A whipsaw situation occurs when the IRS receives conflicting claims for the same items in the same transaction and has no reliable way to determine which claim is correct without additional information.
Potential whipsaw situations can occur in various circumstances, such as divorce, when both spouses claim the same child, executive compensation issues involving restricted stock, or when multiple layers of trusts exist.
In whipsaw situations, the IRS can issue deficiency notices that are inconsistent, for instance, denying all deductions to each of the taxpayers involved, assigning all income to each of the taxpayers involved, or both.
The issuance of the notices does not mean the income tax due will be collected more than once. The IRS is simply protecting against the possibility that income could go untaxed or that the same expenses could be deducted on two different returns.