What does the term 'understatement of tax' refer to?

The term 'understatement of tax' refers to the act of reporting less taxable income than one actually earned, resulting in a lower tax liability. This creates a situation where the taxpayer is not fully acknowledging their true income, leading to an incorrect calculation of the taxes owed.

When a taxpayer understates their income, they might pay less tax than required, which can lead to penalties and interest when the discrepancy is discovered by tax authorities. This practice is often viewed as tax evasion if done intentionally and can have serious legal implications.

In contrast, the other options describe different concepts unrelated to the specific definition of an understatement of tax. Reporting more taxable income than earned pertains to an overstatement, filing tax returns late is a procedural issue, and paying taxes based on incorrect deductions relates to miscalculation rather than income reporting. Thus, these options do not capture the essence of what constitutes an understatement of tax.