2025 Houston Law Guide | Federal and Texas State Law Guidance

Tag: business

  • The Structure of the IRS: Who Handles Your Case?

    The Internal Revenue Service is the federal government’s administrative agency charged with enforcing the Internal Revenue Code. Its structure has a direct impact on how tax controversies are handled, since different divisions of the IRS serve different categories of taxpayers. Understanding which division is responsible for a case helps predict how issues will be developed, what kinds of examiners or attorneys will be involved, and what strategies may be most effective.

    Leadership and National Headquarters

    The IRS is an agency of the Department of the Treasury and is headed by the Commissioner of Internal Revenue, who is appointed by the President and confirmed by the Senate under I.R.C. § 7802. The Commissioner’s office in Washington, D.C. sets national policy, oversees the operating divisions, and develops major enforcement and service initiatives. The Office of Chief Counsel is also housed at headquarters, with attorneys responsible for drafting regulations, issuing rulings, and advising IRS personnel nationwide. Field attorneys from the Chief Counsel’s office represent the Commissioner in the U.S. Tax Court and certain bankruptcy proceedings.

    The Four Operating Divisions

    Since the IRS Restructuring and Reform Act of 1998, the agency has been organized around four operating divisions, each with end-to-end responsibility for a distinct group of taxpayers.

    Wage and Investment Division (W&I). This division serves the majority of individual taxpayers — roughly 120 million filers whose income consists primarily of wages and investment returns. W&I oversees return processing, customer service, and correspondence audits. Its subunits handle pre-filing assistance, return integrity and compliance checks, and administration of refundable credits.

    Small Business/Self-Employed Division (SB/SE). This division manages compliance for approximately 21 million self-employed individuals and about nine million small businesses with assets under $10 million. SB/SE is also responsible for estate and gift tax matters, employment tax issues, and most collection activity. Within SB/SE, specialized units handle field audits, compliance services, and enforcement of delinquent accounts.

    Large Business and International Division (LB&I). LB&I oversees corporations, partnerships, and other entities with assets over $10 million, many of which conduct cross-border operations. Its structure emphasizes “practice areas” focused on common issues such as transfer pricing, treaty compliance, and pass-through entity taxation. LB&I examiners handle some of the most complex audits, often involving international transactions, accounting method disputes, or specialized industries.

    Tax-Exempt and Government Entities Division (TE/GE). TE/GE addresses pension and retirement plans, public charities and private foundations, political organizations, and governmental bodies such as state and local governments. This division reviews applications for exempt status, issues determination letters, and conducts examinations to ensure ongoing compliance with statutory requirements.

    Supporting Units and Specialized Offices

    In addition to the operating divisions, the IRS has nationwide functional offices that play critical roles in tax controversies. The Criminal Investigation Division investigates potential criminal violations of the tax laws and related financial crimes. The Independent Office of Appeals provides an administrative forum for dispute resolution separate from examination, with authority to settle cases based on hazards of litigation. The Taxpayer Advocate Service acts as an ombudsman, assisting taxpayers whose cases have been stalled or whose rights may be impaired. Other units manage communications with Congress, develop compliance statistics, and support technology and research.

    Oversight and Reform Efforts

    Congress established the IRS Oversight Board under I.R.C. § 7802 to provide outside expertise in governance and accountability. Although the Board has been inactive since 2015 due to lack of confirmed members, its creation reflects ongoing concerns about IRS management and taxpayer service. The agency’s current structure was itself a product of the IRS Reform Act of 1998, which shifted the organization away from a geographic model and toward divisions based on taxpayer type. This reorganization was designed to improve service, reduce duplication, and create accountability within distinct taxpayer populations.

  • Partnership Fundamentals: What You Need to Know About Formation and Taxation

    What Exactly Is a Partnership for Tax Purposes?

    For federal tax purposes, “partnership” is defined broadly in § 761(a) as any syndicate, group, pool, joint venture, or other unincorporated organization through which a business or financial venture is carried on, provided it is not classified as a corporation, trust, or estate. Not all co-ownership arrangements qualify. For example, § 761(a)(1) and Treas. Reg. § 1.761-2(a)(2) exclude groups formed solely to hold investment property without conducting a trade or business. Likewise, co-owners of property who merely lease real estate without providing services are not treated as a partnership, but adding services can convert the arrangement into a partnership. See Treas. Reg. § 301.7701-1(a)(2).

