Tax Glossary & Common IRS Tax Terminology

Tax Glossary & Common Tax Resolution Terms

tax glossaryProfessional Tax Resolution understands that the multitude of complex tax terms can be quite confusing. Please use the following tax glossary to reach a better understanding of common IRS terms.

In addition to this tax glossary, we have a comprehensive list of IRS phone numbers and IRS office information to help you reach the correct IRS office. However, prior to contacting the IRS regarding tax debt or a tax settlement, we strongly suggest you take advantage of our free consultation with a licensed CPA and former IRS manager.

Appeal   A request by a taxpayer for the review of a decision by the IRS or State Tax Agency when the taxpayer disagrees with the agency’s proposed action or judgment.

Amended Return   A correction to a previously filed return submitted using IRS Form 1040X. By law, a return can be amended within three years from the date of the filing of the original return or within two years from the date a tax was paid, whichever is later.

Audit   A process used by the IRS to verify the accuracy of a tax return by confirming specific items on the return. Two items commonly verified in an audit include the reporting of income and the use of deductions.

Automated Collection System   A computerized collection system used by the IRS to contact delinquent taxpayers by mail and/or telephone.

Back Taxes   Unpaid taxes due to tax returns that have not been filed or delinquent tax amounts owed for returns that have been filed.

Bankruptcy   A legal proceeding whereby an individual or business is relieved of debt incurred prior to the bankruptcy filing. The discharge of debt in a bankruptcy may or may not include the forgiveness of tax debt, including penalties and interest that have accrued on that debt.

Burden of Proof   A phrase referring to the responsibility and duty of each taxpayer to prove that their tax return is accurate.

Charitable Contribution   A cash or non-cash donation made to an organization that is exists for the benefit of the public. A tax deduction is allowed for such contributions when the recipient organization has received tax exempt status under section 501(c)(3)of the Internal Revenue Code.

Cancelled Debt   Debt that has been forgiven or written-off.  Since debt forgiveness financially benefits the taxpayer who receives it, the amount of the cancelled debt is considered to be taxable income.

Capital Gain   A net gain realized from the sale of property or assets including real estate, stocks, bonds, and mutual fund shares. A gain is classified as a short-term capital gain if the property or assets that produced it have been held for less than one year and as a long-term capital gain if they have been held for more than twelve months.

Capital Loss   A net loss realized from the sale of property or assets including real estate, stocks, bonds, and mutual fund shares. A loss is classified as a short-term capital loss if the property or assets that produced it have been held for less than one year and as a long-term capital loss if they have been held for more than twelve months.

Collateral Agreement   An agreement often secured by the IRS prior to the acceptance of an Offer in Compromise or some other tax resolution agreement that settles a tax debt for less than the full amount owed. A Collateral Agreement allows the IRS to collect funds in excess of the original tax settlement amount if a taxpayer’s financial situation improves significantly.

Correspondence Audit   An audit conducted entirely by mail. It is initiated with an official IRS Notice announcing to a taxpayer that their tax return has been selected for further examination. The notice will typically request that more information or documentation be submitted regarding certain specific items on the return. Most IRS audits are Correspondence Audits.

Deduction   An amount that is subtracted from taxable income to reduce that amount of income that is subject to tax.

Delinquent Tax Return   A tax return that is not submitted by the initial filing deadline or by a deadline established by filing an extension.

Dependent   A qualifying child or relative that can be claimed by a taxpayer as a dependency exemption on a tax return.

Depreciation   A deduction reflecting the gradual loss in value of business property beginning with the original cost of the property and continuing over its assigned tax life.

Earned Income   Taxable income received for working. Earned income includes wages, tips, long-term disability income, strike benefits, and income from self employment.

Estimated Tax   Tax payments that are made to cover a taxpayer’s projected tax liability for the current tax year when they have income, such as self-employment income, that is not subject to withholding.

Field Audit   An audit conducted by an IRS auditor at the taxpayer’s home or business. These audits are typically carried out by the top IRS auditors and are generally requested only when a serious discrepancy has been detected. They are usually requested only for individuals or businesses that have relatively high incomes.

Filing Status   An IRS classification that determines the amount of amount of a taxpayer’s standard deduction and their income tax rate.

Freedom of Information Act   A federal law that allows taxpayers to obtain and review their IRS files.  

Head of Household   A filing status available to an unmarried taxpayer who has at least one qualifying dependent and who has paid more than half of the cost of maintaining the household for at least half of the tax year. The head of household filing status carries a lower tax rate that that of a single taxpayer.

Innocent Spouse   A spouse who is not held responsible by the IRS or State Tax Agency for all or part of a tax liability established by the filing of a joint tax return. This designation is normally granted when a tax liability arises because one spouse omits income, improperly reports income, or reports improper deductions, unbeknownst the other spouse.

