What is a Deficiency?

      A deficiency arises when the IRS or the individual makes an assessment and the tax is not paid.  An individual may make a self-assessment by filing a tax return or the government may make an assessment by filing a return for him.   The issue can get very technical.  For example in Koch, 561 F2d 1115, 77-2 USTC: 9595,40 AFTR2d 77-5545 (4th Cir. 1977), an individual filed a return reporting tax but did not pay the full amount. He was afraid that the IRS would garnish his wages so he filed an amended return showing a "zero" amount owed to create a deficiency so that the IRS would have to issue a notice of deficiency in order to assess.  The court ruled in favor of the IRS.  The court noted that a deficiency is defined as the amount by which the tax assessed by the IRS exceeds the amount shown on the return.  By filing an amended return with no tax shown, the individual was merely trying to create a "deficiency." 

      An amended return cannot serve as the substitute for the original return, upon which no deficiency arose.  The court also noted that the Internal Revenue Code does not expressly authorize amended returns and the IRS uses them for administrative convenience.  Therefore the IRS had no discretion to treat the amended return as controlling whether the deficiency existed within the statutory meaning of the term.

      Beware of the fact that the IRS can make an adjustment to income without asserting a deficiency and if you do not ask them to abate the tax within thirty days, they do not have to issue a Statutory Notice of Deficiency.  The court held in Martz, 77 TC 749 (1981), that the notice sent by the IRS did not constitute a deficiency within the meaning of Section 6211 and the tax court did not have jurisdiction,

      If a deficiency is not due to a mathematical error, the IRS must issue a deficiency notice to make an assessment.  A W-2 Form filed by the individual's employer showed a salary payment to him and the tax withheld thereon.  Although the individual contended that the salary check was not released to him during the taxable year.  He excluded the amount from his return so that the return did not agree with the W-2 statement.  The IRS assessed a deficiency without notice under the procedure for mathematical errors.  The court ruled that the assessment was improper.  There was no mathematical error but a disagreement as to the fact of receipt. See Farley, 64-1 USTC 9371, 13 AFTR2d 932 (EDNY 1964).  The IRS does not have to follow its procedural rules requiring appellate division hearings in order for a notice of deficiency to be valid.  In Cataldo, 60 TC 522 (1973), aff'd, 499 F2d 550, 74-2 USTC 9533, 34 AFTR 2d 74-5329 (2d Cir. 1974), the court ruled that a notice of deficiency is not defective merely because the IRS does not follow its own procedural rules in according a taxpayer an administrative hearing for the year involved.

      The Tax Court ruled that it did not have jurisdiction when a notice of deficiency does not meet the statutory requirements.  In DuMais, 40 TC 269 (1963), nonacq. 1966-1 CB 4, a husband and wife filed joint returns.  During the audit, the agent received a waver of restriction on assessment Form 870, from the husband.  The wife refused to sign the waiver.  The IRS assessed a deficiency against the husband but could not collect the tax.  The IRS then issued a notice of deficiency to the wife and assessed her for the amount previously assessed to the husband. The IRS did not send a copy of the notice of deficiency to the husband.  It was neither a single joint notice of deficiency nor a duplicate original of a joint notice of deficiency.  Section 6212 requires that such a notice must be sent to each spouse if they filed a joint return and they have separate residences.  The court ruled that the notice did not meet the statutory requirements and since its jurisdiction is based on a valid notice deficiency, it did not have jurisdiction.

      The courts presume that a notice of deficiency is correct.  In Mitchell, 58 TCM 1106, 90,001 P-H Memo. TC (1990), the IRS mailed a notice of deficiency for two years in which the individual did not file.  The individual filed a petition with the Tax Court on the same day that second notices were mailed out abating the first notice of deficiency.  The IRS used the wrong forms for the abatement notices.  The individual argued that the deficiency notice was invalid because the IRS abatement forms were presumed correct and the Tax Court ruled against him taking the position that the deficiency notice has the assumption of correctness.

      In McCarthy, 57 TCM 1569, 89, 479 P-H Memo. TC (1989), the court ruled that compliance with Section 6020(b) is not a jurisdictional prerequisite to the issuance of a valid deficiency notice.  Section 6020(b) is the Internal Revenue Code Section that gives the IRS the power to file returns for individuals who do not file returns.