How a Notice of Deficiency is generated

A Notice of Deficiency (commonly called the “90‑day letter”) is an administrative step the IRS uses when it concludes—after an audit, office review, or document matching—that a taxpayer owes more tax than reported. The IRS explains the proposed adjustments, the additional tax, and any proposed penalties or interest. The taxpayer then has a limited window to challenge the determination in the U.S. Tax Court instead of paying first (IRS, Notice of Deficiency guidance).

Key facts you should know right away:

  • The standard deadline to file a petition with the U.S. Tax Court is 90 days from the date the notice is mailed (150 days if the notice is mailed outside the United States) (26 U.S.C. §6213; IRS guidance).
  • If you do not file a petition within the deadline, the IRS can assess the tax and begin collection actions.
  • A Notice of Deficiency is not the same as a bill. It is an opportunity to litigate without first paying.

(My practice note: I’ve handled many cases where missing the 90‑day deadline removed litigation options and limited relief to collection alternatives or refund claims — so calendar the deadline immediately.)

Common triggers that lead to a Notice of Deficiency

  1. Underreported or unreported income
  • Mismatches between your return and third‑party information (W‑2s, 1099s, brokerage 1099‑B) are a frequent trigger. When taxpayers omit 1099 income or understate business receipts, the IRS may propose an increase and issue a notice.
  • Example: a client omitted several 1099‑NEC payments; the IRS matched those 1099s to the return and issued a deficiency notice.
  1. Questionable deductions or credits
  • Large or unusual deductions, inconsistent business expense claims, or improperly claimed credits (e.g., EITC without required documentation) often prompt review and, after an adverse finding, a notice.
  • Keep contemporaneous records—receipts, logs, and substantiation—especially for home office, vehicle, or charitable deduction claims.
  1. Calculation or filing errors
  • Simple arithmetic errors, incorrect filing statuses, or omitted capital gains can lead the IRS to propose changes. Processing reviews sometimes escalate into formal notices when the change raises additional tax beyond the threshold for a deficiency.
  1. Related‑party transactions and basis disputes
  • The IRS scrutinizes transactions with family members, corporations you control, or partnerships where basis calculations are complex.
  1. Claimed losses or unusual tax positions
  • Significant loss claims (e.g., passive losses, hobby vs. business issues, casualty losses) or aggressive tax positions without adequate documentation can result in deficiency notices.
  1. Computer matches and information return mismatches
  • The IRS automated systems compare your return to information returns it receives. Mismatches often start an inquiry that can culminate in a Notice of Deficiency if not resolved.

What the notice contains and immediate steps to take

A typical Notice of Deficiency will:

  • Identify the tax year(s) and specific line items or categories the IRS adjusted.
  • Show the calculation that produces the additional tax, plus penalties and interest if applicable.
  • Provide the date by which you must file a petition with Tax Court (90/150 days).
  • Describe how to contact the IRS and how to request additional time to respond (rarely granted).

Immediate checklist when you receive the notice:

  1. Read it carefully and note the deadline for petitioning Tax Court.
  2. Assemble the file: tax return, all supporting documents, third‑party statements, correspondence, and any audit workpapers.
  3. Consider contesting in Tax Court if you have a reasonable dispute of law or fact and you prefer litigation without paying the tax up front.
  4. If uncertain, contact a tax attorney, CPA, or enrolled agent experienced with Tax Court practice.

(Author note: In my experience, the best outcomes come from quick triage: if the IRS math is wrong or records are incomplete, many notices can be resolved administratively; if the dispute is legal or judgmental, Tax Court may be the better path.)

When to consider Tax Court vs. other options

You can respond to a Notice of Deficiency in three primary ways:

  • File a petition in the U.S. Tax Court within the 90/150‑day window and litigate the dispute without paying the deficiency first.
  • Pay the proposed deficiency (or secure a collection alternative) and then pursue a refund claim through the IRS and, if denied, sue in U.S. District Court or the U.S. Court of Federal Claims.
  • Negotiate or request Appeals review with the IRS Office of Appeals before or after petitioning (procedural specifics vary).

