What action does the IRS take if an agreement is not reached following an income tax audit?

When the IRS conducts an income tax audit and an agreement is not reached, the agency typically issues a Statutory Notice of Deficiency. This notice, often referred to as a "90-day letter," informs the taxpayer of additional tax owed based on the auditor's findings. It effectively opens up a formal process where the taxpayer is given the opportunity to contest the IRS's determination before it becomes final. The taxpayer has 90 days from the date of the notice to file a petition in the U.S. Tax Court if they disagree with the IRS's proposed changes.

The other actions listed do not apply in the same context. For instance, a warning letter does not have the same legal standing as a Statutory Notice of Deficiency and is usually less formal. Settling an audit informally implies that there was an opportunity for negotiation that successfully resolved the matter, which is not the case when an agreement hasn't been reached. A secondary audit is not a common follow-up action taken by the IRS after an initial audit has been completed and disagreement persists; rather, it would typically lead to formal notification of the amount owed or further legal steps. Thus, the issuance of a Statutory Notice of Deficiency represents the IRS’s formal and structured response to