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Glossary

Abatement of Penalties - An abatement of penalties is a request to the IRS to remove certain penalties that were added to the taxpayers account for a particular year or multiple years. The taxpayer is required to have reasonable cause that is specific for each year when submitting this request and must be able to explain why this reason should grant the penalties to be removed from their account.

Amended Tax Return - This is a tax return filed to make changes to a previously filed tax return. A taxpayer has three years from the due date of the original return or the actual date of filing to file an amended return. If filing amended returns, you must have a copy of the original return filed, along with an explanation and documentation as to what items need to be amended.

Appeal - IRS administrative process for taxpayers to contest decisions within the IRS.  Also known as the Appeals Division.

Back Taxes - Taxes that have not been paid on the due date or were underreported either by accident or by intention on a past tax return. The tax authorities (IRS) can demand payment of back taxes plus the imposing of penalties and or interest.

Collection Division - That organizational arm of the IRS which has the mission of collecting delinquent taxes and securing delinquent tax returns for individuals, businesses, corporations, trusts, or any other entity that owes IRS money. The Service Center Collection Function, the Automated Collection Site, or the Field Collection Function is all part of the Collection Division. The revenue officer is required to effectively collect against any Balance Due accounts.

Collection Information Statement (CIS) - IRS standard financial statements required from individuals and/or self-employed individuals (Form 433-A) and businesses (Form 433-B) that owe IRS taxes and have indicated an inability to pay the liability. IRS uses these forms to determine the taxpayer?s ability to pay in full by installment agreement or a hardship situation.

Collection Statute of Limitation - IRC Section 6503 places an express limit on the time in which the IRS may collect a tax. Normally, the Collection Statute is 10 years from the date of assessment, but can be extended under certain situations.

Compliance - All taxes are paid up to date and all returns required to file are filed to date. Therefore, if submitting an OIC, IA or status 53 for an individual, the taxpayer must have all estimated tax payments paid to date and returns filed. If submitting an OIC or IA for a business, the taxpayer must have paid all taxes for the past two quarters and filed all returns.

Currently Non-Collectible - Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.

Discharge of Federal Lien - The process whereby the taxpayer or interested third party applies to have the federal tax lien removed from a specific piece of property or other asset. The discharge may be granted if:

·         IRS has no interest in the property,

·         IRS will receive the net proceeds from the sale of the asset, or

·         The taxpayer has equity in other assets equal to 3 times the amount of the tax liability.

Federal Insurance Contributions Act (FICA) - This is Social Security Tax. FICA consists of Social Security (supplemental retirement income) payroll tax and a Medicare (hospital insurance) tax. The tax is levied on employers, employees, and certain self-employed individuals. On some pay stubs it may be listed as some form of Old Age Survivors and Disability Insurance (OASDI).

Federal Tax Deposit (FTD) - An employer must deposit employment taxes withheld (income tax withholding and FICA taxes) including the employers share of the FICA, either monthly or semi-weekly (depending on the amount of tax withheld) with an authorized commercial bank or Federal Reserve Bank.

Federal Unemployment Tax Act (FUTA) - A Federal tax paid by employers that provide for the administrative costs of a state?s unemployment compensation program for workers who have lost their jobs through no fault of their own. Only the employer pays FUTA tax, it is not deducted from the employee?s wages. This annual tax is reported on Form 940.

Garnishment - Legal process whereas the IRS has enforces collection on a tax by seizure of debtor's assets such as wages, bank account, other income and assets.

IRS Form 1040- Individual Income Tax Return - Those individuals and married couples who are required to file with IRS must complete this return.  Form 1040EZ is for income less than $100,000, interest less than $1,500 and cannot be used if the taxpayer received the advanced earned income credit.

IRS Form 1065- Return for Business Partnership Income - Return for partnerships to report income and expenses for the previous tax year.

IRS Form 1120- Corporation Income Tax Return - Return for incorporated businesses to report income and expenses for the previous tax year.

IRS Form 940 - Annual Unemployment Tax Return - Each business reports Federal Unemployment Tax Act (FUTA) tax based on the amount paid to each employee. The tax applies to the first $7000 paid to each employee [Federal base = $7000, State base is different] in a year after subtracting any exempt payments. FUTA tax along with state unemployment systems provides payments of unemployment compensation to workers who have lost their jobs.

IRS Form 941- Quarterly tax return/ payments - Businesses that withhold wages from their employees are required to file 941-Employers Quarterly Federal Tax Return. These are filed each calendar quarter i.e. January thru March, filed April 30; April thru June, filed July 31; July thru September, filed October 31; and October thru December, filed January 31. Any business that pays more than $2500 in net taxes is required to make quarterly deposits to authorized financial institutions. Again, IRS is trying to aid businesses in being compliant with paying their tax.

IRS Form W-2 - Employers must provide employees with a statement of how much they earned in wages, tips and other compensation from the previous year in a W-2 form (by January 31 of each year). The form will reflect state and federal taxes, social security, Medicare wages and tips withheld.

IRS Form W-4 (Employee's Withholding Allowance Certificate) - This form, completed by the employee, determines how much of the individuals paycheck is withheld for federal income taxes.

Installment Agreement (IA) - Agreement between the IRS and taxpayer that allows the taxpayer to pay back taxes owed through a payment plan.

Levy - Garnishment attached to taxpayers wages, bank account, account receivables, social security income, or other income or asset.

Lien - Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will affect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. A Federal Tax Lien is formally recorded in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgment lien creditors and other lenders.

Lien Discharge - Removal of a lien on a specific piece of property to allow for its sale or disposal.