Choose Tax Court when:

  • You have a strong factual or legal defense and want to litigate without first paying the tax.
  • The case involves a novel legal issue that might create beneficial precedent.
  • The amount at stake justifies litigation costs and the taxpayer wants the tax liability adjudicated in Tax Court.

Consider paying or settling when:

  • The tax at issue is small relative to litigation costs and the facts strongly favor the IRS.
  • You want to avoid the time and expense of court, and offer‑in‑compromise or payment arrangements are viable.

If your case is small and meets requirements, you may request the Tax Court’s Small Tax Case (S‑court) procedure (Tax Court Rule 170). Decisions there are faster but are not precedential and have a limit on the amount in dispute (current limits are set by the Tax Court; check recent guidance before filing).

Burden of proof and evidence considerations

Who bears the burden of proof depends on the issue. Generally, the taxpayer bears the burden to prove claimed deductions and facts, but the IRS must show the deficiency is correct if it relies on third‑party documents to rebut your return. Recent changes in law (e.g., in some limited situations where the IRS has substantial evidence) may shift or affect burdens. Expect to produce contemporaneous records, credible testimony, and supporting documents.

Practical timeline and what happens if you miss the deadline

  • Day 0: Notice mailed.
  • Day 1–90 (or 150 if mailed abroad): File a Tax Court petition to prevent assessment and preserve the right to litigate without paying first.
  • After the deadline without a Tax Court petition: The IRS may assess the deficiency, send a bill (Notice and Demand for Payment), and begin collection (liens, levies) if unpaid.

Missing the Tax Court deadline eliminates the immediate option to challenge in Tax Court and generally requires that you pay the assessment and pursue a refund suit or other remedies, which can be more costly and time‑consuming.

Costs, timelines, and practical considerations

  • Filing a Tax Court petition has a modest filing fee, but total litigation costs (attorneys, experts) can be substantial depending on complexity.
  • Tax Court cases often take 12 months or longer to reach trial and decision, though timelines vary.
  • Settlement negotiations remain possible after filing a petition; Tax Court petitioning does not foreclose settlement.

How I help clients in practice

In my practice as a tax professional, I first triage every Notice of Deficiency to determine whether the IRS made a math or processing error, whether the taxpayer has records to support the return, and whether the issue is legal or factual. If the taxpayer has strong documentation, I favor administrative resolution or Appeals negotiation. If the facts are disputed or the IRS’s legal position is weak, I recommend timely Tax Court petitioning and prepare the record for litigation.

Useful resources and internal references

  • IRS: Notice of Deficiency / Tax Court information (see IRS.gov for current guidance).
  • U.S. Tax Court procedural pages and Small Tax Case Division (ustaxcourt.gov).

Relevant internal guides on FinHelp:

(These internal pages explain filing mechanics, appeals, and small case rules in more detail.)

Common mistakes to avoid

  • Ignoring or misplacing the 90‑day deadline.
  • Failing to assemble contemporaneous documentation before deadlines.
  • Assuming the IRS is always correct—errors do occur, and missing documentation on their end sometimes creates an improper deficiency.

Final practical checklist

  1. Date‑stamp the notice and calendar the respond‑by date immediately.
  2. Gather all relevant documents and engage a competent tax professional if you’re unsure.
  3. Evaluate litigation cost vs. amount at dispute; consider Appeals or settlement if litigation is uneconomic.
  4. If you file a petition, prepare for discovery, possible settlement, and trial; if you do not, prepare to respond to collection activity.

Disclaimer: This article is educational and does not constitute legal or tax advice. For personalized guidance, consult a qualified tax attorney or licensed tax professional. For IRS official guidance, visit IRS.gov; for general consumer tax resources, see Consumer Financial Protection Bureau (consumerfinance.gov).