401(k)
A deferred compensation plan set up by an employer. A portion of the employee’s earnings is deducted and placed in a qualified retirement plan. The employer may match a percentage of the amount the employee elects to withhold. The employee is not taxed on either the amount deducted from their pay or the employer’s matching amount until receipt of the distributions, usually at retirement.
Abatement (of Interest / Penalties)
The IRS reduces or removes penalties or interest owed by a taxpayer.
Accounting Methods
The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash method or the accrual method.
Accounts Receivable
Accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods or services that have been provided to the customers.
Accrual Method
One of the two most common methods of business accounting in which income and expenses are reported in the tax year earned, whether or not received or paid. Businesses maintaining an inventory are required to use the accrual method for purchases and sales.
ACS High Dollar Unit
Special collection units of the IRS that handles high dollar cases typically from $100,000 to $999,999.
Adjustable Rate Mortgage (ARM)
A long–term loan to finance a real estate purchase, typically a home. Unlike a fixed–rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted periodically during its term.
Amended Return
A tax return filed on Form 1040X after the original return has been filed. An amended return is used to correct errors or to claim more advantageous ways of filing the original return. An amended return can also be used to carryback certain unused credits or a net operating loss.
Analysis Letter
An assessment of a taxpayer’s financial income, expenses and assets with a detailed explanation of the situation and options for resolution.
Appeal Rights
The IRS has an appeals system for taxpayers who do not agree with the results of an examination of their tax returns or with other adjustments to their tax liability. The IRS will send to a taxpayer a report and/or letter that explains the proposed adjustments, the taxpayer’s right to request a conference with an Appeals office, as well as how the taxpayer can request an appeals conference.
Asset
An item of useful or valuable property that has a cash or exchange value.
Audit (a/k/a Examination)
An examination and verification of a tax return by the IRS.
Automated Collection System
Automated Collection System is a computerized IRS collection system. Many taxpayers which have a back tax liability are monitored through ACS. ACS’ primary function is to collect on a back tax liability through full payment of the tax or through monthly installment agreement payments. ACS will also place an account into a Currently Not Collectible status when a taxpayer can demonstrate they are in a financial hardship. ACS issues levies and garnishments in order to collect on the back tax liabilities. By contacting ACS, a tax professional can help resolve an open case. The resolution of a particular case may be a release of garnishment, the implementation of an installment agreement, or having the taxpayer’s account being placed into a Currently Not Collectable status.
Back Taxes
Back taxes – or tax debt – are unpaid taxes assessed against a taxpayer by a level of government (i.e. Federal, State, Local) that are past due. Internal Revenue Service (IRS) back taxes are past due federal income taxes. Back taxes are assessed either by not paying taxes when they become due, failing to report all income and taxes on a return, or failing to file a return.
Balance Sheet
A statement of a company’s financial position at a particular moment in time. This financial report shows the two sides of a company’s financial situation — what it owns and what it owes. What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders’ equity. Expressed as an equation, a company’s balance sheet shows assets = liabilities + shareholder equity. If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to shareholders, and the company’s balance sheet is in fact unbalanced because the company owes more than it owns.
Bank Contact Information
The fax number and name and or department in the bank that handles IRS bank levies.
Bank Levy
A one–time occurrence where the IRS freezes all funds in a taxpayer’s account on the day the bank receives the IRS levy. If not released within 21 days, the funds plus interest will be sent to the IRS.
Bank Statement
A summary of all financial transactions occurring over a given period of time on a deposit account, a credit card, or any other type of account offered by a financial institution.
Bankruptcy
The act of declaring yourself insolvent, or unable to fulfill existing financial obligations. Includes a legal proceeding where the court will declare a person insolvent.
Benefits Statement
A statement used to report income and calculate taxes owed to the federal government of the United States.
Business Assets
Items used in a trade or business or used to produce rental or royalty income.
Business Entities
An individual or group of people organized for some profitable or charitable purpose. Business entities include organizations such as corporations, partnerships, charities, trusts, and other forms of organization. Business entities, just like individual persons, are subject to taxation and must file a tax return. Some business entities are exempt from federal income tax. These include non–profit charities, S–corporations, and partnerships. Business entities may be subject to state income tax, depending on the laws of the state or states where they conduct business.
Business Tax Liability
Amount of tax, penalties and interest owed on business account.
C–Corporation
Legal business entities owned by shareholders with the ability to own property, incur debts and sue or be sued. C–Corporations are taxed separately from its shareholders.
Cafeteria Plan
A plan wherein an employer offers a choice of salary or specified nontaxable fringe benefits from which participating employees may select. The plan may be funded with employer contributions, employee contributions (usually through salary reduction agreements) or a combination of both. Also called a section 125 plan.
Cancellation of Debt Income
When a person takes out a loan it is not considered as income because the person has a corresponding obligation to repay the debt. However, if the debt is canceled, then that obligation is destroyed. The borrower is now in a better position than if the loan was fully repaid. Therefore the taxpayer has received a benefit and the amount of canceled debt will be included as gross income.
Cash Method
One of the two most common methods of accounting. Under the cash method of accounting, income is reported in the tax year actually or constructively received and expenses are deducted in the tax year paid. The form of accounting in which income, either actively or constructively earned, is reported along with all paid expenses in the entire year. Most sole proprietors and self–employed individuals use this method of accounting.
Certificate of Deposit (CD)
A debt instrument from a bank or savings institution that has a set maturity date. CDs usually pay interest.