    In other words, the IRS does not require you to file partnership papers for you to be treated as a partnership. If you and someone else are carrying on a business together—even informally—the IRS may classify you as a partnership. Simply co-owning property isn’t enough, but providing services alongside that ownership can be.

    Do You Need to File Anything Under State Law to Have a Partnership?

    Surprisingly, the answer is no. Treasury Regulation § 301.7701-1(a)(1) makes clear that a partnership may exist for federal tax purposes even without a formal entity recognized under state law. Courts look primarily to intent. In Commissioner v. Culbertson, 337 U.S. 733 (1949), the Supreme Court explained that a partnership exists when parties, in good faith and with a business purpose, intend to carry on an enterprise together and share in its profits. Contributions of labor or capital are not strictly required.

    Put simply, you don’t need to go through state filings for the IRS to treat you as a partnership. If two or more people intend to run a business and divide the profits, the law may recognize a partnership—even if no one invested money or contributed labor at the start.

    How Are Startup Costs Treated for Tax Purposes?

    When forming a partnership, certain expenses must be capitalized under § 709(a). Organizational expenses—those incident to creating the partnership and chargeable to the capital account—may be deducted up to $5,000 immediately, reduced once costs exceed $50,000, with a full phase-out at $55,000. See § 709(b). Any remaining expenses may be amortized over 180 months. Importantly, syndication fees (such as the cost of issuing partnership interests) do not qualify for this election and must be capitalized. If the partnership liquidates early, unamortized expenses may be deducted under § 165.

    In other words, some startup costs can be written off right away, but once your expenses get too high, the deduction shrinks and disappears. The balance must be spread out over 15 years. Certain fees—like those for raising capital—can never be deducted this way and must be added to the business’s long-term costs.

    How Does the IRS Decide Whether an Entity Is a Partnership or a Corporation?

    The “check-the-box” regulations in Treas. Reg. § 301.7701-3 give taxpayers flexibility. By default, unincorporated entities with more than one member are treated as partnerships, while single-member entities are disregarded as separate from their owners. Either type of entity may elect to be taxed as a corporation by filing the appropriate election. This system allows business owners to tailor tax treatment to their goals, though the choice carries long-term implications for taxation and liability.

    Put simply, if you form an LLC, the IRS has default settings: one owner means it’s ignored for tax purposes, two or more owners means it’s treated as a partnership. But you can “check the box” to be taxed as a corporation if that makes more sense for your goals. The choice is powerful but also sticky, so it should be made carefully.

    What Should I Think About When Choosing Between a Partnership and a Corporation?

    The decision between a flow-through entity and a corporation depends on multiple factors. Partnerships avoid entity-level tax and allow losses to flow through to partners. Corporations, by contrast, can defer shareholder-level tax but face double taxation on distributions. Other considerations include the availability of the § 199A deduction, exposure to employment taxes, local filing fees, creditor protection, and the ability to raise capital. No single factor controls; the optimal choice depends on the owners’ income profile and long-term strategy.

    In other words, partnerships usually mean simpler taxes because profits and losses go straight to the owners. Corporations can help with liability protection and raising money, but they come with extra layers of tax. The right choice depends on your income level, risk tolerance, and long-term plans.

    How Does the § 199A Deduction Work for Partnerships?

    Section 199A provides a deduction equal to the lesser of (1) 20% of qualified business income (QBI) or (2) 20% of taxable income reduced by net capital gains. See § 199A(a). QBI for each trade or business is further limited to the greater of (i) 50% of W-2 wages or (ii) 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property. § 199A(b)(2).

    The deduction is subject to income thresholds. For 2022, the phase-out begins at $170,050 for single filers and $340,100 for joint filers, fully phasing out at $220,050 and $440,100. § 199A(b)(3).

    Specified Service Trades or Businesses (SSTBs)—including law, accounting, consulting, financial services, athletics, and other fields where the principal asset is the reputation or skill of the owners—are further restricted. See § 199A(d)(2). For high-income taxpayers, SSTB income may be partially or entirely excluded from QBI.

    Finally, guaranteed payments under § 707(c) do not count as QBI. Nor do payments to partners acting in a non-partner capacity under § 707(a). In addition, Treas. Reg. § 1.199A-5(c)(2)(i) provides that if a trade or business provides property or services to an SSTB and both are commonly owned (50% or more), that portion of income is recharacterized as SSTB income.

