Immediate meaning and why it matters

Receiving a Notice of Deficiency (NOD) is not the same as being immediately assessed or collected against. Instead, it is the IRS’s formal statement that it believes your return contains errors that increase your tax liability. Crucially, the NOD creates a statutory right: you have a limited, non‑extendable window to challenge the IRS’s determination in the U.S. Tax Court without first paying the assessed amount (90 days if the notice was mailed to a U.S. address; 150 days if mailed to an address outside the U.S.). (Source: IRS – Understanding Notices & Letters; U.S. Tax Court rules.)

In my tax-practice experience, the NOD is often the most time-sensitive notice a client will receive because it directly affects litigation rights. Failing to act within the deadline usually removes the option to contest the deficiency pre‑assessment and forces you to either pay and sue for a refund later or negotiate collection options after the IRS assesses.

First steps to take (practical checklist)

  1. Read the letter carefully — note the date mailed, the 90/150‑day deadline, and which tax year(s) are affected. The notice will list the adjustments and the reasons.
  2. Do not ignore it. Missing the deadline typically means the IRS will assess the proposed tax and begin collection actions.
  3. Gather documentation that supports the return items in dispute (forms W‑2/1099, canceled checks, receipts, basis records, brokerage statements, contemporaneous logs for business or home‑office use).
  4. If you already have representation, notify your tax pro immediately. If not, consider hiring a tax attorney, CPA, or enrolled agent with Tax Court experience. In my practice, cases where clients engaged experienced counsel early were more likely to settle favorably without litigation.
  5. Decide whether to file a petition in Tax Court, arrange to pay and later sue for a refund, or pursue administrative remedies with the IRS. Time and facts guide this choice.

Options explained

  • File a petition in U.S. Tax Court (most common when you disagree): Filing preserves your right to contest the deficiency without paying the tax first. Tax Court petitions must be filed within the 90 (or 150) days noted in the NOD. Tax Court procedures (docketing, discovery, pretrial, possible trial) follow federal rules specific to the Tax Court. (Source: U.S. Tax Court website.)

  • Do nothing and let the IRS assess: If you do not file a Tax Court petition within the deadline, the IRS will assess the amount it proposed. After assessment, you lose the pre‑assessment Tax Court option. You can still challenge the tax later by paying the assessed amount and filing a refund suit in U.S. District Court or the U.S. Court of Federal Claims, but that requires paying first.

  • Negotiate or pay and then file a refund suit: Some taxpayers choose to pay the deficiency and then file a refund claim and, if necessary, a refund suit to recover amounts paid. This path is common where speed or business reasons make it preferable to avoid Tax Court timelines.

  • Administrative alternatives after assessment: If the IRS assesses and moves to collect, you can request a Collection Due Process (CDP) hearing, propose an installment agreement, seek Currently Not Collectible (CNC) status, or submit an Offer in Compromise (OIC). For example, see our detailed guides to installment agreements and offers in compromise.

Evidence and recordkeeping — what wins cases

Tax Court and IRS appeal examiners focus on documentation and contemporaneous records. Common winning evidence includes: original source documents (Forms 1099, W‑2s, brokerage statements), bank statements, receipts, invoices, canceled checks, ledgers, and detailed logs (for mileage, home‑office use, or contractor hours). In disputes over basis, holding‑period records and transaction confirmations are often decisive.

My practice tip: organize a concise exhibit book mapped to each adjustment the IRS lists. Presenting a clear, indexed packet reduces friction and increases the chance of early settlement.

Timeline and consequences

  • NOD issued → 90/150 days to file a Tax Court petition. If you file, the IRS does not assess during that time on the disputed amount.
  • If you do not file → IRS assesses and issues a Notice of Intent to Levy or files a lien if payments remain unpaid. Interest and penalties continue to accrue from the original due date of the tax.

Important: the NOD is not a final determination — it is the IRS’s proposed adjustment. However, unless challenged, it becomes the basis for assessment and collection.

Appeals, conferences, and settlement possibilities

Before or after filing a petition, taxpayers can seek to settle. The IRS often offers pre‑trial settlement conferences in Tax Court and the IRS Office of Appeals may be involved if the case proceeds after assessment. For collection issues after assessment, Appeals and the Collection Division handle alternatives like installment agreements or Offers in Compromise. Review our in‑depth resources on Offers in Compromise for when settlement may make sense and on installment agreements for manageable payment plans.

Common mistakes to avoid

  • Waiting to respond: Don’t assume you can ask for more time; Tax Court filing deadlines are firm.
  • Accepting the IRS’s position without review: Some NOD items are math errors or mismatched third‑party reports that are easy to rebut with documentation.
  • Relying on incomplete records: Lack of contemporary documentation is the most frequent reason taxpayers lose disputes.

Costs and representation

Filing a Tax Court petition has fees and procedural costs (filing, potential expert witnesses, discovery costs). Many taxpayers engage counsel early to evaluate whether the merits justify litigation costs. In lower‑dollar cases, informal resolution with the IRS or paying and pursuing a refund may be more cost‑effective.

Special situations

  • If the NOD covers multiple years, evaluate cross‑year effects (e.g., loss carryovers, basis adjustments).
  • If you live or work outside the U.S., remember you have 150 days to file and different service rules may apply.
  • If the IRS’s position is based on third‑party information (e.g., 1099s), emphasize documentary evidence tying your records to those reports.

Practical example (anonymized)

A recent client received an NOD alleging underreported capital gains. We immediately gathered brokerage confirmations showing accurate basis adjustments for wash sales and cost basis reporting. Within 30 days, we submitted a supporting packet to the IRS and prepared to file in Tax Court. The IRS agreed to abate the proposed deficiency after reviewing the documentation — avoiding litigation and interest accumulation.

Where to find authoritative guidance

Final practical advice and disclaimer

If you receive a Notice of Deficiency, act immediately: identify the deadline, assemble supporting records, and consult a tax professional if the liability is material or the facts are complex. This article is educational and not a substitute for personalized legal or tax advice. For decisions that affect your tax obligations, consult a qualified tax professional or attorney familiar with Tax Court practice and IRS procedures.