Certificate of Release of Federal Tax Lien
A letter issued by the IRS that informs the recipient that it is removing its tax lien from a taxpayer’s property or credit report. It will be issued upon full payment of the taxes, penalties, interest, and recording fees OR when the IRS may no longer legally collect the tax obligation.
Certified Public Accountant (CPA)
A CPA is a professional accountant licensed by the state.
Chapter 7 Bankruptcy
Allows for discharge of unsecured debts but may result in the loss of a home, car, or other secured debt. Chapter 7 relief is available only to those individuals who earn less than the median for their state or who qualify because of special circumstances.
Collateral Agreement
A collateral agreement is an additional or secondary agreement that the Internal Revenue Service may require before agreeing to settle your back tax liability.
Collection Due Process (CDP) Hearing
Allows taxpayers a right to a hearing before Appeals regarding proposed collection enforcement actions or filed a Notice of Federal Tax Lien. During the hearing, a taxpayer may dispute the enforcement action or propose a resolution to the underlying tax controversy.
Collection Hold
IRS suspends collection activity on a tax debt for a limited time in order for the taxpayer to file taxes, collect financial information, or acquire funds to make payment on the tax liability.
Collection Information Statement
A financial statement listing assets, income, liabilities, and expenses submitted by the taxpayer. This financial statement can be submitted on Form 433–A, Collection Information Statement for Wage Earners and Self–Employed Individuals, or Form 433–B, Collection Information Statement for Businesses.
Collection Statute Expiration Date (CSED)
The end of the time period, set by statute, in which the IRS has to collect taxes, penalties, and interest. It is set ten years from the date of assessment of the tax, unless extended by some statutory exceptions.
Community Property
Property belonging in equal shares to a husband and wife. This concept of ownership for property acquired after marriage is followed in Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
Corporations
A legal business entity owned by shareholders with the ability to own property, incur debts, and sue or be sued.
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Correspondence Audit
Audit/Examination type conducted entirely by mail. The taxpayer will receive a letter from the IRS requesting additional information about certain items shown on the taxpayer’s return, such as income, expenses and itemized deductions. If the Examination is conducted by mail, the taxpayer can act on his or her own behalf or have someone represent them. This person must be an attorney, accountant, enrolled agent, or the person who prepared the return and signed it as the preparer.
Currently Not Collectible (CNC) Status
A temporary status that suspends all collection activity upon a showing that payment of the tax liability, immediately or through monthly payments, would leave the taxpayer unable to pay necessary living expenses. Generally, unless the taxpayer’s financial situation changes, the account will remain on CNC status until the time the IRS has to collect the tax liability expires, which is known as the collection statute expiration date (CSED).
Debt–to–Income Ratio
A percentage of a consumer’s gross monthly income that goes towards the payment of bills.
Deed of Trust
An instrument used in some states instead of a mortgage. A deed of trust passes legal title to real property is placed in one or more trustees to secure the repayment of a sum of money or the performance of other conditions.
Deferred Payment Offer in Compromise
An Offer in Compromise that is payable in installment payments. The Offer in Compromise must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the IRS evaluates the offer.
Dependent
Someone the taxpayer supports and can claim as an exemption. To qualify, the dependent must meet all five of the following tests:
- Relationship or member of household test
- Citizenship test
- Joint return test
- Gross income test
- Support test
Disability Insurance
A form of insurance that replaces a portion of the insured’s income due to a sickness or injury.
Dissipated Assets
Assets that have been sold, gifted, transferred or spent on non–priority items or debts and are no longer available to pay the tax liability. The IRS will include the value of these assets for purposes of calculating a taxpayer’s minimum Offer in Compromise.
Doubt as to Collectibility
Basis for acceptance of an Offer in Compromise where there is doubt that the tax can be paid in full.
Employee
For income tax purposes, an employee is an individual who is subject to the will and control of the employer not only as to what shall be done, but also as to how it shall be done. An employee is to be distinguished from an independent contractor because an employee’s wages are subject to income tax withholding, and in most cases, social security and Medicare tax withholding. Employee status also affects how the taxpayer claims allowable deductions.
Employer Identification Number
A nine (9) digit number used by the IRS to identify the tax account of an employer.
Enrolled Agent
A person able to practice and represent taxpayers before the IRS. Enrolled agents, like attorneys and certified public accountants (CPAs), are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can practice before.
Equity in Assets
The difference between an asset’s current market value and the debt against it.
Estimated Tax Payments
The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and the amount of any expected credits.
Extension to File
A provision allowing additional time to file a tax return. A taxpayer must file a request for an extension to file with the IRS.
Extreme Financial Hardship
When a taxpayer is unable to meet basic living expenses and is in imminent jeopardy of a substantial calamity as a result of IRS collection action. Common examples include eviction or foreclosure.
Fair Market Value
The price an item would sell for, assuming the buyer and a seller both have reasonable knowledge and are not under undue pressure.
Fee Agreement
A written agreement signed by the client and attorney specifying the service to be performed and the fees to be paid.
Field Audit
Audit/Examination type conducted by the IRS on the business premises of the taxpayer. Alternatively, it may be in the office of the tax practitioner representing the taxpayer.
Filing Status
The category you classify your income tax return as, based mainly upon your family status. Your filing status is an important factor in determining your standard deduction and tax rate and whether you must file a return. The five filing status types are:
- Single
- Married filing jointly
- Married filing separately
- Head of household, and
- Qualifying widow(er).
