Legal Definitions - deficiency in tax

A deficiency in tax refers to a situation where a tax authority, such as the Internal Revenue Service (IRS), determines that a taxpayer owes more tax than they originally reported or paid on their tax return. It represents the difference between the correct amount of tax legally due and the amount the taxpayer initially calculated and submitted. This determination often occurs after an audit or review of a tax return, indicating an underpayment of tax.

• Example 1: Mathematical Error

  A self-employed graphic designer files their annual income tax return. While calculating their total business expenses, they accidentally add a column of figures incorrectly, resulting in an understatement of their net income by $3,000. Consequently, the tax paid was less than what was actually owed.

  Explanation: When the tax authority reviews the return and identifies this mathematical error, the additional tax amount that should have been paid on the $3,000 of understated income constitutes a deficiency in tax.

• Example 2: Unreported Income

  An individual sells some valuable antique furniture online for a profit of $7,500. When preparing their annual tax return, they mistakenly believe that this type of income is not taxable and therefore do not include it in their reported gross income.

  Explanation: If the tax authority later discovers this unreported income, the additional tax liability that arises from the $7,500 profit, which was not initially declared, would be considered a deficiency in tax.

• Example 3: Disallowed Deduction

  A homeowner claims a deduction for home office expenses on their tax return. During an audit, the tax authority determines that the specific area claimed as a home office was not used exclusively and regularly for business, failing to meet the legal requirements for the deduction. As a result, a portion of the claimed deduction is disallowed.

  Explanation: Because the disallowed deduction led to a lower taxable income and thus a lower tax payment than what was legally owed, the difference in tax due to these incorrect deductions represents a deficiency in tax.