Quick overview

Receiving a statutory notice of deficiency (the “90‑day letter”) is not the end of the road — it is the beginning of a formal process that protects the taxpayer’s right to challenge an IRS determination. The critical decision is whether to file a timely petition in the U.S. Tax Court, pay the tax and later sue for a refund in a district court or the Court of Federal Claims, or try to resolve the issue administratively (for example, through the IRS Office of Appeals).

This article explains the legal mechanics, choices and practical steps you should take after the IRS mails a notice of deficiency. I’ve handled these cases professionally for over 15 years and include hands‑on tips that matter in real disputes.

(Authoritative references: IRS guidance on notices and appeals; U.S. Tax Court procedures. See source links below.)

How the notice starts the clock

  • The notice of deficiency is a statutory notice that the IRS mails to inform you it intends to assess additional tax for a specific year (often marked as a 90‑day letter). If you want to keep the right to challenge that proposed tax in Tax Court, you must file a petition within the deadline stated on the notice — typically 90 days from the date the IRS mailed the notice (150 days if the notice was mailed to a person outside the United States). This deadline is strictly applied by the courts.
  • Filing a timely petition with the U.S. Tax Court prevents the IRS from making the assessment while the Tax Court has jurisdiction (see IRC §6213 and U.S. Tax Court guidance).

Sources: U.S. Tax Court (petition rules) and IRS explanation of taxpayer notices (https://www.irs.gov/individuals/understanding-your-notice-or-letter-from-the-irs; https://www.ustaxcourt.gov/).

Your primary options (with pros, cons and key deadlines)

1) File a petition in the U.S. Tax Court (often the best immediate protection)

  • What it does: Keeps the deficiency from being assessed while the case is pending and lets you litigate without first paying the full disputed tax.
  • Timing: Must be filed within 90 days (or 150 days if outside the U.S.) from the notice mailing date — no extensions.
  • Pros: You do not have to pay the disputed tax to get a hearing; the Tax Court is an established forum with judges experienced in tax law.
  • Cons: Litigation can be slow; interest continues to accrue on the unpaid tax from the original due date.
  • Practical note: For disputes under $50,000 for the year you can request the Small Tax Case procedure (S case) in Tax Court, which is faster and less formal but decisions are not precedential.

2) Pay the tax, then sue for a refund in U.S. District Court or the Court of Federal Claims

  • What it does: Removes the case from Tax Court and allows a refund suit where you can demand a jury trial in district court (not in the Court of Federal Claims).
  • Timing: You must pay the assessed tax and file a timely refund suit after the IRS issues a refund denial or after six months if no decision.
  • Pros: Potentially different procedural advantages (jury trial option in district court) and in some cases a faster, more favorable forum depending on the facts and local rules.
  • Cons: You must pay the disputed tax up front; if you lose, you may have fewer recovery options for interest and litigation costs.

3) Try to settle administratively with the IRS (including Appeals)

  • What it does: Use the IRS Office of Appeals or available collection alternatives (e.g., an Offer in Compromise) to resolve the dispute without full litigation.
  • Timing: Discussions can start before or after filing a Tax Court petition; Appeals often accepts cases regardless of a Tax Court petition and can settle matters while litigation is pending.
  • Pros: Avoids the cost and uncertainty of court litigation; may preserve confidentiality and allow creative compromise.
  • Cons: Appeals outcomes vary by case, and you may need persuasive documentation and negotiation skill.

4) Small Tax Case (S case) in Tax Court

  • Eligibility: Disputes of $50,000 or less measured by the amount of tax in dispute for the tax year.
  • Advantages: Faster, simpler procedures and no formal discovery; lower cost.
  • Limitations: A small tax case decision is not precedential and cannot be appealed (except on limited jurisdictional grounds).

Step‑by‑step: If you receive a notice of deficiency

  1. Read the notice carefully. Note the mailing date, tax years involved, tax amounts, and the stated deadline to file a Tax Court petition.
  2. Preserve and assemble documentation. Collect tax returns, bank records, receipts, loan documents, canceled checks, accounting worksheets and prior correspondence with the IRS.
  3. Consider immediate professional help. A tax attorney, enrolled agent, or experienced CPA can evaluate whether the facts favor Tax Court litigation, settlement, or paying and suing for refund. In my practice, early triage narrows the factual issues and often reduces discovery cost later.
  4. Decide whether to file a Tax Court petition. If you contest liability and want to avoid paying first, prepare and file the petition within the 90‑day (or 150‑day) deadline. The Tax Court website explains petition content requirements and the small tax case option.
  5. If you choose to pay: document the payment and track the refund procedure and corresponding deadlines for filing a refund suit in the district courts or Court of Federal Claims.
  6. Explore Appeals. Even after filing a petition you (or your representative) can request Appeals consideration. Appeals may settle matters without a hearing.

Useful site guides: see our detailed walkthrough on how to prepare a timely response to a notice of deficiency and a step‑by‑step on how to petition the U.S. Tax Court (internal links below).

Practical risks and realities

  • Interest continues to run on the disputed amount from the original tax due date until paid. Paying earlier reduces interest and potential penalties (see IRS Interest and Penalties guidance: https://www.irs.gov/payments/interest-and-penalties).
  • Missing the deadline to file a Tax Court petition is usually fatal to your chance to litigate the deficiency without paying first; the statute is strictly enforced.
  • Filing a petition does not automatically stop all IRS collection activity in unrelated tax years; it prevents assessment of the specific claimed deficiency while Tax Court has jurisdiction.
  • If you accept a collection alternative (Offer in Compromise, installment agreement), ensure any settlement terms are explicit and in writing.

Evidence, burden of proof and litigation strategy

  • Generally the IRS has the burden to show that its adjustments are correct when it issues a notice of deficiency; the taxpayer then presents contrary evidence. However, in certain limited cases (e.g., fraud penalties), the burden shifting rules are different. Litigation strategy hinges on documentary proof, consistent records, and credible expert testimony if applicable.
  • Discovery in Tax Court is available (requests for production, depositions in some situations), but the Court encourages narrowing issues early.

Cost considerations

  • Litigation costs (attorney fees, expert witnesses, document production) can exceed settlement values. Evaluate the economic tradeoff: sometimes settling through Appeals or agreeing to a smaller liability is the most cost‑effective route.
  • Small tax case procedures lower cost but sacrifice appeal rights and precedential value.

Short checklist: immediate actions within 48–72 hours

  • Confirm the mailing date on the notice and calendar the 90/150‑day deadline. No extensions.
  • Send a secure copy of the notice and all related tax records to your tax advisor.
  • Avoid informal admissions to IRS agents about facts in dispute — direct them to your representative if you have one.

Where to learn more / authoritative resources

Internal guides on FinHelp:

Final practical tips (from practice)

  • Early triage matters: within days of getting a notice I recommend a short intake with a tax professional to determine the substantive strength of the IRS adjustments and whether documentary gaps can be closed quickly.
  • Keep communications written. Any concessions made verbally to the IRS can complicate later litigation.
  • If money is tight, explore the Appeals Office or a partial payment plus an installment agreement while preserving the right to dispute liability.

Disclaimer: This article is educational and does not constitute legal or tax advice. For personalized advice based on the specifics of your notice of deficiency, consult a qualified tax attorney, CPA, or enrolled agent.