Tax Glossary

Abatement of Penalties or Penalty Abatement

Use Form 843 to claim a refund or request an abatement of certain taxes, interest, penalties, fees, and additions to tax.

The IRS may provide administrative relief from a penalty that would otherwise be applicable under its First-Time Penalty Abatement policy. You may qualify for administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes when due under the First Time Penalty Abatement policy if the following are true:

• You didn’t previously have to file a return or you have no penalties for the 3 tax years prior to the tax year in which you received a penalty.
• You filed all currently required returns or filed an extension of time to file.
• You have paid, or arranged to pay, any tax due.

The failure-to-pay penalty will continue to accrue, until the tax is paid in full. It may be to your advantage to wait until you fully pay the tax due prior to requesting penalty relief under the IRS’s first time penalty abatement policy.

Amended Tax Return

If you discover an error after filing your return, you may need to amend your return. Do file an amended return if there’s a change in your filing status, income, deductions, or credits. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, Form 1040A, Form 1040EZ, Form 1040NR, Form 1040NR-EZ, or to change amounts previously adjusted by the IRS. You can also use Form 1040X to make a claim for a carryback due to a loss or unused credit; however, you may also be able to use Form 1045, Application for Tentative Refund, instead of Form 1040X.

Appeals

Because people sometimes disagree on tax matters, IRS has an appeal system. Most differences can be settled within this system without going to court. Reasons for disagreeing must come within the scope of tax laws, however. For example, an appeal of a case cannot be based only on moral, religious, political, constitutional, conscientious, or similar grounds. The tax decision reached by the examiner may be appealed to a local appeals office, which is separate and independent of the IRS Office that conducted the examination.  An appeals office is the only level of appeal within the IRS.  Conferences with appeals office personnel may be conducted in person, through correspondence, or by telephone with the taxpayer or its authorized representative

Audit

An IRS audit is a review/examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.

Selection for an audit does not always suggest there’s a problem. The IRS uses several different methods:

• Random selection and computer screening – sometimes returns are selected based solely on a statistical formula. The IRS can compare your tax return against “norms” for similar returns. The IRS develops these “norms” from audits of a statistically valid random sample of returns, as part of the National Research Program the IRS conducts. The IRS uses this program to update return selection information.
• Related examinations – the IRS may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.

The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office or at the taxpayer’s home, place of business, or accountant’s office. Remember, you will be contacted initially by mail. The IRS will provide all contact information and instructions in the letter you will receive.

Generally, the IRS can include returns filed within the last three years in an audit. If they identify a substantial error, they may add additional years. They usually don’t go back more than the last six years.

The length varies depending on the type of audit; the complexity of the issues; the availability of information requested; the availability of both parties for scheduling meetings; and your agreement or disagreement with the findings.

Automated Collection System (ACS) and Revenue Officer (RO)

When the IRS sends a bill to a taxpayer, if the taxpayer does not respond to the first notice or subsequent notices, the account becomes delinquent. Delinquent accounts may be turned over to the Automated Collection System (ACS) or to the Collection field function. ACS personnel will contact the taxpayer by telephone to attempt to work out an agreeable payment solution. If the delinquent account requires field contact, a Revenue Officer (RO) will try to resolve the account with the taxpayer.  If the taxpayer does not cooperate, the IRS may take enforced collection action. Enforcement action could include serving a notice of levy to attach taxpayer income or assets such as bank accounts. In some cases, the IRS will take enforcement action by seizing and selling property.

Bankruptcy

For individuals, the most common type of bankruptcy is a Chapter 13. Before you consider filing a Chapter 13 here are some things you should know:

• You must file all required tax returns for tax periods ending within four years of your bankruptcy filing.
• During your bankruptcy, you must continue to file, or get an extension of time to file, all required returns.
• During your bankruptcy case, you should pay all current taxes as they come due.
• Failure to file returns and/or pay current taxes during your bankruptcy may result in your case being dismissed.

Partnerships and corporations file bankruptcy under Chapter 7 or Chapter 11 of the bankruptcy code. Individuals may also file under Chapter 7 or Chapter 11.

Bookkeeping

Good records will help you monitor the progress of your business, prepare your financial statements, identify sources of income, keep track of deductible expenses, keep track of your basis in property, prepare your tax returns, and support items reported on your tax returns. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Example reporting includes:

• Accounts Receivable
• Accounts Payable
• Monthly Operating Statements
• Bank Reconciliations
• Balance Sheet
• Audit Trails
• Financial Graphs and Budgets
• Profit and Loss (P&L)

Centralized Authorization File (CAF)

A CAF number is a unique nine-digit identification number and is assigned the first time you file a third-party authorization with IRS. A letter is sent to you informing you of your assigned CAF number. The Centralized Authorization File (CAF) allows the input of codified additional acts authorized on a Form 2848, Line 5a. Taxpayers should be clear about additional acts authorized and to which representative it applies.

Collection Statute Expiration Date (CSED)

Generally, cases in which a tax has been assessed within the applicable statutory period of limitations on assessment, a proceeding in court to collect the tax may be commenced, or a levy to collect the tax may be made, within 10 years after the date of assessment.

