The IRS issues various forms of correspondence to taxpayers. Among the most critical is Letter 894, formally known as a Notice of Deficiency, issued by the Office of Appeals. This letter is not a routine notice; it is a legally binding document informing you that the IRS has determined you owe additional tax. This notice also gives you a limited and final opportunity to dispute that determination before the IRS can assess and collect the tax.
Understanding its content, legal effect, and the strict deadlines it imposes is essential to protecting your rights.
What is Letter 894?
Letter 894 is the IRS’s formal notification that, after review, it has determined a “deficiency” in your taxes for one or more specific years. This means the IRS believes you underpaid based on the information it examined—often following an audit or appeal review. Once issued, Letter 894 represents the IRS’s final position before assessment.
The law grants you 90 days (or 120 days if the notice is addressed outside the United States) from the date of the letter to file a petition with the United States Tax Court.
This deadline is jurisdictional—if you do not file within the allowed time, the Tax Court cannot hear your case. After the deadline expires, the IRS will assess the tax, add applicable interest and penalties, and begin collection action. There are no extensions or exceptions for late filing.
What does Letter 894 Include?
A typical Letter 894 includes:
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- The tax years involved.
- The amount of the proposed deficiency, with interest and penalties if applicable.
- An explanation of the IRS’s adjustments and the legal basis for them.
- The deadline to file a Tax Court petition.
- In some cases, a Form 4089-A (Waiver), allowing you to agree to the IRS’s determination and waive your right to petition.
What Are Your Options?
Upon receipt, you have three clear options:
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- Agree with the IRS determination – Sign and return the waiver, then pay the additional tax or arrange an installment agreement.
- Disagree and contest the determination – File a petition with the Tax Court within the 90-day window. This allows you to dispute the tax before paying it.
- Ignore the letter – This is the most damaging choice. Inaction will result in assessment, accrual of interest and penalties, and eventual enforced collection.
The 90-day (or 120-day) deadline is absolute. The Tax Court will dismiss any petition filed late, regardless of the reason. Acting quickly after receiving Letter 894 is crucial.
Relevance to Taxpayers
The IRS’s determination is legally presumed to be correct. You bear the burden of proving it wrong. This means you must have credible evidence, accurate records, and a sound legal argument to succeed.
We Can Help!
Letter 894 is a formal and legally binding Notice of Deficiency from the IRS Office of Appeals. It informs you that the IRS has determined you owe additional tax and gives you a single, time-limited opportunity to challenge that determination in the U.S. Tax Court before payment is required. The law provides no second chance once the deadline passes. Immediate review and decisive action are essential to protect your rights and avoid irreversible consequences.
At JH Tax Law, our team can evaluate the strength of your position, help you file a timely and complete petition, and ensure compliance with all court and IRS procedural requirements. If you’ve received Letter 894, contact our office for a confidential consultation today.