Final Notice
Letter sent by the IRS when payment on past due taxes has not been made. This is the final notice that collection action (e.g. garnishment, levy, lien, etc.) will be enforced against a taxpayer’s income or assets in thirty (30) days.
Financial Hardship
When a taxpayer is unable to meet basic living expenses.
Gross Monthly Income
Total income received in the form of money, property, or services that are subject to tax unless specifically exempt or excluded by law.
Head of Household
The filing status for an unmarried taxpayer who pays over half the cost of maintaining his/her home. That home is also the principal residence for over half the tax year of his/her qualifying child (whether or not the child is claimed as a dependent) or a qualifying relative who is claimed as a dependent. A dependent parent who does not live with the taxpayer may also qualify the taxpayer for the head of household status if qualifications are met.
Independent Contractor
A taxpayer who contracts to do work according to his own methods and who is not subject to control except as to the results of such work. An employee, by contrast, is subject to the control of the employer as to the methods to be used to obtain the desired results.
Individual Retirement Account (IRA)
A trust set up to receive retirement contributions of individuals. The arrangement may be in the form of an individual retirement account or individual retirement annuity. The amount that may be contributed is limited. Amounts earned in the IRA are not taxed until they are withdrawn.
Individual Tax Liability
Taxes owed by individuals or by persons filing a joint return. Individual tax liabilities are those reported on IRS Form 1040, Form 1040A, and Form 1040EZ. Although the name implies that the liability attaches to an individual, married persons filing jointly will both owe any tax liability jointly and severally.
Individual Taxpayer Identification Number
The taxpayer identification number for persons who do not qualify for a Social Security number. It is usually assigned to resident aliens of the United States.
Injured Spouse Relief
When a joint return is filed and the refund is used to pay one spouse’s past due child support, spousal support, or a federal debt, the other spouse can request a refund for his/her share of the overpayment that was used to pay the past due amount. The test to qualify as an injured spouse is:
Not legally obligated to pay the past due amount and One of the following criteria is met:
- Made and reported tax payments (such as federal income tax withheld from wages or estimated tax payments);
Earned income (such as wages, salaries, or self–employment income) and claimed the earned income credit or the additional child tax credit; OR - Claimed a refundable credit, such as the health coverage tax credit or the refundable credit for prior year minimum tax.
Innocent Spouse Relief
Tax rules designed to protect married taxpayers who file joint returns from being held responsible for taxes due to erroneous actions by their spouses—such as failing to report income or claiming unsubstantiated deductions. A spouse requesting innocent spouse relief must prove (1) lack of knowledge and (2) no reason to have knowledge of an error that resulted in the underpayment of tax on the joint return in order to be granted relief of the responsibility for the underpayment. A taxpayer has two (2) years from the time the IRS begins trying to collect the underpayment to petition for innocent spouse relief.
Installment Agreement (IA)
An agreement under I.R.C. § 6159 allowing a taxpayer to pay the tax liability over equal monthly payments until the liability is paid in full or the time the IRS has to collect the tax liability expires, which is known as the collection statute expiration date (CSED).
Installment Agreement Processing Fee
Fee the IRS charges to set up a monthly payment plan, also known as an Installment Agreement.
Installment Agreement Reinstatement Fee
Fee the IRS charges to reinstate a recently defaulted monthly payment plan, also known as an Installment Agreement. IRS will usually reinstate Installment Agreements that went delinquent within three months of the request for reinstatement.
Interest
An amount charged for the use of borrowed money.
Interest-Only Mortgage
A loan in which, for a set term, the borrower pays only the interest on the principal balance and the principal balance remains unchanged. At the end of the set term, the balance will be amortized over the remainder of the term of the loan.
Internal Revenue Service (IRS)
Government agency, under the Department of the Treasury, responsible for administering and enforcing the internal revenue laws.
IRS Allowable Expense Test
Allowable expenses include those expenses that are necessary to provide for a taxpayer and or his family’s health and welfare and/or for the production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family need to live. There are three types of necessary expenses:
National Standards: Five categories of expenses under the national standards are food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous.
Local Standards: Two categories of expenses under the local standards are housing and utilities and transportation. Taxpayers will normally be allowed the local standard or the amount the taxpayer actually pays, whichever is less.
Other Expenses: Other expenses may be allowed if they meet the necessary expense test. The amount allowed must be reasonable considering the taxpayer’s individual facts and circumstances. An expense is necessary if it provides for the health or welfare of the taxpayer and or his family or for the production of income.
IRS Automated Collection Service (or ACS)
A computerized system at the IRS linking numerous telephone stations. Primary function is to collect back taxes through full payment of the tax or through monthly installment agreement payments. ACS can place an account on Currently Not Collectible status when a taxpayer can demonstrate financial hardship. ACS can issue levies and garnishments in order to collect on the back tax liabilities. By contacting ACS, our professionals can resolve an open case with any IRS Representative. The resolution of a particular case may be a release of a levy (on wages and/or a bank account), the implementation of an installment agreement, or the taxpayer’s balances being placed on Currently Not Collectible status.
IRS Customer Service
Call center division of the IRS where employees take inbound calls from taxpayers. The IRS Customer Service Center cannot issue or release levies.
IRS Federal Tax Lien
A legal claim to your property as security or payment for your tax debt.
IRS Form 1040
Every person is required to declare the income he or she received during the prior year. The return may be filed jointly with a spouse, single, married filing separately or head of household. Simplified versions of the form 1040 are forms 1040EZ and 1040A.