Installment Agreement   A payment plan negotiated with the IRS or State Tax Agency whereby a taxpayer agrees to pay a tax debt over a specified period of time rather than with a single lump-sum payment. The terms of an Installment Agreement normally depend on the amount of the tax liability together with the current and projected financial status of the taxpayer.

Lien   A claim by the IRS or State Tax Agency against any one of a taxpayer’s assets when the taxpayer has not paid, or made arrangements to pay, a tax debt. The lien gives the agency that issues it priority over other creditors with respect to the identified property.

Levy   The actual seizure of a taxpayer’s property by the IRS or State Tax Agency. A levy is normally exercised only after all previous attempts to collect a tax debt have been ignored.

Offer in Compromise   A tax settlement option that allows a taxpayer to settle a tax debt for less than the full amount owed.  Although the process of filing an Offer in Compromise is long and complicated and the qualification criteria are very specific, it is an excellent tax settlement option for a qualifying taxpayer because it allows for the resolution of all outstanding tax balances at once and the suspension of all collection activities while the offer is under consideration.

Office Audit   A face-to face audit done in the auditor’s office. Like the Correspondence Audit, it is initiated when the IRS issues a notice requesting that a taxpayer provide documentation to substantiate certain items on a tax return.

Net Operating Loss Carry Back   A tax relief option that allows a taxpayer to reduce an existing tax liability by applying net operating losses for the current fiscal year against a gain from a previous year.

Notice of Deficiency   A formal letter from the IRS informing a taxpayer of a tax deficiency and advising them of their appeal rights with the United States Tax Court. A Notice of Deficiency can be issued when no tax return has been filed but is most often sent when the tax amount shown on a submitted return is less than the actual amount owed according to IRS calculations.

Partial Payment Installment Agreement   A tax settlement option that allow a taxpayer to settle a tax debt for less than the full amount owed and to pay the balance of the settlement amount over a specified period of time.

Penalty   An amount assessed by the IRS or State Tax Agency for failure to file a tax return by the filing deadline or failure to pay the tax amount due as shown on a tax return that has been filed. Both types of penalties are based on the tax amount due and are calculated from the due date of the return.

Penalty Abatement   The reduction or elimination of a tax penalty by the IRS or State Tax Agency when the circumstances are such that a taxpayer has acted in a reasonable and prudent manner and yet, because of circumstances beyond their control, was unable to meet their tax debt obligations.

Reasonable Cause   A determination made by the IRS to excuse late filing and late payment penalties when a taxpayer can show that they had a valid reason for not filing a return or making a tax payment.

Reasonable Collection Potential   An amount calculated by the IRS which takes into account a taxpayer’s income and assets. This amount is often used as the minimum amount the IRS will accept in any type of tax settlement proposal.

Statute of Limitations   Laws that put time limits on various tax-related actions. The Statute of Limitations imposed on the IRS for collecting a tax liability together with any interest and penalties that have accrued on the liability is 10 years from the date the tax was assessed. The Statute of Limitations for auditing a tax return is three years from the filing deadline for the return.

Substitute for Return   A return prepared by the IRS or State Tax Agency when one has not been filed. These agency-generated returns use only income statements and mortgage interest and omit all possible credits and deductions that would result in tax savings for the taxpayer.

Tax Credit   A tax incentive provided by the government to stimulate demand for a certain product or industry. There have been recent tax incentives for housing and energy efficient vehicles and appliances. A tax credit directly reduces the amount of tax a taxpayer is liable for.

Taxpayer Advocate Service   An independent organization within the IRS that exists for the purpose of helping taxpayers resolve problems.

Trust Fund Recovery Penalty   A harsh penalty imposed when a business fails to meet its payroll tax deadlines. The penalty is equal to 100 percent of the payroll tax balance and does not take into account the reason for the delinquency. Under the provisions of this penalty, blame can be assigned to anyone who was in any way responsible for the payroll tax debt.

Uncollectible   A temporary designation granted by the IRS or State Tax Agency when a taxpayer does not have sufficient assets and/or income to pay a tax debt. Once this status is granted, all collection activity by the collecting tax agency stops until the situation is reevaluated and it is determined that the taxpayer has the ability to pay the debt.

Wage Garnishment   An aggressive collection technique use by the IRS or State Tax Agency to collect a tax debt. The collecting tax agency directs an employer to deduct a predetermined amount from a delinquent taxpayer’s paycheck and to forward that amount to them.

If our tax glossary has helped you recognize your need for a tax resolution professional, call us at (877) 889-6527 or visit our consultation request page to set up a free consultation with a licensed tax expert.

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