DEFINITION of 'Deficiency'

Conceptually, the numerical difference between the amount of tax that a taxpayer or taxpaying entity reports on a tax return and the amount that the IRS determines is actually owed. The term only applies to shortfalls and not to surpluses. Taxpayers are notified of deficiencies via deficiency letters.

BREAKING DOWN 'Deficiency'

Deficiencies can easily become back taxes if prompt action is not taken by taxpayers. A notice of deficiency does not automatically equate to an audit or disciplinary action, but it should be taken seriously. Taxpayers can use the contact information provided on the deficiency letter to contact the IRS for further information.

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