A tax deficiency occurs when the IRS determines that a taxpayer owes more in taxes than the amount reported on their tax return. This can happen as a result of an audit, errors on the original return, or failure to report income or claim appropriate deductions or credits.
When a tax deficiency is identified, the IRS sends a Notice of Deficiency to the taxpayer, which outlines the additional taxes owed, along with any applicable penalties and interest. The taxpayer has the right to dispute the deficiency by filing a petition with the U.S. Tax Court within 90 days of receiving the notice.
Common reasons for tax deficiencies include:
- Underreporting income.
- Overstating deductions or credits.
- Filing errors.
If the taxpayer agrees with the IRS’s assessment, they can pay the additional tax owed or set up a payment plan. If they disagree, they must present evidence to support their position and resolve the dispute through the Tax Court or other means.
Tax deficiencies can result in significant financial consequences, so it’s important for taxpayers to address the issue promptly and explore options for resolving the debt.