    Put simply, § 199A is a valuable tax break that allows many business owners to deduct up to 20% of their income. But it comes with lots of caveats: income limits, restrictions for service professions like law and accounting, and rules against manipulating related businesses to qualify. Whether you get the deduction depends on your income level, industry, and how your partnership pays partners.s to partners acting in a non-partner capacity under § 707(a). In addition, Treas. Reg. § 1.199A-5(c)(2)(i) provides that if a trade or business provides property or services to an SSTB and both are commonly owned (50% or more), that portion of income is recharacterized as SSTB income.

  • I Received a 30-Day Letter from the IRS — Now What?

    Receiving a 30-day letter from the IRS can be unsettling. This notice, usually accompanied by a Revenue Agent’s Report, explains proposed changes to your tax return and calculates the additional tax the IRS believes you owe. For example, the report might show an underpayment of $20,000 based on adjustments to income or deductions. The “30-day” part refers to the short deadline you have to decide how to respond. Here are the main options.

    1. Agree and Pay

    If you review the report and conclude the IRS is correct, you can agree with the changes, sign the waiver included with the letter, and pay the amount due (plus interest). This ends the matter quickly and avoids further administrative or judicial proceedings.

    2. Pay and Preserve Your Rights

    Even if you disagree, you may choose to pay the tax first and then file a formal claim for refund. If the IRS denies the claim or fails to act within six months, you can bring a refund suit in a U.S. District Court (with the possibility of a jury trial) or in the U.S. Court of Federal Claims (bench trial only). This route requires upfront payment but preserves the ability to litigate.

    3. File a Protest and Go to Appeals

    If you do not want to pay right away, you can file a written protest within 30 days. This sends your case to the IRS Independent Office of Appeals, which is separate from the audit function. Appeals officers have authority to settle cases based on the “hazards of litigation,” meaning they evaluate the strengths and weaknesses of both sides. Many taxpayers resolve disputes here without having to go to court.

    4. Take No Action and Await a Notice of Deficiency

    If you ignore the 30-day letter, the IRS will eventually issue a Notice of Deficiency — sometimes called a “90-day letter.” That notice gives you 90 days to file a petition in the U.S. Tax Court. The Tax Court is unique because it allows you to litigate before paying the disputed tax. However, if you miss the 90-day deadline, you lose that option and must pay first before challenging the assessment.

    Making the Right Choice

    Which path is best depends on the size of the proposed adjustment, the strength of your legal position, and whether you can or want to pay the disputed tax upfront. Acting within the deadlines is critical. Ignoring the letter will not make the issue disappear — it only moves the case further down the IRS enforcement pipeline.

  • The Tax Controversy Pipeline: From Audit to Litigation

    A federal tax controversy follows a recognizable path, beginning with the selection of a tax return for examination and potentially ending with judicial review in federal court. Each stage offers opportunities to resolve disputes, but each also carries procedural requirements that affect taxpayer rights and strategy.

    Return Selection

    The IRS examines only a small percentage of filed returns, but its selection process is increasingly sophisticated. Many returns are chosen through the Discriminant Inventory Function (DIF) system, which assigns scores based on statistical likelihood of error. Others are identified through compliance campaigns, whistleblower tips, or third-party information reporting. Certain transactions, such as those involving large losses, international activity, or complex structures, are more likely to attract IRS attention.

    Examination

    Once a return is selected, the IRS initiates an examination, commonly referred to as an audit. Examinations may be conducted by correspondence, in an IRS office, or in the field. During this process, the IRS requests documents, interviews taxpayers, and evaluates whether the reported items comply with the law. If the IRS proposes changes, it issues a Revenue Agent’s Report. The taxpayer may agree and resolve the case, or disagree and move forward in the process.

    Administrative Appeals

    If the taxpayer contests the proposed adjustments, the matter may proceed to the Independent Office of Appeals. Appeals is separate from IRS Examination and is empowered to settle cases based on the “hazards of litigation.” This means Appeals weighs the strengths and weaknesses of each side’s position and may compromise accordingly. For many taxpayers, Appeals represents the best opportunity to resolve a case without the time and expense of litigation.

    Judicial Forums

    When administrative resolution fails, taxpayers may turn to the courts. Three forums are available, each with distinct advantages:

    • U.S. Tax Court. This is the primary pre-payment forum, allowing taxpayers to challenge a deficiency before paying it. Proceedings are specialized, with judges experienced in tax law.
    • U.S. District Courts. Taxpayers may pay the disputed tax and sue for a refund in the federal district court for their jurisdiction. District court cases allow for jury trials, which may be strategically important in certain disputes.
    • U.S. Court of Federal Claims. Like the district courts, this forum hears refund suits, but it sits in Washington, D.C. and has nationwide jurisdiction.

