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Glossary of Tax Terms


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Appeal

A request by a taxpayer for the review of a decision by the IRS or FTB when the taxpayer disagrees with the agency's proposed action or judgment.



Amended Return

A correction to a previously filed return submitted. 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.



Automated Collection System

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



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 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, and bonds. 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, and bonds. 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 collection money in excess of the original dollar 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. Many 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 from 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 usually carried out by the most experienced IRS auditors and are generally requested when a serious discrepancy has been detected. They are commonly requested for individuals or businesses that have relatively high incomes.



Filing Status

An IRS classification that determines the 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 than that of a single taxpayer.



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.



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 demanding 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 him or her of their appeal rights when 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 filed return is less than the actual amount owed according to IRS calculations.



Partial Payment Installment Agreement

A tax settlement option that allows 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 FTB when the circumstances are such that a taxpayer has acted in a reasonable and prudent manner and yet, because circumstances beyond their control, was unable to meet his or her 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 he or she had a valid reason for not filing a return or making a tax payment.



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 the penalty, blame can be assigned to anyone who was in any way responsible for the payroll tax debt.



Wage Garnishment

An aggressive collection technique use by the IRS or FTB 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.