In order to properly use either form 1040EZ or form 1040A, a taxpayer must meet a number of technical requirements. Below are the more common requirements:
Schedule A – When preparing a tax return, a taxpayer may reduce their taxable income by either opting to subtract a standardized deduction from their income, or to subtract specific tax deductible expenses from their income. If the taxpayer chooses to subtract specific tax deductible expenses, such as home mortgage interest, a percentage of medical expenses, etc. the taxpayer will use Schedule A to list and describe the itemized tax deductible expenses.
Schedule C – If a taxpayer receives income from self-employment, he or she may wish to offset their gross income by the expenses incurred to generate the income. By offsetting business expenses against gross business income the taxpayer will be able to reduce their taxable income, and consequently the overall taxes owed. Self employment income and expenses should be reported on Schedule C. If the taxpayer is operating the business as a corporation, partnership or limited liability company, the taxpayer may not use a schedule C, as business income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.
Schedule D – Almost all physical assets, whether it is for personal or investment purposes is considered a capital asset. If a taxpayer sells their physical asset for more than they paid for it (minus any applicable depreciation), the taxpayer will be deemed to have received a profit from the sale. This profit is called a capital gain. If the taxpayer had sold the property for less than what they paid for it )minus any applicable depreciation, the taxpayer will be deemed to have incurred a loss from the sale, or a capital loss. There are many rules which specify when a taxpayer may subtract capital losses from income. For a more detailed explanation of these rules, please contact your tax preparer or accountant. Capital gains and losses should be reported on Schedule D.
Schedule E – When a taxpayer has income or loss from a trust, estate, real estate rental, royalties, an S-Corporation, or Partnership, this income or loss should be reported on Schedule E. Income from an S-Corporaton or Partnership must be reported even if the taxpayer has not received the income. There are many rules which specify when a taxpayer may deduct Schedule E losses against other income. For a more detailed explanation of these rules, please contact your tax preparer or accountant.
Schedule F – Schedule F, is very similar to Schedule C, noted above, except that Schedule F is used to report farming income and expenses, for self employed farmers. If the taxpayer is operating the farm as either a corporation, partnership or limited liability company, Schedule F should not be used to report income and expenses. Farming income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.
Schedule SE – Self employed individuals are required to pay self employment tax on their net business income. Generally speaking, if a taxpayer expects to owe less than $1,000 in total taxes, the taxpayer may pay the self-employment tax when the return is due. If a taxpayer expects to owe more than $1,000, the taxpayer is required to pay estimated tax payments on at least a quarterly basis. Although quarterly payments are the norm, a taxpayer may wish to pay more frequently in order to avoid a large quarterly payment, or if the taxpayer needs to demonstrate that payments are currently being made. Schedule SE is used to calculate a taxpayer’s self-employment tax, so that proper estimated tax payments may be made for the year.
IRS Form 1065
A document used for specific tax purposes related to a business partnership. It is used to report information such as income, losses, gains, credits, or deductions, accumulated during the operation of a partnership for a tax year. It is necessary because each partner contributes to the partnership and in return, shares any profits or losses that the business experiences. The partnership itself never pays taxes on the income it makes, but instead passes those profits or losses through to its partners who pay taxes (i.e. Schedule K). The partners also receive deductions or credits as they are passed through from the partnership.
IRS Form 1099
A form used to report a wide variety of taxable income, such as interest, dividends, stock sales, and self–employment income. Income data
on a Form 1099 is reported in different places on the tax return.
IRS Form 1120
A tax return used to report the income, gains, losses, deductions, and credits in order to figure the income tax liability of a corporation.
IRS Form 2290
Heavy highway use tax form used to figure and pay the tax due on highway motor vehicles with a gross weight of 55,000 pounds or more.
IRS Form 2848, Power of Attorney
A Power of Attorney is an authorization to act on someone else’s behalf in a legal or business matter. The person authorizing the other to act is the principal or granter (of the power), and the one authorized to act is the agent or attorney.
In order to have a tax professional represent you before the Internal Revenue Service you need to complete an IRS Form 2848, Power of Attorney. The individual you authorize must be a person eligible to practice before the IRS (i.e. attorneys, enrolled agents, certified public accounts, tax preparers, etc.). Your authorization will allow that individual to receive and inspect your confidential tax information and act on your behalf when resolving issues with the Internal Revenue Service.
IRS Form 433–A
A financial statement listing assets, income, liabilities, and expenses submitted by the taxpayer.
IRS Form 433–B
A financial statement listing assets, income, liabilities, and expenses submitted by a business or corporation.
IRS Form 433–F
A financial statement listing assets, income, liabilities, and expenses submitted by the taxpayer.
IRS Form 656, Offer in Compromise
Form 656 is the official form that must be used to submit an Offer in Compromise to the IRS. The IRS will not consider an Offer in Compromise submitted on any other form. The form itself spells out all of the requirements and contingencies associated with an Offer in Compromise. The form must be filled out to include the type of tax to be compromised (income tax, payroll tax, tax penalties, etc.), the relevant tax periods or years, the grounds for making the offer and the amount offered. Usually, Form 656 must be submitted with a Collection Information Statement and a processing fee.
IRS Form 656–A
A form used when submitting an Offer in Compromise certifying that the taxpayer is not required to submit the Offer in Compromise application fee and deposit based on their family unit size and income.
