Background

A Notice of Deficiency (sometimes called a “90‑day letter”) is the IRS’s formal determination that your filed return is incorrect and that additional tax is owed. The process is rooted in the Internal Revenue Code—see IRC §§6212–6213—and is described by the IRS as the taxpayer’s opportunity to challenge a proposed deficiency in Tax Court. (IRS guidance: Publication 556 and Tax Court filing rules.)

How it works — timeline and immediate effects

  • The IRS issues the notice when an audit or examination results in proposed changes.
  • You typically have 90 days from the date on the notice (150 days if the notice was mailed to you outside the U.S.) to file a petition in the U.S. Tax Court. See IRC §6213 and Tax Court procedures.
  • Filing a timely petition in Tax Court prevents the IRS from assessing the proposed additional tax while the case is pending under IRC §6213(a). However, interest on the disputed tax generally continues to accrue. Collections are usually stayed until the court issues a decision.

Options after receiving a Notice of Deficiency

1) File a petition in U.S. Tax Court (no prepayment required)

  • This is the most direct way to dispute the deficiency without first paying the tax. You’ll file a petition that identifies the notice, the tax years involved, and the grounds for contesting the IRS’s position.
  • Tax Court offers two tracks: regular cases and small tax cases (Tax Court’s Small Cases Procedure) for eligible disputes (typically limited to smaller amounts). Small cases are informal but decisions are not precedential.

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

  • If you prefer, you can pay the assessed amount and file a refund suit. This route requires prepayment but allows suit in a district court or the Court of Federal Claims.

3) Try to resolve the issue with the IRS (pre‑trial settlement or administrative appeals)

  • Sometimes cases settle before a Tax Court trial. You can also pursue conferences with the IRS’s Independent Office of Appeals before or during litigation in many instances.

Real-world examples (practical perspective)

  • Example 1: Unreported income. I once represented a taxpayer whose notice was based on a 1099 that double‑counted a contractor payment. By documenting bank deposits and contracts, we persuaded the IRS to withdraw the proposed deficiency at an early conference.
  • Example 2: Disallowed deductions. A small business owner received a notice disallowing certain home‑office and vehicle deductions. Preparing contemporaneous logs and receipts narrowed the dispute and reduced the exposure at trial.

Who is affected

Individuals and businesses can receive a Notice of Deficiency. Common triggers: audit adjustments, unreported income identified through third‑party reporting, or disallowed deductions/credits. If you receive a notice, act quickly—the deadlines are strict.

Practical steps to take immediately

  1. Read the notice carefully—identify the tax year(s), amounts, and reasons for adjustment.
  2. Calendar the petition deadline (90/150 days) and consider talking to a tax professional immediately. Missing the deadline usually lets the IRS assess and begin collection.
  3. Gather documentation that supports your original return: receipts, bank records, contracts, ledgers, and contemporaneous notes.
  4. Consider the best forum: Tax Court (no prepayment), refund suit (requires prepayment), or negotiating with Appeals.

Common mistakes and misconceptions

  • Misconception: “I must pay immediately.” You do not have to pay if you timely file a Tax Court petition.
  • Mistake: Missing the 90‑day deadline. If you miss it, you forfeit the Tax Court option and the IRS can assess and collect.
  • Mistake: Trying to resolve complex legal issues without counsel. Tax Court cases often hinge on legal standards and evidentiary rules—professional help usually improves outcomes.

When to consider Tax Court vs alternatives

  • Choose Tax Court when you want to dispute the deficiency without prepaying the tax and when the legal issues are suited to Tax Court precedent and procedures.
  • Consider paying and suing for refund if you need an expedited district court timeline or a jury trial (available in district court).
  • Use Appeals when you see a realistic path to settlement without litigation.

Practical tips and strategies

  • File early but only after documenting your position. Last‑minute, poorly prepared petitions make litigation harder.
  • Preserve evidence now: copies of the notice, relevant returns, receipts, contemporaneous records, and correspondence with the IRS.
  • If possible, consult a CPA, enrolled agent, or tax attorney to evaluate estimated exposure and litigation risk.
  • Evaluate settlement possibilities early — many cases resolve by agreement before trial.

Frequently asked questions

Q: What happens if I don’t respond?
A: If you don’t file a petition in Tax Court within the deadline, the IRS can assess the proposed additional tax and begin collection activity.

Q: Can I represent myself in Tax Court?
A: Yes. Individuals may represent themselves, but most taxpayers benefit from professional representation.

Q: Does interest and penalties stop while the case is pending?
A: Interest generally continues to accrue on the unpaid amount. Some penalties may still apply depending on the facts.

Related FinHelp resources

Authoritative sources

  • IRS Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund (IRS.gov): https://www.irs.gov/pub/irs-pdf/p556.pdf
  • Internal Revenue Code §§6212–6213 (Notice of Deficiency and Petition Rights)
  • U.S. Tax Court Rules and procedures (uscourts.gov / ustaxcourt.gov resources)

Professional disclaimer

This article is educational and does not constitute legal or tax advice for your specific situation. For advice tailored to your facts, consult a qualified tax professional (CPA, enrolled agent, or tax attorney).

(Information reviewed to mid‑2025.)