Tax Term of the Week

Abatement of Penalties-An abatement of penalties is a request to the IRS to remove certain penalties that were added to the taxpayer's 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.

Further Reading:
Penalty & Interest Abatement
Why You Pay Interest

Tax Term of the Week

Garnishment- Legal process whereas a creditor (the IRS in this case) has obtained judgment on a debt (IRS back taxes or other debt) may obtain full or partial payment by seizure of a portion of a debtor's (taxpayer in this case) assets such as wages, bank account, etc. A garnishment is also commonly known as a levy.

TAX TERM OF THE WEEK

Amended Tax Return- This is a tax return filed to make changes to a previously filed tax return. A taxpayer has 3 years from the due date of the original return or the actual date of filing to file an amended return. When filing amended returns, you must provide a copy of the original return filed, along with an explanation and documentation as to what items need to be amended.

Tax Term of the Week

Tax Lien- A tax lien is NOT a levy!! A government tax lien gives the IRS a legal claim to your property as security or payment for your tax debt. Once a lien is filed, the IRS has claim against ALL your property, your accounts receivable if you own a business, and anything you acquire after the lien is filed. This means that if you go to liquefy any assets, the IRS has legal claim to that money. In this way, liens ensure that the IRS gets paid if your financial situation changes.

If you ignore the problem, the IRS may become more aggressive and place a levy on your account(s), even going as far as to seize your property. Additionally, tax liens can only be lifted when your tax debt is paid in full.

Tax Term of the Week

Exemptions- This is an amount that the IRS lets you subtract from your income to reflect all the people who count on your income. Exemptions can be claimed for yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any deductions, either standard or itemized, that you claim.

Tax Term of the Week

Tax Credits- Tax credits are much like credits you get from a store. After you figure your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. And a few even could give you a refund you weren’t expecting.

Tax Term of the Week

Substitute for Return- 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 Substitute for Return (SFR). When an 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 Term of the Week

AGI-"Adjusted Gross Income", AGI, is all the income you receive over the course of the year such as wages, interest, dividends and capital gains minus your deductions, things such as contributions to a qualified IRA, some business and medical expenses, moving costs and alimony payments. The adjusted gross income is the first step in calculating your final federal income tax bill.

Tax Term of the Week

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 IRS Form 1040. Schedule C allows taxpayers to deduct the expenses incurred during the tax year 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 taxpayer's 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.

Tax Term of the Week

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.

Tax Term of the Week

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 Term of the Week

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).

Tax Term of the Week

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 receive individual or business tax submissions in electronic format, process them through a pre-posting phase, post the transactions, analyze the transactions and produce output in the form of Refund data, Notice data, Reports, and information feeds to other entities.

Tax Term of the Week

Compliance- In order to be in full compliance, all taxes must be paid up to date and all returns required to file must be filed to date. Therefore, if submitting an OIC, IA or CNC (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.

Tax Term of the Week

IRS Form 1065- (Return for Business Partnership Income Return)-this form is for partnerships to report income and expenses for the previous tax year. For more information on form 1065, click here.

Tax Term of the Week

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.

Tax Term of the Week

Bankruptcy- This is a legal process under Federal statutes that provides for rehabilitation of a debtor through the discharge of certain debts or through a debt repayment plan over a certain period of time. Creditors cannot contact the debtor during the bankruptcy. They must wait until it is fully discharged.

There are three chapters of bankruptcy:

Chapter 7: This chapter of bankruptcy law provides for a full liquidation of an entity's non-exempt property to satisfy creditors, and discharges all dischargeable debts.

Chapter 11: This chapter of the bankruptcy law provides for a partial payment of some debts and the partial discharge of some debts belonging to a business.

Chapter 13: This chapter of the bankruptcy law provides for the partial payment of some debts and the partial discharge of some debts for an individual. It is also known as the Wage Earner's Repayment Plan since all creditors must receive a dividend.

Further Reading:
Tax Foreclosure

Tax Term of the Week

Statute of Limitations - 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).

The most common statute for tax debtors, the collections statute, is usually 10 years after the liabiliy is assessed. However, these terms can be extended due to such things as bankruptcy and failed Offer-In-Compromises.

Tax Term of the Week

Discharge of Federal Lien- Authorized under the IRS Code. 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:
The IRS has no interest in the property, the 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.

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As always, you can find an array of articles by perusing this site or by checking out my coworkers' individual sites:

IRS MIND

Tax Negotiation

Tax-Thoughts

TaxConsultant4U

BabyBoomer

And if you need the assistance of a tax resolution firm, seek out the best: Effectur, Inc.

Tax Term of the Week

Licensed Taxpayer Representative- an individual who is licensed to practice before the IRS and solve someone's tax problems under Circular 230. They do not practice law, nor do they certify accounting practices. The LTR is the client's representative before the taxing authorities (IRS). They use their years of experience and vast know-how to effectively advocate on their clients behalf.

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As always, you can find an array of articles by perusing this site or by checking out my coworkers' individual site:

IRS MIND

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And if you need the assistance of a tax resolution firm, seek out the best: Effectur, Inc.