IRS Form 940
A form used to report annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only employers pay FUTA tax. It is not deducted from the employees’ wages.
IRS Form 941
A form employers use to report and deposit the taxes withheld from each employee’s paycheck. Each time an employer pays wages, the employer is required by federal law to withhold a certain amount for federal income tax, social security tax, and Medicare tax from an employee’s paycheck. Under the withholding system, taxes withheld by the employer from an employee’s checks are credited to the employee in payment of their tax liability. Federal law also requires an employer to pay any liability for the employer’s portion of social security and Medicare taxes. This portion of social security and Medicare taxes is not withheld from employees.
IRS Form 943
A form to report federal income tax withheld and employer and employee social security and Medicare taxes on wages paid to farm workers.
IRS Form W–2
A form an employer sends to its employees and to the IRS at the end of the year to report each respective employee’s annual wages, taxes withheld, and other information.
IRS Form W–4
A form submitted by an employee to their employer so that the employer can withhold the correct federal income tax from the employee’s pay. The Form W–4 instructs the employer of that employee’s selected filing status and claimed number of exemptions.
IRS Managerial Review
A group manager must review all cases exceeding $5,000 to ensure that they reflect a thorough analysis of a taxpayer’s financial statement(s), consideration of other available means of collection, and the rationale for allowing a taxpayer to retain assets with equity. The manager must agree that the resolution proposed is the appropriate resolution for the case.
IRS Office of Appeals
The Office of Appeals is independent of any other IRS office and provides a venue where disagreements concerning the application of tax law can be resolved on a fair and impartial basis.
IRS Revenue Officers (RO)
Employees of the IRS charged with the duty of collecting back taxes. Usually revenue officers are assigned outside of the centralized IRS offices to field offices to handle taxpayers in an assigned geographical area. Revenue officers are typically assigned to cases where a business owes payroll taxes, a taxpayer fails to file multiple years of returns, or a taxpayer has a substantial tax liability.
IRS Summons
A legal order issued by the IRS compelling a taxpayer or third party to appear and provide financial information to the IRS.
IRS Tax Liability
Amount of tax owed to the IRS, which is also known as IRS tax debt or IRS back taxes.
IRS Taxpayer Advocate Service (TAS)
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers in solving tax problems that have not been resolved through normal channels, or who are experiencing significant hardships.
Joint and Several Liability
Taxpayers who file and sign a joint return are fully responsible for the accuracy of the return and for the full liability. The liability applies to each spouse regardless of who earned the wages or income on the return.
Keogh Plan
A pension or profit–sharing plan available to self–employed individuals and their employees.
Levy on Income
A legal seizure of wages, social security, pension, or other income in order to satisfy a tax debt.
Lien
A legally recognized right or interest that a creditor has in another’s property, lasting until the debt that it secures is paid or satisfied. A tax lien is a legal right the IRS has in a taxpayer’s property. The lien secures the tax debt and does not relate specifically to a debt owed on that property.
Lien for Taxes
The U.S. Treasury, as part of its tax collection efforts, may attach a lien (or a legal claim) on the property of a taxpayer who is delinquent in the payment of amounts owed to the IRS and who has not made arrangements to pay.
Lien Subordination
When the IRS moves their claim or interest in a taxpayer’s property to a secondary or lesser position. Generally, the IRS will only subordinate the lien if the property is going to be sold or refinanced and money is going to be paid to the IRS.
Life Estate
A legal arrangement whereby the beneficiary is entitled to possession or income generated from the property for his or her life. After the death of the beneficiary, the property will go to the individual holding remainder interest or to the grantor by reversion.
Limited Liability Company (LLC)
A hybrid business entity that has the characteristics of both a partnership and corporation. The owners have the limited personal liability of a corporation, yet can retain the benefits of pass through taxation of income for tax purposes.
Liquidation
The process of converting securities or other property into cash.
Loan Modification
A process where the terms of a mortgage are modified outside the original terms of the contract between the borrower and the lender.
Mandatory Retirement
Contributions to a retirement account that are required as part of a taxpayer’s employment.
Married Filing Jointly
A filing status for taxpayers who are married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance. The income, deductions, and credits of both spouses are entered on a joint return.
Married Filing Separate
A filing status for married taxpayers who choose to record all respective incomes, deductions, and credits on separate individual tax returns.
Means Test
Investigative process to determine whether an individual’s family income precludes them from eligibility to file a Chapter 7 Bankruptcy.
Money Market Account
A deposit account with an interest rate typically higher than a bank account.
Mutual Fund
A professionally managed type of investment that pools money from many investors and invests that money in stocks, bonds, short term money market instruments and other securities.
National Standards
For IRS tax debt resolution, the IRS established an average monthly acceptable amount for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. The standards are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). The amount of each standard varies depending upon the taxpayer’s family size and geographical location. A taxpayer is allowed to claim the standard for each expense without having to document their actual expenses. If a taxpayer claims more than the average amount per month, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the total number of persons allowed for National Standards should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return.
Net Available Income
Monies remaining out of gross income after subtracting ordinary and reasonable expenses.
Non-Liable Party (NLP)
A party with whom the taxpayer shares living expenses, but who is not liable for the taxpayer’s tax debt.
Non-Reimbursed Work Expenses
Ordinary and necessary expenses incurred by the employee to perform the job duties that the employee was hired to perform, but that are not reimbursed to the employee by the employer.
