Deficiency

A deficiency is the amount by which a tax payment is lower than the amount independently calculated by the Internal Revenue Service (IRS). When there is a tax deficiency, the IRS sends a deficiency letter to the taxpayer, noting the amount of the shortfall. For example, an employer reports wages paid to a taxpayer on a Form W-2, which the taxpayer does not report to the IRS. The IRS can spot the deficiency by comparing its copy of the Form W-2 to the taxpayer’s tax return.