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Underpayment of Tax Vs. Understatement of Tax

Unlike limitations in innocent spouse or separation of liability relief situations, with equitable relief, a taxpayer can be entitled to either relief from an underpayment or understatement of tax. Definitions:

Understatement of Tax - This is generally the difference between the total tax that should have been shown on a return and the amount of tax actually shown on the return. This difference is due to erroneous items on the return.

Example - A joint return shows a tax liability of $5,000, all of which was paid.  When the return is audited, the IRS finds that $10,000 of one spouse’s income was unreported.  The additional tax on this income is $1,500 for a total tax liability of $6,500. The understatement of tax is $1,500.

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Underpayment of Tax - This is the amount of tax reported on the taxpayer’s return, but which hasn’t been paid. For instance, if spouses file jointly owing a total tax liability of $6,000 and they pay only $4,000 with their return, their underpayment of tax is $2,000.

    

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