Quick overview
A Notice of Deficiency is one of the most important IRS letters a taxpayer can receive. It alleges that the IRS has determined a tax shortfall for a particular year and — crucially — it gives you the right to challenge that determination in the U.S. Tax Court without first paying the disputed amount. The notice commonly appears as a formal “90‑day letter.” (See IRS guidance: Notice of Deficiency.)
This article explains what triggers a notice, the practical steps you should take immediately, the legal deadlines and options available (including petitioning Tax Court, paying and suing for a refund, or negotiating after assessment), and common mistakes that put taxpayers at risk.
Disclaimer: This content is educational and does not constitute legal or tax advice. For tailored advice, consult a CPA, enrolled agent, or tax attorney.
How a Notice of Deficiency is triggered
The IRS issues a Notice of Deficiency after reviewing a return, third‑party information (W‑2s, 1099s), or the results of an audit or correspondence examination that lead the IRS to believe additional tax is due. Before issuing a formal assessment, the IRS uses this notice to give taxpayers an opportunity to contest the proposed tax liability in Tax Court. If you receive a notice, it will explain the adjustments, the tax increase, and the date by which you must act. (See IRS overview: Notice of Deficiency.)
Common triggers include:
- Unreported income (missing or incorrect 1099s, cryptocurrency transactions)
- Disallowed deductions or credits
- Timing issues (e.g., reporting errors or late filings)
In practice: I’ve seen notices arrive after automated matching flagged a missing 1099 or when a taxpayer’s Schedule C deductions lacked supporting records. Early document review often resolves many apparent discrepancies.
Key deadlines and what they mean
- Standard deadline: You generally have 90 days from the date on the Notice of Deficiency to file a petition with the U.S. Tax Court. If you are outside the United States, that period is 150 days. If you miss this deadline, you lose the automatic right to litigate in Tax Court and the IRS can assess the tax and begin collection. (IRS: Notice of Deficiency and U.S. Tax Court rules.)
- Interest: Interest on any tax ultimately assessed runs from the original due date of the return until paid. Interest continues to accrue regardless of appeals or petitions.
Why the deadline matters: Filing the Tax Court petition within the 90 days pauses the IRS from assessing the proposed tax while the case is pending in Tax Court — you don’t have to pay first to keep your case alive.
Response options after you receive the notice
- File a petition in U.S. Tax Court (within 90 days)
- Advantage: You can dispute the deficiency without paying first. Tax Court handles many technical tax issues and is often the appropriate forum for pure tax liability disputes.
- Practical tip: Hire counsel or an experienced representative early — the Tax Court uses its own rules and timelines.
- Pay the proposed tax and sue for a refund
- If you miss the Tax Court deadline or choose to pay, you can later pursue a refund through U.S. District Court or the U.S. Court of Federal Claims.
- Note: This route requires payment first, then a separate lawsuit, which can be more expensive and time‑consuming.
- Negotiate after assessment
- If the IRS assesses the tax (for example, you missed the 90‑day window), you still have post‑assessment options such as:
- Filing an administrative appeal within IRS Appeals
- Requesting an Installment Agreement to pay over time
- Applying for an Offer in Compromise if you cannot pay the full amount and meet eligibility criteria
- Seeking penalty abatement for reasonable cause where appropriate
- These remedies are available after assessment but may not preserve all pre‑assessment rights.
- Provide additional documentation to the IRS
- If the notice resulted from missing or mismatched information (e.g., a late 1099), you may be able to resolve the issue by supplying substantiation. However, submitting documents to the IRS does not extend the 90‑day period for filing a Tax Court petition.
Practical first steps (checklist)
- Read the notice carefully; note the date on the letter and the 90‑day deadline.
- Don’t ignore the notice. Mark the deadline on your calendar and set reminders.
- Gather documentation that supports your original return (receipts, bank records, third‑party forms).
- Call the number on the notice to confirm the adjustments and ask what records the IRS relied on — document the call (date, rep name/ID).
- Contact a tax professional if the proposed amount is large or the facts are complex. In my practice, early engagement of a tax attorney or CPA often prevents missteps that close off rights.
What to include if you file a Tax Court petition
A Tax Court petition must include basic identifying information, the year(s) at issue, and a concise statement of why you dispute the deficiency. Practice tip: keep the petition factual and attach a short chronology; you’ll present evidence later. Filing the petition stops assessment until the Court decides.