Lien Release - Issued by IRS when a tax debt is fully paid or if the taxpayer can prove they are suffering from a financial hardship and are unable to provide for their family's health and well being.

Master File - An IRS File which consists of a series of runs, data records and files that are in production with links to many of the other IRS systems. All businesses and individuals have an IRS Master File. Master files receives individual or business tax submissions in electronic format and processes them through a pre-posting phase, posts the transactions, analyzes the transactions and produces output in the form of Refund data, Notice data, Reports, and information feeds to other entities.

Notice of Federal Tax Lien - Whether a taxpayer does or does not own any property, IRS will issue a lien against their SSN to hinder them from purchasing, selling or transferring any property. A lien will affect their credit report. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. If not preparing an OIC, the lien will be released when the tax debt is either paid in full or the statute to collect the tax has expired. *The Internal Revenue Code of 1986 provides for a statutory lien of the Federal Government to be filed for a tax debt after a proper assessment, notice and demand, and a neglect or refusal to pay. Liens can be discharged or subordinated under special circumstances.  A Federal Tax Lien is formally recorded in the appropriate public records office (county recorder, MENSE, Secretary of State (UCC) or US District Court) in order to establish priority over creditors, judgment lien creditors and other lenders.

Notice of Levy - A notice imposing and collecting a fine. When used in conjunction with IRS, this normally refers to the document that is served on a third party that attaches to wages, bank accounts, and other personal property.

Offer In Compromise - Code Section 7122 authorized the Commissioner or his delegate the authority to compromise most tax liabilities. An OIC is an agreement between the IRS and taxpayer that allows the taxpayers delinquent tax debt to be compromise for less than the amount owed. An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances.

Power of Attorney (POA) - Taxpayer's authorization to have another person represent the taxpayer before the IRS in connection with a Federal tax matter. 

Refund Statute Expiration Date - A taxpayer may request a refund of an overpayment within three years from the time the return was filed or within two years from the time the tax was paid, whichever is later. If no return was filed by the taxpayer, the claim must be filed within two years from the time the tax was paid (IRC 6511(a)). 

Schedule C - Profit and Loss from Business - When a taxpayer has an unincorporated business and is a sole proprietor business owner, they are required to file taxes on Schedule C attached to their Form 1040. Schedule C allows taxpayers to deduct the expenses incurred during the tax year they conducted business from the gross income received. Schedule C taxpayers are required to pay half of their Self-Employment tax since they work for themselves. Any debt incurred by a sole proprietor will be recorded as a 1040 liability under the taxpayers SSN and can be found on their IMF (Individual Master File).  Taxpayers need to be able to prove the figures listed on the 1040, Schedule C.

Schedule K-1 - Partner's Share of Income, Credit, Deductions - Each partner within the partnership uses this Schedule K-1 to report his or her share of the partnerships income, credits, deductions, etc. This form is not filed with IRS, but is simply a record-keeping requirement. Even though partnerships are not generally subject to income tax, each individual partner is liable for tax on their share of the partnership income, whether or not it is distributed.

Self Employment Tax - Self-employment tax is the social security and Medicare tax for people who work for themselves. When an individual pays self-employment tax, they are contributing to their coverage under the social security system. This differs from wage earners who have social security taxes taken from their wages. An individual must pay self-employment tax if: 1) the net earnings from self-employment are $400 or more OR 2) Services are performed for a church as an employee and $108.28 or more is received.

Status 53 - Status 53 is also referred to as Currently Non-Collectible, Currently Uncollectible, or CNC. Status 53 allows taxpayers to make no monthly payments to their delinquent tax debt due to minimal income to provide for themselves and their family.  Status 53 is reviewed by the IRS on a regular basis and the client's status can be changed back to "Collectible" if there is any change in the client's financial situation. Penalties and interest continues to accrue while the client is in Status 53.

Statute of Limitation - The IRS has set specific time periods before expiration of certain actions, i.e. to collect a tax, make an assessment to an account, to request a refund, to file bankruptcy, etc.

Subordination of Federal Tax Lien - The legal process whereby the IRS will subordinate its Federal Tax Lien to a third party by temporarily setting aside the lien to enable a refinance or sale of a piece of property. Normally the IRS must determine that it is in its best interest to subordinate.

Substitute for Return (SFR) - If a taxpayer has not filed a return and the IRS feels it can collect from the money earned, an IRS Revenue Officer may file a SFR. When a SFR is filed, the agent lists all of the income reported to the IRS for that year, but only gives the taxpayer one exemption and only the standard deduction, i.e. nothing is itemized. Even if for the past 10 years the taxpayer has itemized, the IRS prepares the return in their favor. If the taxpayer has children the IRS tries to file the return based on the information from the previous years, i.e. married filing joint with 2 children. But IRS will only file this way if they have previous returns showing this info.

Tax Debt - Debt that is owed to the IRS or state authority.

Tax Laws - The body of law created by congressional action that governs the entire administrative process of the tax system. Officially known as Title 26, Unites States Code, it is more commonly known as the Internal Revenue Code or the Code. Interpretation of the Code begins with the IRS, and will ultimately end with the interpretation provided by the judicial system.

Tax Liability - The total tax bill that an individual or business owes after all withholding (individuals), Federal Tax Deposits (businesses), Estimated Tax Payments (individuals, sole proprietorships & corporations), and payments attached to the tax return are submitted and credited by the IRS.

Tax Problem - Tax problems can refer to any type of problems taxpayers are having with the IRS (federal) or state tax authority. These problems may include garnishments, levies, liens, back taxes and interests owed, haven't filed a tax return, haven't paid your business taxes, haven't paid your self-employment taxes, can't pay your Installment Agreements, and other tax issues.

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