Every year, millions of taxpayers receive letters from the IRS proposing adjustments to their tax returns. Most people assume those letters came from a human being who reviewed the file, weighed the facts, and made a considered decision to send the notice. That assumption is increasingly wrong. The IRS relies heavily on automated systems to compare filed returns against third-party data and to generate formal correspondence—including legal documents—without any human involvement at all.

That raises a question worth taking seriously: when an automated IRS computer program generates a statutory notice of deficiency, does that program have the legal authority to do so? A statutory notice of deficiency is not just a strongly worded letter. It is the formal legal document that triggers a taxpayer’s right to challenge a proposed tax assessment in the U.S. Tax Court. If the system that produced the notice lacked delegated authority to do so, the notice may be legally void—and the IRS’s entire case may fall apart along with it.

That question was raised in O’Neill v. Commissioner, now on appeal before the U.S. Court of Appeals for the Ninth Circuit (Appeal from U.S. Tax Court, Docket No. 28075-22). The case asks the court to consider whether the IRS’s Automated Under Reporter program—a system that works largely without human oversight—had the legal authority to issue statutory notices of deficiency in 2019, more than a year before the IRS formally delegated it that power.

Facts & Procedural History

The taxpayer filed Form 1040EZ returns for tax years 2016 and 2017. Along with each return, he submitted a Form 4852, which is a substitute for a Form W-2. He used these forms to correct what he believed were errors in third-party information returns submitted to the IRS by his employers or other payers. The IRS reviewed both returns and accepted them without dispute.

For 2016, the IRS issued a CP49 notice confirming an overpayment of $1,806.34. For 2017, it issued a CP13 notice stating that the taxpayer owed nothing—the IRS had reviewed the return, agreed with the figures, and noted that the taxpayer owed “$0.00.” At that point, the matter appeared resolved.

Then the IRS’s Automated Under Reporter (“AUR”) program entered the picture. The AUR is a computer system that matches filed returns against third-party information returns—Forms W-2 and 1099—already in the IRS’s database. When the AUR detected discrepancies between the taxpayer’s returns and the third-party data, it generated CP2000 notices for both years proposing adjustments. These were the same discrepancies the taxpayer had already addressed through his Form 4852 filings and that the IRS had already accepted. The AUR process continued, and in 2019, it generated CP3219A notices for both years—formal statutory notices of deficiency.

The taxpayer challenged the notices through IRS administrative channels, repeatedly requesting the evidence underlying the AUR’s calculations. The IRS issued two 4314C notices for each year, asking for additional time to respond, but never produced the requested evidence before issuing the notices of deficiency. The taxpayer then petitioned the U.S. Tax Court. Judge Juan F. Vasquez ruled against him. The taxpayer appealed to the Ninth Circuit and his reply brief raises the delegation authority challenge.

What Is a Statutory Notice of Deficiency?

To understand the context here, we have to start with the Statutory Notice of Deficiency.

The statutory notice of deficiency is the cornerstone of the IRS’s deficiency assessment process. Under § 6212(a), the Secretary of the Treasury has the authority to send a taxpayer written notice when the IRS determines that a tax deficiency exists. That document\—commonly called a “90-day letter”—triggers a defined window of rights for the taxpayer.

Under Sec. 6213(a), the taxpayer has 90 days from the date of mailing to file a petition with the U.S. Tax Court challenging the proposed deficiency. That deadline is the taxpayer’s gateway to contesting the IRS’s position before paying anything. Without a timely petition, the IRS can proceed to assess and collect the full amount. For most individual taxpayers, paying first and suing for a refund in federal district court is not a realistic alternative. Tax Court is the only practical forum.

That makes the validity of the notice of deficiency a threshold issue in any deficiency case. An invalid notice cannot support a valid assessment. If the notice is void, the IRS lacks legal authority to assess the tax, and even if the taxpayer petitioned the tax court, the court has nothing valid to sustain.

How the IRS Delegates Authority to Issue Notices

Not just anyone at the IRS—and not just any IRS system—can issue a statutory notice of deficiency. Section 6212(a) grants that authority to the Secretary of the Treasury. The Secretary does not exercise that authority personally. Instead, it flows downward through a formal chain of internal delegations published in the Internal Revenue Manual (“IRM”).

These delegations are not informal or discretionary. They are the IRS’s own published framework for deciding which offices, employees, and functions are authorized to take specific legal actions on behalf of the agency. The relevant delegation order here is IRM Delegation Order 4-8, which governs the authority to issue statutory notices of deficiency. When the AUR generated the taxpayer’s notices in 2019, the operative version was Revision 1, dated September 4, 2012. That version listed specific IRS functions and positions authorized to issue notices of deficiency. The Automated Under Reporter system was not among them.

