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- Deficiency: A taxpayer’s correct liability, as determined by the IRS, less the amount reported on the return.
- Assessment: In order for the IRS to use administrative procedures to collect the tax owed, it must first “assess” it. Assessment means formally recording the tax liability.
- Statute of limitations
- Collection: In theory, the IRS has only ten years from an assessment to collect. But this limitation has so many exceptions, waivers, and extensions that it has been virtually swallowed up. Nevertheless, thorough planning requires a solid understanding of how the statute of limitations applies to each case, and a consideration of what impact other actions have on the statute of limitations, such as filing an offer in compromise or seeking a collection due process hearing.
- Assessment: Before the IRS can assess a tax deficiency, it must send the taxpayer a written notice of deficiency. The notice of deficiency must be sent within the statute of limitations on assessment. The IRS generally has three years from the date the return was filed within which to assess tax.
- Refund procedure: Can be pursued at any point in the controversy process. Refund procedures require the taxpayer to first remit payment for the deficiency amount before claiming a refund.