Taxpayers may or may not have to make the full tax payment when petitioning their case, depending on the forum. Let’s understand the tax prepayment requirement of each court, which is as follows:

U.S. Tax Court:

Generally, no payment of the disputed amount is required to invoke jurisdiction before the U.S. Tax Court. The taxpayer may file a petition after receiving a notice of deficiency and litigate the entire proposed deficiency without first paying the tax amount in issue.

Next, let’s understand this pre-payment requirement in more detail.

Prepayment Requirement

You may not need to pay the disputed amount to file a case in the U.S. Tax Court. After you receive a Notice of Deficiency from the IRS, you can go to Tax Court and fight the full amount they say you owe without paying first.

As mentioned, you don’t have to pay the tax before filing. But these are still referred to as “pre-payment” or “pre-assessment” cases. This terminology can be misleading, as it implies that prepayment of the tax is required, but in reality, no prepayment is necessary. This is because you can dispute the IRS in U.S. Tax Court before paying the disputed amount.

Next, let’s understand how the U.S. Tax Court’s jurisdiction is affected if a taxpayer chooses to pay the disputed amount.

What Happens if a taxpayer chooses to pay the disputed tax amount?

If a taxpayer chooses to pay the disputed tax, the taxpayer may lose jurisdiction in the U.S. Tax Court. However, it depends on when and at what time the taxpayer makes the payment.

The following could be the timing of the taxpayer’s payment of tax before approaching the U.S. Tax Court and how it could affect jurisdiction in a U.S. court:

• Payment of Disputed Tax before the IRS mails the Notice of Deficiency – likely to lose jurisdiction in a U.S. Tax Court.
• Payment of Disputed Tax After the IRS mails a Notice of Deficiency – likely to lose jurisdiction in U.S. Tax Court.
• Payment of Disputed Tax after Challenging the Notice of Deficiency in the U.S. Tax Court.

Next, let’s examine the U.S. Tax Court’s jurisdiction to hear the cases in the scenarios above.

Let’s consider the first scenario, in which a taxpayer chooses to pay the tax amount without a notice of deficiency.

1. Scenario 1: Payment of Disputed Tax before the IRS mails the Notice of Deficiency

A taxpayer may choose to pay the additional tax before the IRS mails a formal Notice of Deficiency (NOD).

The payment may be based on an earlier IRS communication proposing additional tax, even though no statutory Notice of Deficiency has been issued.

If the taxpayer pays the proposed liability in full before the IRS mails an NOD, the IRS will generally not issue one. If the liability is fully paid, there is no remaining deficiency for the IRS to assert through a formal deficiency notice.

This outcome can significantly affect taxpayers who want to challenge the IRS’s determination in the U.S. Tax Court.

In deficiency cases, the U.S. Tax Court’s jurisdiction is based on IRC §§ 6212 and 6213. Under these provisions, the IRS must issue a statutory Notice of Deficiency before the U.S. Tax Court can hear the case.
As the IRS generally will not issue an NOD after full payment, the taxpayer usually cannot petition the U.S. Tax Court.

Thus, if the taxpayer pays the disputed tax amount before the NOD is issued, the taxpayer is unlikely to litigate the case in a U.S. court. This is because the U.S. court lacks jurisdiction.

Let’s understand the scenario with a simple example.

Example 1:

In April 2025, Sara received a 30-day letter from the IRS stating she owed an additional $6,000 in taxes for 2023. She disagreed with the IRS but paid the full amount in May to avoid more interest and penalties. Since she already paid the tax liability, the IRS did not send a Notice of Deficiency.

Now, Sara wants to challenge the amount she paid in the U.S. Tax Court. However, without a Notice of Deficiency, she cannot file a petition there. Instead, she can file a refund claim with the IRS. If the IRS denies her claim, she can then sue for a refund in U.S. District Court or the U.S. Court of Federal Claims.