    The choice of forum depends on multiple factors, including the taxpayer’s ability to pay, the type of issue, procedural preferences, and perceived judicial outlook.

    Collection Proceedings

    Even after liability is determined, disputes may continue at the collection stage. The IRS has broad authority to assess liens, levy assets, and garnish wages. Taxpayers can contest these actions through Collection Due Process hearings or administrative appeals. In some cases, litigation arises over the appropriateness of collection measures or the availability of installment agreements and offers in compromise.

    Strategic Considerations

    At every stage of the pipeline, taxpayers and their advisors must weigh cost, risk, and procedural posture. Early resolution may be preferable to avoid litigation, but in some cases judicial review is the only way to secure an independent evaluation. Understanding the stages of a tax controversy helps practitioners guide clients effectively through what is often a lengthy and complex process.

  • What Are Separately Stated Items in a Partnership Return?

    Why Aren’t All Partnership Items Reported Together?

    Partnerships file an annual information return, but unlike corporations, they are not subject to entity-level tax. Instead, income, deductions, credits, and other items flow through to the partners under IRC §702(a). However, not all items are treated the same for tax purposes. Some must be “separately stated” because their treatment depends on each partner’s individual tax circumstances.

    In other words, while ordinary business income can be reported as a lump sum, items like capital gains, charitable contributions, and foreign tax credits may have very different consequences depending on who the partner is. For that reason, the partnership must identify and pass these items through separately.

    What Counts as a Separately Stated Item?

    The Code and regulations identify a list of items that must be disclosed separately on a partner’s Schedule K-1, including:

    • Short-term and long-term capital gains and losses
    • Section 1231 gains and losses
    • Charitable contributions
    • Dividends (qualified or otherwise)
    • Foreign taxes paid or accrued
    • Tax-exempt interest
    • Other items identified in the regulations at Treas. Reg. §1.702-1(a)(8)(i)-(ii)

    Each of these can impact a partner’s tax liability in different ways, so they cannot simply be included in the “bottom line” partnership income.

    Example: Why Separate Reporting Matters

    Imagine a partnership with two equal partners. The partnership earns $100,000 of ordinary business income and also realizes a $20,000 long-term capital gain.

    • If everything were lumped together, each partner would be allocated $60,000 of “income.”
    • But that would obscure the fact that $10,000 of each partner’s allocation is a capital gain.

    For a partner in the 15% capital gains bracket, that $10,000 is taxed more favorably than ordinary income. For a partner with capital losses from other investments, that $10,000 might offset those losses. The Code requires that this item be separately stated so each partner can apply their own tax situation correctly.

    Example: Charitable Contributions

    Suppose the same partnership donates $10,000 to a qualified charity. The deduction must be reported separately because it is subject to each partner’s own §170 limitations (generally based on adjusted gross income). Partner A, with significant AGI, may deduct the full $5,000 share. Partner B, with limited AGI, may only deduct a portion this year and carry the rest forward. Without separate reporting, this individualized limitation would be impossible to apply.

    The Bottom Line

    Separately stated items under IRC §702(a) ensure that each partner’s distributive share reflects the real tax consequences applicable to them individually. While it adds complexity to partnership reporting, it is a necessary safeguard to make sure tax rules apply fairly and consistently.

  • Cash vs. Accrual for Partnerships: IRS Rules, Exceptions, and Tax Planning

    Choosing an accounting method determines when your partnership recognizes income and deductions. For many partnerships the cash method defers tax until money actually changes hands; the accrual method accelerates recognition when the right to receive or the obligation to pay arises. Federal law restricts who may use cash accounting. Under I.R.C. § 448(a)(2), a partnership cannot use the cash method if any partner is a C corporation, unless an exception applies. Two principal exceptions are (i) when the C-corporation partner is a personal service corporation (PSC) (§ 448(b)(2)), and (ii) when the partnership’s average annual gross receipts for the preceding three taxable years do not exceed $25 million (§ 448(b)(3)). In addition, a partnership may not use the cash method if it is a “tax shelter” as defined for these purposes in § 461 (§ 448(a)(3)).

