An abatement of penalties is the removal of penalties from a taxpayer's account by the IRS or state tax agency. Requests for penalty abatement may be made for a specific years or across multiple years and must show reasonable cause. A thorough, detailed explanaiton of the reason the IRS should remove the penalty should accompany this request.

An amended tax return is filed when a previously filed tax return must be changed. Amended returns must be filed within three (3) years from the due date of the original return or the actual date of filing, whichever is sooner. A copy of the original return should accompany the amended return along with an explanation for the amendement request. Supporting documentation should also be included.

An appeal is a process whereby a taxpayer may contest an IRS decision. Appeals are made to the Appeals Division.

Back Taxes

Back taxes are taxes that were not paid by the due date or were under-reported on a previous tax return. The IRS can request back taxes regardless of whether the ommission was intentional or accidental. Tax agencies (i.e., the IRS and state tax agencies) may impose penalties and/or interest on back taxes.

Bankruptcy is a legal process that follows Federal guidelines. In a bankruptcy situation, a debtor may seek the opportunity to make a fresh start by requesting that certain debts be discharged. Certain debts may be assigned for repayment over time. Creditors may not contact the debtor during bankruptcy proceedings. There are three chapters of bankruptcy: Chapter 7 Bankruptcy, Chapter 11 Bankruptcy and Chapter 13 Bankruptcy.

See descriptions below:

Chapter 7: This chapter of the bankruptcy law provides for a full liquidation of non-exempt property to satisfy creditors. Chapter 7 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: Often refered to as the Wage Earners Repayment Plan, this chapter of the bankruptcy law provides for the partial payment of some debts and the partial discharge of some debts for an individual.

The burden of proof is a legal term referring to the requirement to provide information or evidence of the legitimacy of a claim. In virtually all back tax related issues, including offers in compromise, penalty abatement, etc., the burden of proof to substantiate claims or deductions fall to the taxpayer.

The Centralized Authorizaton File (CAF) is located in three of the ten IRS Service Centers. It is the repository for Form 2848 Power of Attorney and Form 8821 Tax Information Authorization. Individual authorized by these forms have a CAF number.

The Collection Division of the IRS is the branch tasked with collecting delinquent taxes and obtaining delinquent tax returns from individuals, businesses, corporations, trusts, and other entities that owe money to the IRS. The Service Center Collection Function, the Automated Collection Site, and the Field Collection Function are all part of the Collection Division. Revenue officers are tasked with collecting on any accounts that have a balance due.

The Collection Information Statemetn refers to the 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. The Internal Revenue Service uses these forms to evaluate each taxpayer for their ability to pay their debt in full through an installment agreement or to determine if there is a hardship situation.

The Collection Statue of Limitation comes from IRC Section 6503. It specifies a limit on the time period in which the Internal Revenue Service (IRS) may collect a tax debt. Under normal circumstances, this is 10 years from the date of assessment. It may be extended under specific circumstances.

Community property states include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, the law stipulates that a "community" is created by the marriage and holds that all property acquired during the marriage be held as "community property." This means that both the wife and the husband have an interest of one-half of the community's assets. The IRS may invoke this to serve a Notice of Levy on a wife's salary in connection to for her husband's separate tax liability.

Compliance refers to having all taxes paid up to date and all returns required to be filed on file with the IRS. Compliance is a requirement when submitting an Offer In Compromise, Installment Agreement request or request for Status 53 for Individuals. The business compliance requirement includes paying all taxes for the previous two quarters and filing all returns.

Currently Non-Collectible, also known as Status 53, Currently Uncollectible, or CNC, tells the IRS that a taxpayer does not have the resources to pay back taxes. It gives taxpayers time to acquire income needed to provide for themselves and their family without making monthly payments on their delinquent tax debt. The IRS will not attempt to collect the debt from taxpayers in this status.

Deductions are expenses subtracted from adjusted gross income when calculating taxable income. These may include state and local taxes paid, charitable gifts, and certain types of interest payments or business expenses.

A default is a failure to repay an outstanding debt according to the terms previously agreed upon.

A discharge of a Federal Line is authorized under the IRS Code. It is the process wherein a taxpayer or interested third party requests that a Federal tax lien be removed from a specific asset (property or other). The discharge may be granted if certain conditions are met.

The Earned Income Tax Credit is a tax credit given to qualified low-income wage earners, even if no income tax was withheld from their pay.