Evidence and documentation that matter
The IRS and Tax Court focus on objective documentation. Useful items include:
- Bank statements and cancelled checks
- Third‑party records (1099s, W‑2s) and correspondence with payers
- Receipts and invoices for business expenses
- Detailed logs (mileage, services performed) and contemporaneous notes
Tip: Maintain a clear audit file organized by tax year and type of document. See our guide on building an audit‑ready file for practical recordkeeping tips.
Related reading: Preparing a Concise Audit Response Packet: Checklist of Documents and Field Audit Survival Guide: Interviews, Records, and Strategy.
Common mistakes that cost taxpayers
- Missing the 90‑day deadline and losing the right to Tax Court review.
- Treating the notice as a bill and only paying without analyzing options.
- Providing partial or poorly organized documentation that fails to rebut the IRS’s position.
- Assuming the IRS is infallible — it often relies on third‑party information that can be incorrect.
In one case I handled, a taxpayer paid a proposed deficiency rather than petitioning Tax Court; months later, we proved the IRS overstated income because a 1099 had been issued in error, but the client’s only recourse was a refund claim and litigation after payment, which increased costs and delay.
Appeals, settlement, and post‑assessment remedies
If the Tax Court petition is not filed or if the IRS assesses the tax, you can still pursue administrative appeals within IRS Appeals or seek alternatives:
- Administrative appeal: File a timely protest or request for appeal; Appeals personnel are separate from the revenue agent who proposed the change. (IRS Appeals overview.)
- Installment Agreement: Request to pay over time if you cannot pay in full.
- Offer in Compromise: If you meet strict criteria and can show doubt as to collectibility or disagreement on liability, you may settle for less than the full balance.
- Abatement of penalties: If you have reasonable cause for the underlying error, penalties (not interest) can sometimes be abated.
Interest and penalties
Interest accrues from the original due date of the return and continues until the tax is paid. Penalties (e.g., late payment, accuracy‑related) can be added unless there’s reasonable cause. Even if penalties are abated, interest generally continues to accrue.
When to get professional help
Consider hiring a qualified representative (CPA, enrolled agent, or tax attorney) when:
- The dollar amounts are significant relative to your finances.
- The facts are complex (business losses, basis disputes, partnership adjustments).
- You need to file a Tax Court petition and want representation.
In my practice, retaining counsel early — particularly before responding in writing to the IRS — reduces the chance of inadvertent admissions and preserves litigation strategy.
Frequently asked questions
Q: Can I respond to the notice by filing an amended return?
A: Filing an amended return does not stop the 90‑day clock for filing a Tax Court petition. An amended return may correct errors, but it won’t substitute for timely Tax Court action if you want to preserve that forum.
Q: If I miss the 90‑day deadline, am I out of options?
A: No — you can still pursue administrative appeals after assessment, or pay and file a refund suit. However, you lose the distinct advantage of Tax Court review without payment.
Q: Does the IRS always send a Notice of Deficiency before assessing tax?
A: Not always. The Notice of Deficiency is required when the IRS wants to provide the statutory right to petition Tax Court before assessment. For other types of letters and procedures, different rules apply.
Resources and authoritative references
- IRS — Notice of Deficiency (90‑day letter): https://www.irs.gov/individuals/notice-of-deficiency
- U.S. Tax Court — How to File a Petition: https://www.ustaxcourt.gov
- Taxpayer Advocate Service — Taxpayer Rights Overview: https://taxpayeradvocate.irs.gov
- IRS Appeals: https://www.irs.gov/appeals
Internal resources from FinHelp
- Field Audit Survival Guide: Interviews, Records, and Strategy — https://finhelp.io/glossary/field-audit-survival-guide-interviews-records-and-strategy/
- Preparing a Concise Audit Response Packet: Checklist of Documents — https://finhelp.io/glossary/preparing-a-concise-audit-response-packet-checklist-of-documents/
Final advice: Treat a Notice of Deficiency as a legal deadline, not just an informational letter. Confirm the date, gather evidence, and decide promptly whether to petition the Tax Court or pursue other remedies. Early professional help often saves time and money and preserves your rights to the fullest extent.
