CP3219N notice