What to Do if You Receive a Statutory Notice of Deficiency: Step-by-Step

That official-looking envelope from the IRS containing a Statutory Notice of Deficiency means you’re facing one of the most urgent deadlines in tax law—you have exactly 90 days to challenge the IRS’s proposed assessment before it becomes legally binding and enforceable.

This formal notice represents your final opportunity to dispute additional taxes, penalties, and interest in U.S. Tax Court, prior to assessment, where an independent judge can review your case. Once those 90 days expire without action, the IRS gains immediate authority to assess the tax, and after certain procedural rights lapse or remain unenforced, they have the authority to collect the proposed amount through wage garnishments, bank levies, and property seizures that can severely impact your financial stability.

What You Need to Know About a Statutory Notice of Deficiency

• This notice is your official ticket to U.S. Tax Court — if you miss the 90-day deadline, you lose that right.
• Sending a letter to the IRS in response to the statutory notice of deficiency does not stop the clock on your deadline.
• Once the case moves to collections, it becomes more complex, expensive, and stressful to resolve.
• State taxing authorities will often follow the IRS’s lead — compounding your issues if left unresolved.

What Exactly Is a Statutory Notice of Deficiency?

A Statutory Notice of Deficiency is the IRS’s official determination that you owe additional taxes, penalties, and interest, which becomes legally binding unless you petition the U.S. Tax Court within 90 days of the notice date. This formal document typically follows an audit or examination where the IRS identified discrepancies in your tax return that you either disagreed with during appeals or failed to respond to altogether. The notice provides detailed calculations showing exactly how the IRS arrived at their proposed deficiency amount and serves as your formal invitation to challenge their findings in federal court.

Why You Must Act Fast

When you receive a Statutory Notice of Deficiency, you are at a critical turning point in your tax dispute. This document is your one chance to take the IRS to Tax Court before their proposed assessment becomes final. Waiting or assuming a letter to the IRS pauses the process is a costly mistake — the 90-day clock does not stop.

The longer you wait, the harder and more expensive it becomes to fix the problem. If you let this move into collections and do not enforce certain procedural rights, the IRS gains full authority to levy your wages, seize bank accounts, or file liens against your property — and state tax authorities will often follow suit.

Understanding Your Urgent 90-Day Timeline

You have exactly 90 days from the date printed on the notice—or 150 days if you’re living outside the United States—to file a petition with the U.S. Tax Court. This deadline can’t be extended under any circumstances, even if you’re actively working with the IRS on other tax matters or attempting to negotiate a resolution.

The 90-day clock starts ticking from the date shown on the notice itself, not when you actually receive it in the mail. This distinction matters because mail delays won’t excuse a late filing. If you moved recently and the notice was sent to an old address, the deadline still applies based on the original mailing date (subject to special rules regarding notifying the IRS of an address change). Missing this deadline transforms your tax dispute from a manageable challenge into a much more expensive and complex problem.

Once those 90 days expire, you lose your right to challenge the IRS’s findings in Tax Court, where you could have argued your case before an independent judge. Instead, you’ll face the much more limited options available after the IRS has already assessed the tax debt against you.

Reviewing the Notice Details Carefully

Your Statutory Notice of Deficiency contains vital information that will determine your next steps, so you need to examine every section with careful attention. The notice specifies which tax years are involved, the type of tax in dispute, and provides detailed calculations showing exactly how the IRS arrived at their proposed deficiency amount.

Pay particular attention to the specific issues the IRS identified during their examination. Common problems include unreported income from 1099s or other sources, disallowed business deductions, denied tax credits, or penalties for failure to file or pay on time. The notice will reference the specific tax code sections and regulations the IRS believes you violated, along with their interpretation of the facts in your case.

Compare the IRS’s calculations line by line with your original tax returns and supporting records. Document any discrepancies you find between the IRS’s position and your understanding of the facts. These differences will form the foundation of your potential Tax Court petition and guide your evidence-gathering efforts. Don’t assume the IRS got everything right—revenue agents make mistakes, and their interpretations of complex tax law aren’t always correct.

