Deficiency [Tax]: What It Means and How It Affects You
Definition & Meaning
A deficiency in tax terms refers to the situation where the amount of tax owed by a taxpayer is greater than the amount reported on their tax return. This typically occurs when a taxpayer does not accurately report their income or deductions. The deficiency can also apply in the context of estate taxes, where the tax imposed on an estate exceeds what the executor has reported. Understanding this term is crucial for taxpayers to ensure compliance with tax laws and to avoid potential penalties.
Legal Use & context
The term "deficiency" is commonly used in tax law, particularly in cases involving income tax and estate tax assessments. It is important in legal practice as it can lead to additional tax liabilities, interest, and penalties for taxpayers. Taxpayers may encounter deficiencies during audits or when filing amended returns. Users can manage their tax filings and address deficiencies using legal templates available through US Legal Forms, which are drafted by qualified attorneys.
Real-world examples
Here are a couple of examples of abatement:
For instance, if a taxpayer reports $50,000 in income but the IRS determines that the actual income is $60,000, there is a deficiency of $10,000. This deficiency would result in additional taxes owed on the unreported income.
(Hypothetical example) An estate executor files a return showing a tax liability of $100,000, but the IRS assesses the estate tax at $120,000, resulting in a deficiency of $20,000.
Relevant laws & statutes
Key statutes related to tax deficiencies include:
- Internal Revenue Code (IRC) Section 6211, which defines a deficiency.
- IRC Section 6601, which addresses interest on underpayments of tax.
- IRC Section 6662, which outlines penalties for underpayment due to negligence or disregard of rules.