A Notice of Deficiency is issued when the IRS reviews a taxpayer’s return and determines that the reported tax liability is lower than the amount determined.
When such a notice is issued, Taxpayers generally have two primary options to challenge it, as follows:
The taxpayer disputes the additional tax assessment before paying it. This typically involves filing a petition with the U.S. Tax Court.
Please note, 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.
In Refund Litigation, the taxpayer generally first pays the disputed tax in full and then files an administrative refund claim with the IRS. If the IRS denies the claim, the taxpayer may then file a refund suit in the U.S. District Court or the U.S. Court of Federal Claims.
Let’s understand the above-mentioned litigation processes in the following section in more detail.