An Enrolled Agent (EA) is person who has earned the privilege of paracticing, that is representing taxpayers, befor ethe Internal Revenue Service. 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. They have technical expertise in the field of taxation and are authorized by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals. The Enrolled Agent profession dates back to 1884 when, after questionable claims had been presented for Civil War losses, Congress acted to regulate persons who represented citizens in their dealings. 

Equitable Relief is an option for a spouse that does not qualify for innocent spouse relief or separation of liability. To qualify they must show that it would be unfair to be held liable for the understatement or underpayment of taxes.

Estimated Tax Payments are tax payments made to IRS for the current tax year. Taxpayers who do not have withholding taken out of their paycheck or who owed more than $1,000 on the previous year's tax return are required to pay estimated tax payments to the IRS for the current year. Estimated payments allow taxpayers to remain in compliance with the payment demands of the IRS. These payments are due the 15th of April, June, and September of the current year and January of the following year. Taxpayers that are required to make ES payments need to be current with those payments in order to pursue an Offer in Compromise.

The FICA tax consists of Social Security (supplemental retirement income) tax,  payroll tax, and a Medicare (hospital insurance) tax. FICA tax is levied on employers, employees, and certain self-employed individuals. Some employers list this as some form of Old Age Survivors and Disability Insurance (OASDI).

A Federal Tax Deposit is a deposit made by an employer of employment taxes withheld (income tax withholding and FICA taxes). The deposit includes the employers share of the FICA. Deposits are made monthly or semi-weekly (depending on the amount of tax withheld) with an authorized commercial bank or Federal Reserve Bank.

The Federal Unemployment Tax Act (FUTA) refers to a Federal tax paid by employers to cover administrative costs for a state's unemployment compensation program for workers who have lost their jobs through no fault of their own. Employer pays FUTA tax. This tax is not deducted from the employees wages. It is an annual tax and is reported on Form 940.

A garnishment is a legal process where a creditor (the IRS in this case) obtains a judgment on a debt (IRS back taxes or other debt). In order to obtain full or partial payment they seize of a portion of the debtor's (a taxpayer in this case) assets such as wages, bank accounts, etc.

Each business that reports Federal Unemployment Tax Act (FUTA) tax based on the amount paid to each employee uses this form. For the Federal taxes, the tax applies to the first $7000 paid to each employee in a year after subtracting any exempt payments.

Businesses that withhold wages from their employees are required to file form 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.

A federal tax form for individuals and married couples who are required to file with the IRS. Form 1040EZ is for those with income less than $100,000 and interest income of less than $1,500. It cannot be used if the taxpayer received the advanced earned income credit. Form 1040PC is a paper tax return prepared on a computer using the approved IRS tax preparation software. 

This form is used for partnerships to report income and expenses for the previous tax year.

This is the tax return for incorporated businesses to report income and expenses for the previous tax year.

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 the year immediately following the earnings. The form will reflect state and federal taxes, social security, Medicare wages and tips withheld.

This form, completed by the employee, determines how much of the individuals paycheck is withheld for federal income taxes.

An innocent spouse is a spouse who unknowingly filed a joint tax return with a spouse who reported an understatement of taxes due. The unknowing or innocent spouse must prove that, at the time the tax return was signed, he/she did not know, or have reason to know, there was an understatement of tax. This request must also show that it would be unfair to hold the innocent spouse liable for the understatement of tax (and any penalties). To request innocent spouse relief, the taxpayer must file Form 8857.

An installment agreement is an agreement between the IRS and a taxpayer that allows the taxpayer to pay their delinquent debt over a pre-defined period of time.

Itemized deductions are expenses claimed on a tax return (typically on Schedule A), that are subtracted from the adjusted gross income to determine taxable income. Examples of itemized deductions include medical expenses, taxes paid (other than federal taxes), interest, charitable contributions, and employee business expenses.

A levy is a garnishment attached to taxpayer's wages, bank account, accounts receivable, social security income, etc.

A licensed taxpayer representative is a tax professionals who is licensed to practice before the IRS and solve your tax problems under the terms of Circular 230. They do not practice law, nor do they certify accounting practices. The LTR staff is the clients' link to the taxing authorities (IRS). These individuals use their experience and know-how to advocate on behalf of their clients.

A lien is placed against a taxpayer's social security number (SSN) to prevent a taxpayer from buying, selling or transferring property. A lien affects credit scores. If the taxpayer is preparing an OIC and it is accepted, the lien will be released once the OIC payment terms have been satisfied. Otherwise, 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, judgement lien creditors and other lenders.