Deciding Whether to Petition Tax Court

Choosing whether to challenge the deficiency in Tax Court requires a strategic analysis of your case’s strengths, the amount at stake, and your available resources. If you need professional guidance in assessing these factors, consider consulting a tax lawyer before deciding.

Consider the financial stakes involved—if the proposed deficiency is relatively small compared to the time and expense of Tax Court proceedings, paying the assessment might be more practical than fighting it. However, don’t automatically assume that small amounts aren’t worth disputing, especially if the IRS’s position could affect future tax years or if penalties and interest will continue accumulating.

Evaluate the strength of your supporting evidence objectively. Do you have complete records, receipts, contracts, and documentation that clearly support your tax position? Are there witness statements or expert opinions that could help your case? Tax Court judges base their decisions on evidence and legal arguments, not on sympathy or good intentions.

You should also consider your capacity to handle Tax Court proceedings, either personally or through professional representation. While you can represent yourself, tax law is complex, and the court’s procedures require attention to detail and adherence to specific deadlines throughout the case.

Gathering and Organizing Supporting Documentation

If you decide to challenge the deficiency, begin collecting and organizing every document that supports your tax position and contradicts the IRS’s findings. This documentation phase often determines the outcome of your case, so approach it systematically and thoroughly. Start with the specific items the IRS questioned—if they disallowed business deductions, gather comprehensive evidence including receipts, invoices, contracts, and bank statements that prove expenses were legitimate and properly categorized.

For business owners, you will need profit and loss statements, general ledgers, and accounts payable and receivable records, among other records. If the IRS challenged unreported income, gather bank statements, 1099s, and other income records. Don’t overlook supporting evidence like meeting notes, client correspondence, and calendar entries that demonstrate business purposes for questioned expenditures.

Organize your documents chronologically and by issue, creating clear summaries that explain how each piece of evidence supports your position. This systematic approach will help you present a compelling narrative that connects your documentation directly to the disputed tax positions. Think like you are building a story that a Tax Court judge will understand—connect the dots between your documents and your tax return positions.

Create copies of everything and maintain both physical and digital backups of important evidence. Don’t overlook supporting evidence that might not seem directly related to the tax issues. For example, if the IRS questions whether travel expenses were business-related, gather meeting notes, client correspondence, and calendar entries that demonstrate the business purpose of your trips.

Filing a Tax Court Petition

Submit your petition using the court’s required forms, include a copy of the Statutory Notice of Deficiency (carefully following the Court’s redaction rules), and pay the filing fee within the 90-day deadline. The petition must clearly state the errors you believe the IRS made and specify the relief you are requesting from the court.

For disputes involving $50,000 or less per tax year, you can elect Small Tax Case procedures, which offer simplified rules, reduced filing fees, and more informal hearings. Small Tax Cases move faster through the system and don’t require the complex pleadings and discovery procedures of regular cases. However, decisions in small tax cases can’t be appealed, so this election is final.

Your petition must be filed with the U.S. Tax Court in Washington, D.C., and you must serve a copy on the IRS Chief Counsel’s office according to the court’s rules. See the notice for more details on specific petition filing methods. The petition stops the IRS assessment and collection process, giving you time to prepare your case and potentially negotiate a settlement before trial.

Be precise in describing the specific errors you are alleging—vague claims of IRS mistakes won’t survive the court’s review process. Reference specific tax code sections, factual disputes, or procedural errors that support your position. This initial petition sets the boundaries of your case, so include all issues you want to contest.

Exploring Alternative Resolution Options

Even after filing your Tax Court petition, you have multiple opportunities to resolve your case without going to trial. The IRS Office of Chief Counsel will typically contact you after receiving notice of your petition to discuss potential settlement options. These negotiations often result in mutually acceptable compromises that resolve cases based on the relative strengths of both parties’ positions.