The IRS did not add the AUR to Delegation Order 4-8 until Revision 2, published December 7, 2020. The taxpayer’s 2016 deficiency notice had been issued in March 2019. The 2017 deficiency notice followed in August 2019. Both preceded the IRS’s formal authorization of the AUR by more than a year.

Why the Delegation Gap Could Invalidate the Notices

The government’s response to this argument, as reflected in the taxpayer’s reply brief, is that there is a general presumption that all necessary prerequisites to official action have been met. That argument draws on Kelley v. Commissioner, T.C. Memo. 2023-126, which holds that the party challenging official IRS action must affirmatively prove the defect. The taxpayer does exactly that—he points to the IRM itself, the published delegation orders, and the government’s own concession that the AUR was not listed in Revision 1. That is not a gap that needs to be inferred. It is documented in the agency’s own manual.

Courts have long recognized that the IRS must follow its own internal procedures when exercising delegated authority over taxpayers. An action taken without valid delegated authority is not entitled to the usual presumptions of regularity. The fact that the IRS amended the delegation order in December 2020 to add the AUR is itself telling. If the AUR already had authority, there was no reason to add it. The amendment looks like an acknowledgment that something was missing.

Did the AUR Even Make a “Determination”?

Even if one were to set aside the delegation issue, the taxpayer raises a separate but related challenge: the AUR notices may be invalid because they were not the product of any genuine determination.

This argument draws on Portillo v. Commissioner, 932 F.2d 1128, 1132 (5th Cir. 1991), which held that a valid notice of deficiency must reflect a “thoughtful and considered determination”—one that has “some indicia of reliability.” A notice based on nothing more than a mechanical match to unverified third-party data, without any attempt to examine its accuracy, does not meet that standard. The Portillo court found that the notice before it lacked “any ligaments of fact” and was “arbitrary and erroneous.”

The U.S. Supreme Court reinforced this in United States v. Janis, 428 U.S. 433 (1976), which held that a “naked assessment”—a notice without rational foundation—is not entitled to the usual presumption of correctness. The taxpayer argues the AUR notices here are precisely that. They were generated by a computer matching numbers, not by any human who reviewed the taxpayer’s Form 4852 filings, examined the third-party data’s reliability, or considered the fact that the IRS had already accepted the taxpayer’s returns and confirmed overpayments and zero balances.

This last point deserves attention. When the AUR issued its CP2000 proposals, the IRS’s own records showed that it had already reviewed the 2016 and 2017 returns, agreed with the taxpayer’s calculations, and issued a refund. The AUR appears to have generated its proposals based on the original third-party data without any awareness of those prior determinations. An automated system that can issue formal legal documents demanding thousands of dollars in taxes—while ignoring the agency’s own prior acceptance of the return—raises serious questions about whether any real “determination” was made at all.

The Broader Problem with Automated Tax Enforcement

The AUR program processes an enormous number of cases each year. It is one of the IRS’s primary tools for identifying unreported income and correcting mismatches between filed returns and information returns. When it works as intended, it is an efficient way to address genuine compliance gaps. The problem is that the system is matching data, not making judgments.

This case illustrates what can go wrong. The taxpayer had used Form 4852—the IRS’s own approved mechanism for correcting errors in third-party W-2 and 1099 reports—to explain and rebut the third-party figures the AUR later flagged. The IRS had reviewed those corrections and agreed with them. The AUR then proceeded as if none of that had happened, generating proposals and ultimately formal legal notices based on data the taxpayer had already addressed and the IRS had already accepted.

The IRS correspondence audit process is specifically designed to be a lower-burden way for the IRS to resolve mismatches without a full examination. But when the automated system driving that process ignores the taxpayer’s own submissions and the IRS’s prior determinations, and then generates a formal notice of deficiency—a document with real legal consequences—without any human review, the process has moved well past routine efficiency and into something more troubling.

The Takeaway

This case raises a question that most tax practitioners have probably considered, but never directly challenged. Can an automated IRS computer program issue a valid statutory notice of deficiency if the IRS has not formally delegated it that authority? The IRS’s Automated Under Reporter system generates an enormous volume of proposed adjustments and notices each year, often without any human involvement. Before December 2020, it did all of that without being listed as an authorized issuing function in the IRS’s own Delegation Order 4-8. Every notice of deficiency the AUR generated before that amendment is potentially subject to the same challenge the taxpayer raises here. For taxpayers who receive computer-generated IRS notices—or who represent clients in this space—this appeal is one to follow.

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