Additionally, taxpayers may encounter international tax issues, such as properly claiming foreign tax credits or benefits under an income tax treaty.

In certain cases, an international taxpayer may be unable to obtain a foreign tax credit to which they are entitled. They may wish to recover the credit in a U.S. Tax Court in the absence of a notice of deficiency. Let’s understand through a simple example.

For example, a taxpayer might pay more U.S. tax than necessary to maximize their foreign tax credit yet still fail to receive the credit. However, because there is no disputed tax liability reflected in IRS records, the IRS has not issued a Notice of Deficiency (NOD).
As a result, there is no Notice of Deficiency and no clear basis for U.S. tax jurisdiction in this situation.

Next, let’s understand the scenario with a simple example.

Example 2:

A U.S. citizen works in Germany and earns a salary. He paid $2,000 of German income tax on that salary. When filing their U.S. tax return, he claimed a Foreign Tax Credit (FTC) to offset the U.S. income tax due on the same German salary income, so that the income is not taxed twice.

However, the taxpayer incorrectly calculates the FTC limitation under IRC § 904. They allocate too many expenses to their foreign-source income, which reduces the amount of FTC they can claim. As a result, they pay $1,000 more in U.S. income tax than they actually owe.

In this situation, the taxpayer will likely file an amended return to correct the FTC calculation and claim a refund from the IRS of the $1,000 overpayment. If the IRS denies the refund claim, the taxpayer may then bring a claim for overpayment. However, the IRS did not make any additional assessment or issue a Notice of Deficiency (NOD). Because there is no NOD, the taxpayer cannot petition before the U.S. Tax Court for a refund.

It is generally advisable not to pay the disputed tax immediately. Instead, wait for the IRS to issue a Notice of Deficiency, then petition the U.S. Tax Court if needed. This allows efficient resolution of the tax disputes.

2. Next, let’s consider the second scenario, in which a taxpayer chooses to pay the disputed tax amount under the notice of deficiency and then claims a refund before the U.S. Tax Court.

2. Scenario 2: Payment of Tax After the IRS mails a Notice of Deficiency

In this scenario, the IRS has already mailed you a Notice of Deficiency (NOD), and you later decide to pay all or part of the disputed tax. Paying the tax after the NOD is mailed does not deprive the Tax Court of jurisdiction.

However, you should still file a timely petition with the U.S. Tax Court to preserve your right to have the Tax Court review your case.

When the IRS sends you a Notice of Deficiency (NOD), you are required to contest the notice within a specific timeline. Generally, you have 90 days (or 150 days if the NOD is addressed to a person outside the United States) from the date the IRS mailed the Notice of Deficiency to file a petition with the U.S. Tax Court to dispute the tax. This 90-day or 150-day period is counted from the mailing date shown on the NOD, not the date you receive it. Paying the disputed tax after the NOD has been mailed does not cause you to lose your right to petition the Tax Court, as long as you file the petition within the required 90-day or 150-day period from the mailing date of the notice of deficiency.

If you miss the deadline to file the petition, the IRS can assess the tax, and you generally lose the ability to challenge the deficiency in Tax Court.

Next, let’s consider the third scenario, in which a taxpayer chooses to pay the disputed tax amount after challenging the notice of deficiency before the U.S. Tax Court.

Following such payment, the taxpayer may seek a determination of overpayment directly from the U.S. Tax Court, rather than pursuing a separate refund claim through another forum.

3. Scenario 3: Payment of Disputed Tax after Challenging the Notice of Deficiency in the U.S. Tax Court

When the IRS sends a Notice of Deficiency, the taxpayer can file a petition with the U.S. Tax Court to fight the proposed tax bill. Even while the case is still ongoing, the taxpayer may make voluntary payments toward the disputed amount in certain situations.

If the Tax Court has already ruled that additional tax is owed on a particular issue, the taxpayer may voluntarily pay that portion. This is usually done to prevent interest from continuing to accrue under IRC Section 6601.