A lien discharge is the removal of a lien on a specific piece of property to allow for its sale or disposal.

A lien release is issued by the 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.

A lien subordination is the temporary setting aside of a lien to allow for a sale or refinance.

A master file is an IRS file made up of data records and files. It includes 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 and process them through a pre-posting phase. They post and analyze transactions and produce output in the form of Refund data, Notice data, Reports, and information feeds to other entities.

Monthly disposable income is any positive amount remaining after the taxpayer's necessary monthly living expenses are subtracted from their monthly income. MDI is used to help calculate the taxpayers RCP (reasonable collection potential) for OIC (offer in compromise) purposes.

A notice of federal tax lien is the document indicating that a lien has been issued against a taxpayer's social security number to prevent them from purchasing, selling or transferring any property.

A notice of levy is a notice imposing and collecting a fine. This term typically refers to the document that is served on a third party that attaches wages, bank accounts, and other personal property.

An offer in compromise is an agreement between the IRS and taxpayer that allows the taxpayer's delinquent tax debt to be settled for less than the amount owed. The offered dollar amount is based on the taxpayers net worth plus their future income potential.

An offer in compromise resolves the taxpayer's tax debt problems. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:

1. Doubt as to Collectibility – The IRS doesn’t believe it can collect on the debt that is owed.
2. Doubt as to Liability – There’s doubt that you even owe the IRS.
3. Effective Tax Administration – You owe the tax and you can pay it but due to exceptional circumstances payment would cause an economic hardship or would be unfair and inequitable.

Power of Attorney is the legal form authorizing an individual (Certified Public Accountant, Enrolled Agent, attorney, etc.) to represent a taxpayer before the Internal Revenue Service.

A qualified domestic relations order is an order requesting that a state court allocate an interest in a qualified retirement plan to a former spouse. Payments made to the former spouse as the result of QDRO will not result in the taxpayer being assessed a penalty for early withdrawal from the plan. The former spouse will be taxed on the benefits when received, or the benefits can be rolled over tax free into an IRA or other qualified retirement plans.

The reasonable collection potential is the total realizable value of a taxpayer's assets plus any future income. The total is generally the minimum Offer in Compromise amount.

Total Income - Total Expenses = MDI (Monthly Disposable Income)
MDI x FIP Factor (Future Income Potential) = Future Income
Future Income + Equity in Assets = RCP

The recovery period is the period of time, normally in years, over which the basis (cost) of an item of property is recovered (by depreciation).

A refund is issued to an individual who has more tax withheld from their wages than what is owed on their tax return. This difference is referred to as an overpayment of taxes.

The refund statute expiration date stipulates that 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)).

Unincorporated business owners (sole proprietors) file taxes on a Schedule C attached to their Form 1040. The 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).

Each partner within the partnership uses the Schedule K-1 to report his or her share of the partnership's 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 is the social security and Medicare tax for people who work for themselves.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 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 continus to accure while the client is in Status 53.

A statute of limitation is a specific time period the IRS has before the expiration of certain actions (i.e. to collect a tax, make an assessment to an account, request a refund, file bankruptcy, etc.).

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 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). 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 only if the taxpayer filed previous returns with this info.

A debt is something owed, such as money, goods, or services. With regard to taxes, it is the amount owed to the IRS or state authority.

Tax exempt means not subject to tax. Normally this refers to charitable and other qualified organizations, but can also refer to specific exempt income of individuals.

Tax exemptions are the amount allowed by the tax code for a personal exemption (for an individual and spouse if filing a joint return) and for a dependency exemption (for a taxpayers dependents).

Tax laws refer to the body of laws created by Congressional action to govern 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 is 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 problems can refer to any type of problems taxpayers have with the IRS (federal) or state tax authority. These problems may include garnishments, levies, liens, back taxes and interest owed, unfiled tax returns, unpaid business taxes, unpaid self-employment taxes, unpaid Installment Agreements, etc.

A tax return is any federal, state, or local tax for (personal income tax, corporate income tax, employer quarterly tax return, excise tax return, estate tax return, partnership tax return, fiduciary tax return, or any other return) required by law to be filed to report income, taxes withheld, sales tax, etc.

Taxes are required payments of money to the government (federal, state or local). Tax money provides public goods and services for the community as a whole (roads, schools, law enforcement, public libraries, etc.).