Notice of Deficiency
A Statutory Notice of Deficiency is not an assessment of tax nor does it require you to make immediate payment. It is a proposed deficiency which generally gives you 90 days, (150 days if the notice was addressed to a person outside the United States), to either agree to the deficiency or file a petition with the United States Tax Court for a redetermination of the deficiency. Once the notice of deficiency is issued, the 90 or 150-day period cannot be suspended or extended. During this period, you may ask Appeals to reconsider the case. However, the reconsideration does not extend the 90 day period you have for filing a petition with the Court. The Notice of Deficiency can be rescinded under certain circumstances if both parties agree.
Notice of Intent to Levy
An IRS letter sent to a taxpayer notifying the taxpayer of an unpaid tax liability due to the IRS and that the IRS intends to levy on the taxpayer’s assets if the taxpayer does not make efforts to resolve the tax liability.
Offer Examiner
An examiner appointed to investigate, review, and determine the viability of an Offer in Compromise.
Offer in Compromise (OIC)
An agreement between a taxpayer and the IRS to settle a tax liability for an amount that is less than the full amount owed.
Offer in Compromise Processing Fee
A fee paid to the IRS when a taxpayer submits an Offer in Compromise.
Out–of–Pocket Health Care Costs
The total amount of monthly medical services, prescriptions, and medical supplies paid by a taxpayer that is not covered by the taxpayer’s insurance.
Partial Payment Installment Agreement (PPIA)
A taxpayer’s agreement with the IRS where the IRS reviews a taxpayer’s financial statement and determines that the taxpayer can make a monthly payment, but the payments will not pay off the entire balance within the statutory period.
Partnership
A form of business in which two or more persons join their money and skills in conducting the business. Partnerships must file a return, but are not subject to tax. Each partner is responsible to report his or her share of the partnership’s income, gains, losses, deductions, and credits on his or her individual return.
Paycheck Stubs
Income statement for a W–2 employee. The paycheck stub is usually attached to the taxpayer’s paycheck. The paycheck stub provides information about the pay period, the hourly wages, the total hours worked, the amount withheld for taxes, the amount deducted for other expenses such as court ordered payments, health insurance, life insurance, and contributions into retirement accounts.
Payroll Administrator Contact Information
The name, phone number, and fax number of the person responsible for payroll administration of an employer.
Payroll Tax Deposits
Federal law requires individuals to pay taxes on their income. To administer the collection of individual income taxes, the government requires employers to withhold and send to the government a portion of paychecks for certain types of employees. For each of these “W–2” type employees, an employer is required to withhold a calculated part (based on the amount of income and the number of exemptions an employee claims) out of each employee’s paycheck for taxes. The employer holds these withheld taxes “in trust” and then sends the funds to the government.
Payroll Taxes
Taxes held in trust by a business with Form W-4 employees. The taxes include the employee’s withholding taxes and the employer’s and employee’s portions of Social Security tax and Medicare tax.
Penalties
A fine charged by the IRS for paying and/or filing taxes late. A taxpayer is usually charged interest in addition to penalties for late payment of tax liabilities.
Pension
Payments made periodically to an employee of a definite amount for a specified period from an employer–funded plan after the stated requirements have been met. Its primary purpose is to provide retirement income for employees.
Primary Residence
The home in which a taxpayer lives most of the time. A taxpayer can have only one principal residence at any time. A principal residence can be a home, condominium, cooperative apartment, townhouse, mobile home, or houseboat.
Profit and Loss Statement (or income statement)
A financial statement created by self-employed individuals and sole proprietorships to determine the business’s profitability. The profit or loss (or net income) is derived from a simple calculation: revenue generated (i.e. income received, gross receipts, etc.) minus expenses incurred.
Profit Sharing Plan
A plan for distributing a predetermined percentage of a company’s profits to its employees.
Proper Tax Withholdings
Correct amount of tax that is withheld from a taxpayer’s income that does not create a large overpayment or underpayment of tax.
Proposed Tax Change Notice
A Proposed Tax Change Notice (Notice CP 2000) shows proposed changes to your income tax return. The proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to the Internal Revenue Service by employers, banks, businesses, and other payers. The Proposed Tax Change Notice also reflects any corrections the Internal Revenue Service made to your original return when it was processed. It is not a bill. The Proposed Tax Change Notice provides you the opportunity to disagree, partially agree, or agree with the proposed changes. The Proposed Tax Change Notice will provide an explanation of how to respond.
Proration
Method of dividing expenses within a household. Used to determine a liable taxpayer’s monthly expenses when some expenses are shared by other members of the household. Calculated by comparing the liable taxpayer’s gross monthly income to that of the non-liable parties living in the household. The percentage calculated is then applied to the shared expense(s) to determine the taxpayer’s share of expenses.
Quick Sale Value (QSV)
The amount that could be obtained if an asset is sold quickly, usually less than the fair market value. To calculate, the IRS typically discounts the fair market value by approximately 20%.
Reasonable Collection Potential (RCP)
The amount that could reasonably be collected from a taxpayer to pay towards their tax liability within the time allowed for by statute. The Reasonable Collection Potential is calculated by examining the net available income, equity in assets, retired debt, and dissipated assets.
Remaining Loan Balance
Amount remaining after all payments and credits have been applied.
Retired Debt
A taxpayer’s ability to increase future payments because a necessary expense may decrease or expire. For example, retired debt may occur if a taxpayer’s monthly vehicle payment expires, increasing the taxpayer’s net available income.