Compliance and/or Compliance Check

Compliance means a taxpayer or business has all their taxes paid up to date and all returns required to file are filed to date. A Compliance Check is contacting the IRS to determine if a taxpayer or business is in Compliance.

Currently Not-Collectible (CNC)

A taxpayer may qualify for CNC status when the IRS recognizes you cannot pay the taxes due. It is a temporary delay in collection until your financial condition improves. The taxpayer may be required to fill out a financial information statement to prove financial hardship. A tax lien may be filed during this time and penalties and interest will continue to grow. However, no bank levies or wage garnishments will be issued during this temporary delay.

Employment Taxes

Employers must deposit and report employment taxes. Federal Income Tax, State Income Tax (if applicable), Social Security, Medicare Tax, Federal Unemployment Tax, Self-Employment Tax.  Most common forms are the 941 and 940.

Enrolled Agent (EA)

An EA is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns, or through experience as a former IRS employee.  Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years.

Innocent Spouse/Injured Spouse

By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse.) However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse (or former spouse.)

You must meet all the following conditions to qualify for innocent spouse relief.

• You filed a joint return which has an understatement of tax due to erroneous items, defined below, of your spouse (or former spouse).
• You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax.
• Considering all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
• You and your spouse (or former spouse) have not transferred property to one another as part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.

If you file a joint return and all or part of your refund is applied against your spouses’ past-due federal tax, state income tax, child or spousal support or federal nontax debt, such as a student loan, you may be entitled to injured spouse relief.

To be considered an injured spouse, you must have made and reported tax payments, such as federal income tax withheld from wages or estimated tax payments, or claimed a refundable tax credit, such as the earned income credit or additional child tax credit on the joint return, and not be legally obligated to pay the past-due amount.

If you filed a joint return and you’re not responsible for the debt, but you are entitled to a portion of the refund you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation. Do not use Form 8379 if you are claiming innocent spouse relief.

Installment Agreements (IA)

If a taxpayer is financially unable to pay his/her tax debt in full immediately, they can make monthly payments through an Installment Agreement (IA). The monthly payments are based on how much you owe and how much you can afford to pay each month. An IA is a great solution for taxpayers who have substantial disposable income each month which can allow then to make affordable monthly payments. Interest will continue to grow and there may be applications fees involved, but these pay plans can help you resolve your inability to fully pay your taxes in one payment.

Installment Agreement Guidelines:

• All tax returns must be filed.
• Full financial disclosure.
• Streamline IA: Pay plans set up quickly without full financial disclosure.
  • Individuals that owe $50,000 or less can qualify for a streamline IA.
  • Businesses that owe $25,000 or less can qualify for a streamline IA.

Levy

An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property. If you do not pay your taxes (or make arrangements to settle your debt), and the IRS determines that a levy is the next appropriate action, the IRS may levy any property or right to property you own or have an interest in.

• Bank Levy
  When the levy is on a bank account, the IRS provides a 21-day waiting period for complying with the levy. The waiting period is intended to allow you time to contact the IRS and arrange to pay the tax or notify the IRS of errors in the levy.

• Wage Garnishment
  If the IRS levies (seizes) your wages, part of your wages will be sent to the IRS each pay period until you make other arrangements to pay your overdue taxes, the amount of overdue taxes you owe is paid, or the levy is released.

Lien

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. A federal tax lien exists after the IRS assesses your liability and sends you a bill that explains how much you owe and neglect or refuse to fully pay the debt in time.

The IRS files a public document, the Notice of Federal Tax Lien, to alert creditors that the government has a legal right to your property.

When conditions are in the best interest of both the government and the taxpayer, other options for reducing the impact of a lien exist such as Discharge, Subordination, and/or Withdrawal.

Offer in Compromise (OIC)

The OIC is a program that allows a taxpayer to settle their delinquent taxes for less than the total amount the IRS claims they owe. The OIC is the most commonly used of all tax resolution programs. And more recently, new OIC guidelines have given even more opportunities to those who previously did not qualify for an OIC under previous program guidelines. These guidelines, when correctly applied, result in taxpayers reaching favorable settlements. If these guidelines are not applied properly, a taxpayer’s OIC may be rejected or, even worse, the taxpayer may overpay.

Offer in Compromise Programs use Form 656:

• Doubt as to Collectability
  A Doubt as to Collectability Offer in Compromise is negotiated based on a taxpayer’s inability to pay and considers the taxpayer’s current financial position including the taxpayer’s equity in assets.
• Doubt as to Liability
  A Doubt as to Liability Offer in Compromise allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, an opportunity to have their tax liabilities reconsidered.
• Effective Tax Administration (ETA)
  Effective Tax Administration Offer in Compromise is negotiated when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Substitute for Returns (SFR)

If you fail to file, the IRS may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. The IRS will send you a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment. You will have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, the IRS will proceed with their proposed assessment.

If the IRS files a substitute return, it is still in your best interest to file your own tax return to take advantage of any exemptions, credits and deductions you are entitled to receive. The IRS will generally adjust your account to reflect the correct figures.