    What the cash–accrual choice actually changes

    Under cash accounting, your partnership recognizes $1 of income only when it receives $1 of payment, and a deduction only when it pays the expense. Under accrual accounting, your partnership recognizes income when all events fix the right to receive it and the amount is determinable with reasonable accuracy, and it deducts expenses when all events have occurred that establish the liability and the amount can be determined with reasonable accuracy (subject to the economic performance rules). The difference is purely timing, but timing drives tax.

    Illustrative timing example

    • Facts. On December 28, Year 1, the partnership provides services and invoices $900,000 payable on January 15, Year 2. It also receives an invoice for $300,000 of deductible services performed in late December, which it pays on January 10, Year 2. Assume a 30% combined marginal rate for the partners.
    • Cash method (permitted only if eligible under § 448).
      Year 1 income recognized: $0 (no cash received)
      Year 1 deductions: $0 (no cash paid)
      Year 1 tax on these items: $0
      Year 2 recognizes $900,000 income and $300,000 deductions, for $600,000 net; tax at 30% = $180,000 in Year 2.
    • Accrual method.
      Year 1 income recognized: $900,000 (fixed right to payment)
      Year 1 deductions: $300,000 (fixed liability; economic performance satisfied)
      Year 1 net income: $600,000; tax at 30% = $180,000 in Year 1.

    Same amount of tax, different year. Cash accounting can be attractive when receivables are large at year-end; accrual can be preferable when you routinely incur significant unpaid expenses at year-end.

    The C-corporation partner limitation and the PSC exception

    If a partnership has any C-corp partner, § 448(a)(2) says the partnership cannot use the cash method—unless the C-corp is a PSC (§ 448(b)(2)). A PSC generally is a C corporation whose principal activity is the performance of personal services (for example, law, accounting, health) substantially performed by employee-owners. If your only corporate partner is a PSC, the bar in § 448(a)(2) does not apply, and you may still use cash accounting provided no other restriction applies (e.g., being a tax shelter).

    PSC exception example

    • Facts. P is a three-member partnership providing consulting services. Partners A and B are individuals. Partner C is a PSC. P’s three-year average gross receipts are $38 million.
    • Result. Despite exceeding $25 million, P may still use the cash method because its C-corp partner is a PSC under § 448(b)(2) (and assuming P is not a tax shelter under § 461). If Partner C were a regular C-corp, P would be pushed to accrual under § 448(a)(2).

    The small-partnership gross receipts exception

    Even with a non-PSC C-corp partner, a partnership can use cash accounting if it qualifies as a small partnership under § 448(b)(3)—i.e., its average annual gross receipts for the prior three taxable years do not exceed $25,000,000.

    Computing the three-year average: step-by-step

    • Facts. Gross receipts were: Year −3: $22,000,000; Year −2: $24,000,000; Year −1: $26,000,000.
    • Average. ($22m + $24m + $26m) / 3 = $24,000,000.
      Because $24m ≤ $25m, the partnership may use the cash method (§ 448(b)(3)), even if one partner is a non-PSC C-corp and the partnership is not a tax shelter.
    • If Year −1 had been $30,000,000:
      Average = ($22m + $24m + $30m)/3 = $25,333,333 → exceeds $25m → must use accrual (unless the PSC exception applies).

    “Cliff” year illustration with tax impact

    • Facts. In Year 1 your three-year average first exceeds $25m, forcing a switch to accrual for Year 1. On January 1 you have $8,000,000 of accounts receivable and $3,000,000 of accounts payable carried over from Year 0 under cash accounting.
    • Method change mechanics. A change in accounting method generally requires IRS consent and a § 481(a) adjustment to bring previously unrecognized items into income (or expense). Here, the positive § 481(a) adjustment is typically the net of receivables minus payables not previously recognized under cash: $8m − $3m = $5,000,000 added to income. If taken into account over four years (common for positive adjustments), the partnership picks up $1,250,000 per year, increasing partner-level tax accordingly.
    • Tax effect (30% combined rate): Additional $375,000 tax per year for four years. Planning ahead to manage receivables and payables before the switch can materially soften the blow.

    The “tax shelter” prohibition

    Even if the PSC and gross receipts exceptions would otherwise allow cash accounting, a partnership cannot use the cash method if it is a tax shelter (§ 448(a)(3)). For these purposes “tax shelter” is determined under § 461. While most operating partnerships will not be tax shelters, arrangements promoted to generate tax benefits without corresponding economic substance can fall within the definition. If a partnership is a tax shelter, it must use accrual—no small-partnership or PSC relief.

