2025 Houston Law Guide | Federal and Texas State Law Guidance

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  • 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.

  • Who Handles Tax Disputes in the Federal System?

    When a tax dispute arises, it can feel overwhelming to figure out who exactly is involved. Federal tax controversies are not handled by a single office or court — several government entities share responsibility. Each plays a distinct role in making, interpreting, enforcing, and litigating tax law.

    Congress

    Congress writes the Internal Revenue Code. It enacts the statutes that set out what income is taxable, which deductions and credits are available, and the rates at which tax is imposed. Every tax rule starts with legislation.

    Treasury Department

    The Treasury Department issues regulations that interpret and implement the Code. These regulations provide detailed guidance on how statutory provisions apply in practice. Regulations carry significant legal weight and are often central in disputes.

    Internal Revenue Service (IRS)

    The IRS is the administrative agency charged with enforcing the Code. It issues tax forms, processes returns, conducts audits, collects taxes, and attempts to resolve disputes at the administrative level. The IRS is the primary point of contact for taxpayers and the central player in most controversies.

    Joint Committee on Taxation

    This congressional committee has a specific oversight role: it must approve refunds exceeding $2 million before they can be issued. While not directly involved in day-to-day disputes, the committee provides an additional layer of accountability for very large refund claims.

    Department of Justice (DOJ)

    When tax cases move to federal court (other than the U.S. Tax Court), the DOJ represents the government. DOJ attorneys handle both civil and criminal tax litigation in U.S. District Courts and the U.S. Court of Federal Claims.

    The Courts

    Several courts provide judicial resolution of tax controversies, each with distinct rules:

    • U.S. Tax Court. A specialized national court where taxpayers may challenge a deficiency without first paying the tax. IRS Chief Counsel attorneys represent the Commissioner here.
    • U.S. District Courts. General federal trial courts. Taxpayers must pay first and sue for a refund. These courts allow jury trials.
    • U.S. Court of Federal Claims. Located in Washington, D.C. Like district courts, refund suits require payment first, but no jury trials are available.
    • U.S. Courts of Appeals. Review decisions of the Tax Court, district courts, and the Court of Federal Claims.
    • U.S. Supreme Court. The final arbiter of tax law, though it hears relatively few tax cases.

    Why This Matters

    Understanding which entity is responsible at each stage of a tax controversy helps taxpayers and their advisors make informed decisions. A dispute may begin with an IRS audit, move to Appeals, and then proceed into litigation in Tax Court or a refund forum. At higher levels, appellate courts and even the Supreme Court may weigh in. Knowing the role of each player ensures taxpayers preserve their rights and navigate the process strategically.

  • 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.

  • What Is a Federal Tax Controversy?

    Federal tax controversies arise when a dispute develops between a taxpayer and the federal government over the proper application or enforcement of the Internal Revenue Code. These disputes may involve individuals, small businesses, large corporations, or tax-exempt organizations. They can be resolved administratively within the Internal Revenue Service (IRS) or judicially in one of several federal courts. Unlike routine tax compliance, which focuses on timely and accurate filing of returns, controversies begin when the IRS challenges a taxpayer’s position or the taxpayer challenges an IRS determination.

    Key Government Participants

    Although the IRS is the most visible participant, several government entities play important roles in the process. Congress enacts the statutes that govern federal tax obligations. The Treasury Department issues regulations and sub-regulatory guidance interpreting those statutes. The IRS enforces the law by issuing forms, examining returns, assessing liabilities, and collecting taxes. The Department of Justice Tax Division litigates federal civil tax cases in the district courts and the Court of Federal Claims, as well as all federal criminal tax cases. The Joint Committee on Taxation must approve any refund exceeding $2,000,000. Despite this broad institutional framework, the IRS serves as the primary front-line agency in tax controversies, handling the bulk of examinations, administrative appeals, and collections.

    The Stages of a Tax Controversy

    A tax controversy typically follows a predictable sequence. It begins with return selection, where the IRS identifies a return for review, often through automated scoring systems, referrals, or compliance campaigns. The next stage is examination, where the IRS reviews the return and may propose adjustments. If the taxpayer disagrees, the matter can proceed to the IRS Independent Office of Appeals, which is designed to provide a forum for resolution short of litigation. If no agreement is reached, the taxpayer can seek judicial review. The U.S. Tax Court provides a pre-payment forum, allowing the taxpayer to challenge the deficiency without first paying it. Alternatively, taxpayers may pay the disputed tax and pursue a refund suit in either a U.S. District Court or the U.S. Court of Federal Claims. Even after liability is resolved, disputes may continue over collection actions such as liens, levies, or installment agreements.

    Administrative vs. Judicial Resolution

    The distinction between administrative and judicial resolution is critical. Administrative proceedings are generally more efficient and less costly, but they take place within the IRS, which acts as both examiner and adjudicator. Judicial proceedings provide independence and formal procedural protections, but often require greater expense and, in refund cases, pre-payment of the tax in dispute. This dual system is designed to balance administrative efficiency with the taxpayer’s right to due process.

    Why Tax Controversies Matter

    The stakes in tax controversies can be substantial. Financial exposure often includes not only the underlying tax but also penalties and interest. In some cases, precedent set in a single case affects the treatment of many similarly situated taxpayers. Equally important are the rights at issue: the right to be informed, the right to quality service, the right to pay no more than the correct amount of tax, and the right to appeal an IRS determination in an independent forum. Tax controversies also shed light on broader systemic issues, including the “tax gap” — the difference between taxes legally owed and taxes actually collected. By some estimates, this gap reaches hundreds of billions of dollars annually. Effective resolution of controversies therefore serves not only the interests of individual taxpayers but also the integrity of the federal tax system as a whole.