For example, suppose two issues are being litigated. One issue involves the Foreign Tax Credit (FTC), and another involves a tax treaty position. If the court decides the taxpayer owes money on the FTC issue, the taxpayer may choose to pay the tax determined on the FTC at that point.

On the other hand, the second issue involving the tax treaty position remains in dispute, and the taxpayer maintains that no additional tax is due. The taxpayer can still make voluntary payments on the contested tax treaty issue. However, in the Tax Court case, paying a disputed amount does not, by itself, legally constitute a concession or an admission of liability.

That said, some taxpayers prefer not to make a regular payment on a fully disputed issue. Since a payment can satisfy the liability and may limit certain refund options if the dispute is lost.

In situations like this, a taxpayer who wants to stop interest from running without making a tax payment can instead make a bond or “deposit” under IRC Section 6603. A deposit is different from a regular payment. A payment constitutes final satisfaction of the liability and may be refunded only if the court ultimately finds an overpayment. A deposit, however, is more like a tentative remittance that prevents interest from accruing.
In most cases, the taxpayer can request a refund of the deposit at any time, unless the IRS believes tax collection is at risk.
Let’s understand this scenario with a simple example.

Example:

Sarah, a U.S. taxpayer, received a Notice of Deficiency from the IRS stating she owed an additional $85,000 in taxes. The IRS challenged two separate issues: denial of her $55,000 Foreign Tax Credit (FTC) claim and an adjustment related to a tax treaty position. Sarah promptly filed a petition in the U.S. Tax Court to dispute both issues.

While the overall case was still ongoing, the Tax Court granted partial summary judgment in favor of the IRS on the FTC issue, determining that Sarah owed the full $55,000 on that point. To avoid further interest from accruing on this resolved portion, Sarah made a voluntary payment of the $55,000 plus accrued interest.

This payment settles that portion of her tax bill and can be refunded if the court later finds she overpaid. By paying off the resolved amount, Sarah kept her interest costs down while her Tax Court case continues on tax treaty issue.

• How to stop interest from accruing while the case challenging the notice of deficiency is pending before the U.S. Tax Court?

If you do not pay the disputed tax while your Tax Court case is ongoing, interest and penalties will usually keep adding up. This starts accruing from the original due date of your tax return.

To stop interest from growing, you have the following choices:

• Deposit with the IRS

You can also send money to the IRS as a special deposit, often called a cash deposit, under IRC Section 6603. This deposit stops additional underpayment interest from accruing on the amount deposited while allowing you to continue challenging the IRS’s position in Tax Court.

If you win the case, the IRS returns the deposit. The IRS generally pays interest on the returned deposit, but only at the relatively low federal short-term rate. If you lose, the IRS applies the deposit toward your tax liability. This may significantly reduce or eliminate the underpayment interest that would otherwise have accrued during the dispute.

• U.S. District Court or U.S. Court of Federal Claims:

The taxpayer should pay the full amount of the tax, penalties, and interest assessed before filing a refund suit. This is due to the “full-payment rule” established in Flora v. United States.

Can a Taxpayer file a Refund suit in the absence of a Notice of Deficiency before the U.S. District Court or the U.S. Court of Federal Claims?

Yes, a taxpayer can file a refund suit in the U.S. District Court or the U.S. Court of Federal Claims without a Notice of Deficiency. Generally, if the taxpayer fails to challenge the notice of deficiency before the U.S. Tax Court, they may pay the disputed amount and file a refund suit. However, there are situations in which the taxpayer may not receive a notice of deficiency but may still pay the full tax amount. Later, they may realize they overpaid. In that case, they may file a refund suit in the U.S. District Court or the U.S. Court of Federal Claims.

For example, when the taxpayer self-reports and pays taxes on their own return, there is no “deficiency” for the IRS to formally determine, and thus no NOD is issued. If the taxpayer later believes they overpaid, the only route is to file a refund claim and then sue in District Court or the Court of Federal Claims.