Returned Offer in Compromise
The IRS reviews an Offer in Compromise and determines that the taxpayer is either not compliant, has filed for bankruptcy, or does not provide the information the IRS requested within the required time period. When an Offer is returned, the IRS will keep the processing and deposit fees, and does not allow for appeal rights.
Reverse Mortgage
A reverse mortgage is a loan against a home in which the homeowner does not have to make a payment on the loan as long as they live in the house. In order to qualify for a reverse mortgage, a homeowner generally must be at least 62 years of age. Also, an income is not required to qualify for this type of mortgage. The home must have a very low mortgage balance or be owned free and clear.
The homeowner can receive the loan amount in different ways:
- A single lump sum amount
- A regular monthly amount
- An account that lets the homeowner(s) decide when and how much of the available amount is paid to them
- A combination of the above methods
- Generally, a reverse mortgage does not need to be paid back until the homeowner dies, sells the home or permanently moves out of the home. There are no monthly payments to be made.
Reverse Mortgages
A loan available to seniors and used to release the home equity in the property as a lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies or the home is sold.
Royalty
A payment received for the right to exploit a taxpayer’s ownership of natural resources or a taxpayer’s literary, musical, or artistic creation.
S-Corporation
A type of corporation that elects not to be taxed as a corporation. An S-corporation does not pay federal income tax directly, but instead passes its income or losses and other tax items on to its shareholders, much like a partnership. It provides the legal liability protection of a corporation to its shareholders while avoiding corporate double taxation.
Schedule A
When preparing a tax return, a taxpayer may reduce their taxable income by either opting to subtract a standardized deduction from their income, or to subtract specific tax deductible expenses from their income. If the taxpayer chooses to subtract specific tax deductible expenses, such as home mortgage interest, a percentage of medical expenses, etc. the taxpayer will use Schedule A to list and describe the itemized tax deductible expenses.
Schedule C
If a taxpayer receives income from self-employment, he or she may wish to offset their gross income by the expenses incurred to generate the income. By offsetting business expenses against gross business income the taxpayer will be able to reduce their taxable income, and consequently the overall taxes owed. Self employment income and expenses should be reported on Schedule C. If the taxpayer is operating the business as a corporation, partnership or limited liability company, the taxpayer may not use a schedule C, as business income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.
Schedule D
Almost all physical assets, whether it is for personal or investment purposes is considered a capital asset. If a taxpayer sells their physical asset for more than they paid for it (minus any applicable depreciation), the taxpayer will be deemed to have received a profit from the sale. This profit is called a capital gain. If the taxpayer had sold the property for less than what they paid for it )minus any applicable depreciation, the taxpayer will be deemed to have incurred a loss from the sale, or a capital loss. There are many rules which specify when a taxpayer may subtract capital losses from income. For a more detailed explanation of these rules, please contact your tax preparer or accountant. Capital gains and losses should be reported on Schedule D.
Schedule E
When a taxpayer has income or loss from a trust, estate, real estate rental, royalties, an S-Corporation, or Partnership, this income or loss should be reported on Schedule E. Income from an S-Corporaton or Partnership must be reported even if the taxpayer has not received the income. There are many rules which specify when a taxpayer may deduct Schedule E losses against other income. For a more detailed explanation of these rules, please contact your tax preparer or accountant.
Schedule F
Schedule F, is very similar to Schedule C, noted above, except that Schedule F is used to report farming income and expenses, for self employed farmers. If the taxpayer is operating the farm as either a corporation, partnership or limited liability company, Schedule F should not be used to report income and expenses. Farming income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.
Schedule SE
Self employed individuals are required to pay self employment tax on their net business income. Generally speaking, if a taxpayer expects to owe less than $1,000 in total taxes, the taxpayer may pay the self-employment tax when the return is due. If a taxpayer expects to owe more than $1,000, the taxpayer is required to pay estimated tax payments on at least a quarterly basis. Although quarterly payments are the norm, a taxpayer may wish to pay more frequently in order to avoid a large quarterly payment, or if the taxpayer needs to demonstrate that payments are currently being made. Schedule SE is used to calculate a taxpayer’s self-employment tax, so that proper estimated tax payments may be made for the year.
Secured Loan
A loan in which the borrower pledges an asset as collateral for the loan. In the event that the borrower defaults, the creditor takes possession of the asset and may sell the asset to satisfy the debt.
Self–Employed Individuals
Taxpayers who work for themselves. They decide when, how, and where to work, they obtain their own jobs or sales, pay their own expenses, and receive social security and Medicare coverage through payment of self–employment tax.
Self–Employment Tax
The Social Security/Medicare tax paid by self–employed individuals.
Single
The filing status for an unmarried taxpayer who does not qualify for any other filing status.
Social Security Number
The taxpayer identification number for most Americans. A taxpayer must provide a taxpayer identification number for himself or herself and for each person for whom the taxpayer claims as an exemption or certain other tax benefits on the taxpayer’s tax return.
Sole Proprietorship
A type of business entity, which is owned and run by one individual and where there is no legal distinction between the owner and the business.
Statement of No Filing Requirement
A written statement, signed and dated by the taxpayer, that indicates that he/she did not earn enough income to require the filing of an income tax return. The State of No Filing Requirement is sometimes used to satisfy IRS attempts to get the taxpayer to file a tax return, even in lieu of no income being reported to it.