Many Tax Court cases settle through stipulated agreements where both sides make concessions on disputed issues. For example, the IRS might agree to allow some previously disallowed deductions while you concede other points where their position is stronger. These settlements avoid the uncertainty and expense of trial while often achieving better results than either party might expect from a judge’s decision.

The Tax Court also offers alternative dispute resolution programs, including mediation services that can help facilitate productive settlement discussions. These programs are particularly valuable in cases involving factual disputes or situations where both sides have reasonable arguments supporting their positions.

Settlement negotiations can continue throughout the litigation process, even after discovery and pre-trial procedures begin. The key is maintaining realistic expectations about your case’s strengths and weaknesses while remaining open to reasonable compromise solutions that achieve your primary objectives.

Working with Tax Professionals

Given the complexity and high stakes involved in Tax Court proceedings, consider working with qualified tax professionals to improve your chances of success. You may want to hire a tax attorney with specific Tax Court experience to guide you through the process.

These professionals can help you evaluate the strength of your position objectively, identify the most persuasive arguments for your case, and develop strategies for gathering and presenting evidence effectively. They also understand how to navigate the court’s complex procedural rules while maintaining productive relationships with IRS counsel that can facilitate settlement negotiations.

The cost of professional representation often pays for itself through better case outcomes, reduced stress during the process, and time savings that allow you to focus on your business or personal life. Tax professionals can also help you understand the broader implications of your case for future tax years and develop strategies to prevent similar problems from arising again.

When selecting representation, choose professionals with specific US Tax Court experience rather than general tax practitioners. Ask about their track record in cases similar to yours and their approach to settlement negotiations versus trial advocacy.

What Happens After the 90-Day Period

If you choose not to file a Tax Court petition within the 90-day deadline, the IRS will assess the proposed deficiency, penalties, and interest against you, making the debt legally enforceable through their collection powers. Once assessed, this tax debt carries the same collection authority as any other tax liability, meaning the IRS can file federal tax liens against your property, levy your bank accounts and wages, and seize assets to satisfy the debt, after certain procedural protections lapse.

According to the IRS’s own procedures, they typically begin collection actions within 30-60 days after assessment, starting with demand notices and escalating to enforced collection if you don’t respond with payment or an acceptable resolution plan. These collection actions can severely impact your credit rating, business operations, and personal financial stability.

However, you still have options for resolving assessed tax debts, though they are generally less favorable than challenging the deficiency before assessment. These include installment agreements that allow you to pay the debt over time, offers in compromise that may reduce the total amount owed based on your ability to pay, and currently not collectible status if you’re experiencing genuine financial hardship.

While these post-assessment options can provide relief, they typically require you to demonstrate your inability to pay the full amount or accept payment terms that may be less favorable than what you could have achieved by successfully challenging the deficiency before assessment. The procedures for these alternatives also involve extensive financial disclosure and ongoing compliance requirements that can be burdensome for business owners and individuals alike.

The 90-day window provided by a Statutory Notice of Deficiency represents your best opportunity to challenge the IRS’s position pre-assessment.

How Hughes Noff Approaches a Statutory Notice

Many clients come to us after trying to handle their Statutory Notice on their own or with a professional who simply told them to pay what the IRS demands. We know how to rebuild the case from the ground up, present the right evidence, and fight to get the proposed tax reduced — often significantly.

Facing a Tax Problem? We’re Here to Help.

At Hughes Noff Tax Law, we know how overwhelming it can feel when the IRS or state tax authorities get involved. Whether you’re dealing with an IRS audit or tax dispute, international tax compliance, or tax debt resolution, we’re here to provide you relief and reduce that anxiety. Let us deal with the federal government—so you don’t have to.

We approach every client with empathy and provide the advocacy, direction, service, and resolution they deserve. We have over 25 years of combined experience resolving complex tax controversies and understand the unique and sensitive nature of these matters. As both attorneys and CPAs, we understand the law and the numbers. Our clients appreciate the clarity and peace of mind we help restore—read their stories here.

Contact us today or call 410-694-7758 to schedule your consultation.