    Tax shelter screen example

    • Facts. Partnership Q has average receipts of $9 million and no corporate partner. It markets interests to outside investors primarily for projected tax losses.
    • Result. If Q is a tax shelter within the meaning of § 461, § 448(a)(3) disqualifies it from the cash method despite being under $25m and lacking a C-corp partner. Q must adopt accrual.

    Strategic considerations when you can choose

    Where cash accounting is permitted, partnerships with long receivable cycles often benefit from deferral. Conversely, capital-intensive businesses with significant year-end payables (or cost accruals) may find accrual advantageous. Your choice can also interact with other provisions (for example, inventories and cost capitalization rules) and with how income is allocated among partners.

    Side-by-side tax deferral math

    • Facts. Year 1 billings of $5,000,000 are invoiced in late December and collected in January; deductible Year 1 services of $1,500,000 are invoiced in December and paid in January. Assume no other differences and a 30% combined marginal rate.
    • Cash method (eligible partnership):
      Year 1 recognizes $0 of the late-December billings and $0 of the unpaid expenses → $0 current-year tax on those items.
      Year 2 recognizes $5,000,000 − 1,500,000 = $3,500,000 net → $1,050,000 tax.
    • Accrual method:
      Year 1 recognizes $5,000,000 − 1,500,000 = $3,500,000 net → $1,050,000 tax.
      Deferral from cash method: $1,050,000 moved from Year 1 to Year 2. The total tax is the same; the time value of deferral is the advantage.

    Common transition pitfalls and how to avoid them

    1. Crossing the $25m threshold unknowingly. The three-year average can creep up quickly. Model your receipts quarterly so you are not surprised by a forced switch under § 448(b)(3).
    2. Ignoring aggregation/affiliation effects. Related-party gross receipts may be aggregated for the test under the statute and regulations; organizational changes can move you over the threshold.
    3. Missing the consent process. Changing methods generally requires a Form 3115 filing and a properly computed § 481(a) adjustment. Skipping this can lead to audit exposure and duplicate income.
    4. Assuming the PSC exception applies. Verify that a corporate partner meets the PSC definition; otherwise, the presence of a regular C-corp forces accrual (§ 448(a)(2)).
    5. Overlooking the tax-shelter rule. If the structure could be characterized as a tax shelter under § 461, cash accounting is off the table (§ 448(a)(3)) regardless of receipts.

    Quick reference to governing provisions

    • Cash method limitations for partnerships with C-corp partner: I.R.C. § 448(a)(2)
    • PSC exception: § 448(b)(2)
    • Small-partnership gross receipts exception (three-year average ≤ $25m): § 448(b)(3)
    • Tax shelter prohibition (by reference to § 461): § 448(a)(3)
    • Tax shelter definition context: § 461
    • Method change conformity (general adjustment rule): § 481(a) (for transitions)

  • I Received a Notice of Deficiency — What Are My Options?

    A Notice of Deficiency, often called a “90-day letter,” is one of the most important documents the IRS can issue. It signals that the IRS has formally determined you owe additional tax and intends to assess it. The notice triggers strict deadlines and limited choices for how to respond.

    Petition the U.S. Tax Court

    The primary option is to file a petition with the U.S. Tax Court within 90 days of the notice’s date. The Tax Court is unique because it allows taxpayers to challenge the IRS’s determination before paying the disputed tax. This provides a valuable opportunity to have an independent judge review the IRS’s position. If the deadline is missed, the right to Tax Court review is lost.

    Pay First and Seek a Refund

    Taxpayers may also choose to pay the disputed amount in full and then file a formal claim for refund with the IRS. If the claim is denied or not acted upon within six months, the taxpayer can pursue a refund suit in federal court. Two forums are available: a U.S. District Court, where jury trials are possible, or the U.S. Court of Federal Claims, which hears refund suits without juries. This path requires upfront payment but preserves judicial review.

    Take No Action

    If no action is taken, the IRS will assess the deficiency after the 90-day period expires and begin collection through liens, levies, or wage garnishment. Inaction effectively concedes the IRS’s determination and removes the opportunity for independent review.

    Why Timely Action Matters

    The Notice of Deficiency is more than just another IRS letter — it is a formal legal notice that starts the countdown to significant rights and consequences. Taxpayers must decide promptly whether to contest the IRS in Tax Court, pay and seek a refund, or allow the assessment to proceed. Understanding these options ensures that important rights are not lost by default.