Streamlined Installment Agreement (SIA)
A monthly payment plan with the IRS that does not require the disclosure of financial information. A Streamlined Installment Agreement is available if (1) a taxpayer’s tax liability is less than $25,000, and (2) the monthly payment amount will pay the tax liability in no more than five (5) years or before the time for the IRS to collect expires. A Streamlined Installment Agreement does not require IRS managerial approval, so is much faster than other types of IRS tax debt resolutions.
Student Loan Payment
Payments made toward a federally secured loan used for qualified educational expenses.
Substitute for Return (SFR)
A formal way for the IRS to make an educated guess about how much a taxpayer may owe in taxes to the IRS for a particular year. The purpose is to arrive at a definite dollar amount of tax liability so that the IRS can begin collection efforts. One the tax liability is determined, the IRS issues a proposed assessment of taxes to the taxpayer. If the taxpayer does not respond to the proposed assessment, that assessment may become final. Once the assessment becomes final, the IRS can legally collect on the tax liability for a period of ten years.
Substitute For Returns
All individuals, and taxpaying entities, are required to file tax returns to calculate their own taxes. However, if a taxpayer fails to file a tax return, the Internal Revenue Service may file the return on behalf of the taxpayer. Prior to filing a substitute return, the Internal Revenue Service will request that the taxpayer voluntarily file the missing return(s). If the taxpayer has still not filed voluntarily, the Internal Revenue Service will prepare the substitute return. Usually the Internal Revenue Service will not file a substitute return until the return has been delinquent by two or more years.
When preparing the substitute return, the Internal Revenue Service will gather the income information reported to the taxpayer in the form of W-2’ and 1099’s. If the taxpayer is self employed or unusual circumstances are present, the Internal Revenue Service may also base the return or bank statements, ledger sheets, the standard of living of the taxpayer, or any other information which suggests the taxpayer’s income.
After determining the taxpayer’s income, the Internal Revenue Service will often prepare the return in a light least favorable to the taxpayer. For example, a 1040 filer would be filed as single or married filing separate, with no dependents or itemized deductions. If the taxpayer had also had self-employment income, the Schedule C would reflect business income, but no expenses. Often the substitute return reflects a much higher tax than what the taxpayer would have been assessed, had the taxpayer filed their own return.
Summons
An investigative tool similar to a subpoena that compels a taxpayer or third party to appear and provide financial information to the IRS
Tax Avoidance
Legal use of the tax system to one’s own advantage to reduce the amount of tax that is payable by means that are within the law.
Tax Evasion
Efforts to evade taxes by illegal means.
Tax Protestor
Someone who refuses to pay taxes by asserting constitutional, legal, or moral grounds.
Taxpayer Identification Number
For individuals, it is typically their social security number. For a business, it is the employer identification number. The IRS uses the tax identification number to identify each taxpayer or each taxpaying entity.
Term Life Insurance
A policy that provides coverage for a limited period of time. If the insured dies during the term of the policy, then the death benefit is paid to the beneficiary.
Tip Income
Gratuities received by a taxpayer for services rendered.
Tolling the Collection Statute Expiration Date
A doctrine which allows for the pausing or delaying of the running of the period set forth by a statute of limitations.
Transportation Expenses
The cost of transportation incurred by an employee or self–employed taxpayer in the course of business or employment. Deductible costs include the cost of operating the taxpayer’s auto, car rental fees, and taxi fares. Commuting expenses are not deductible.
Trust
Any arrangement whereby property is transferred with the intention that the trustee (person holding title to the property) administers the property for another’s benefit (beneficiary). A trust can be created for any purpose that is not illegal or against public policy. The trustee is under a duty to deal with the property for the economic benefit of the beneficiary.
Trust Fund Recovery Penalty (TFRP)
A tax law giving the IRS the power to assess unpaid payroll taxes against any and all persons responsible for administering payroll for a business that owes unpaid payroll taxes.
Underpayment Penalty
A penalty the IRS charges for not paying enough total estimated tax and withholding. To avoid underpayment penalties, pay either 100% of last year’s tax or 90% of this year’s tax in combined estimated and withholding tax payments.
Voluntary Compliance
The principle that U.S. taxpayers voluntarily comply with the tax laws and report their income and other taxed items honestly.
Wage Garnishment
A wage garnishment is a levy that the IRS has a right to issue to the employer of a taxpayer who owes the IRS money. The IRS must give proper notice to a taxpayer before it can actually issue the wage garnishment. Proper notice constitutes several form letters and culminates with a letter with an accompanying Final Notice of Levy. Once the notice has been sent to the taxpayer, the IRS can issue a wage garnishment after 30 days from the date of the letter. An employer is legally obligated to comply with the terms of the wage garnishment. However, if the taxpayer is no longer employed or, for some other reason, such as the employer does not owe the taxpayer any money, the employer does not have to honor the wage garnishment. If the taxpayer goes back to work for the employer, then the employer is re–obligated to honor the wage garnishment. Through the wage garnishment, the IRS is allowed to take all of a taxpayer’s wages up to a certain amount. The IRS gives the employer a chart that informs the employer of how much they need to send to the IRS. Frequently, the amount the IRS can garnish is significant. The wage garnishment is ongoing until the taxpayer contacts the IRS and is able to negotiate a release of the garnishment. The IRS will agree to release a wage garnishment in full if the taxpayer agrees to pay the liability in full, agrees to a payment plan, or can show that the garnishment is causing an economic hardship.
Whole Life Insurance
A life insurance policy is a policy that remains in force throughout the insured’s lifetime so long as the premiums are paid.