What is a "deficiency" in tax terms?

In tax terms, a "deficiency" refers specifically to an underpayment of taxes owed as determined by the IRS. When a taxpayer does not pay the correct amount of taxes based on their income, deductions, and applicable tax laws, the IRS may assess a deficiency. This situation often arises from errors in tax return reporting, underreporting income, or failing to claim all allowable deductions or credits.

The IRS conducts reviews and audits, and if it finds that the taxpayer has not reported enough income or has claimed excessive deductions, it can issue a notice of deficiency. This notice informs the taxpayer of the additional tax owed, along with any interest and penalties that may apply. Understanding this concept is crucial because it impacts the taxpayer's obligation to pay taxes and may lead to additional consequences if not addressed.

Other options are less accurate interpretations of the term "deficiency." For instance, an overpayment of taxes does not align with the definition since a deficiency relates to unpaid amounts rather than any excess. As for penalties for late filing or adjustments on tax returns, these terms are related to compliance and corrections but do not specifically define a deficiency in tax terms.