Tax Terms

Abatement: A reduction or elimination of tax, penalty, and/or interest.

Accrual Basis: A method of accounting where income is recorded when earned even if not yet received and expenses are recorded when incurred even if not yet paid.

Adjusted Gross Income (AGI): Gross income minus adjustments to income.

Allowable Living Expense: The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas.

Alternative Minimum Tax (AMT): Tax benefits can reduce a taxpayer’s regular amount of tax. The AMT sets a limit on those benefits. If the tax benefits reduce the total tax below the AMT limit, the taxpayer must pay the higher AMT.

Appeal: A request for an administrative review of an IRS collection determination or proposed adjustment by the IRS Office of Appeals. There a multiple appeal options available: Collection Due Process Hearing, Equivalent Hearing and Collection Appeals Program.

Audit: An examination of a tax return to determine if taxes are properly reported.

Automated Collection System (ACS): An IRS compliance operation that attempts to resolve tax delinquencies through use of correspondence and call centers to collect tax debts and secure un-filed tax returns.

Automated Substitute for Return Program (ASFR): ASFR is a key compliance program within the IRS, enforcing compliance for taxpayers who have not filed individual income tax returns.

Balance Sheet: A financial statement summarizing assets, liabilities, and owner equity.

Bank Deposits Analysis: An analysis of bank records to identify deposits and verify income reported against a tax return or other financial report. A bank deposit analysis is a common technique employed by the IRS during an audit.

Bank Levy: An administrative seizure of all funds held in a bank account to collect a tax delinquency.

Cash Basis: Method of accounting which records income when it is received and expenses when they are paid.

Chief Counsel: The Chief Counsel at the IRS is appointed by the President of the United States with advice and consent of the U.S. Senate and serves as the chief legal advisor to the IRS Commissioner.

Currently Not Collectible (CNC): A temporary deferral of the IRS’ effort to collect a delinquent tax.  Taxpayers who owe the IRS may have their account reported as Currently Not Collectible for a number of reasons; commonly this is placed on a taxpayers account when the taxpayer proves a financial hardship.

Circular 230: An IRS publication setting forth the rules governing practice before the Internal Revenue Service.

Collection Information Statement: A form the IRS uses to collect financial data from a taxpayer that owes taxes to help evaluate the taxpayer’s ability to pay the tax debt.

Dissipated Asset: An asset of any type that was disposed of and the value was not applied to taxes.

Estimated Tax Payments: A method of paying taxes on income that is not subject to withholding. Estimated tax payments are made to the IRS four times per year and there can be a penalty for not making sufficient estimated tax payments during the year.

Employer Identification Number (EIN): Used to identify a business entity. Most businesses need an EIN which can be applied for online at www.irs.gov.

Excise Tax: A tax on the manufacture, sale, or use of a commodity.

Exit Tax: A tax on the assets of U.S. Citizens who renounce their U.S. citizenship and long term residents who end their U.S. resident status when they are considered “covered expatriates.”

Enrolled Agent: A person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive test covering individual and business tax returns, or through experience as a former IRS employee.

FBAR:  Form 114 Report of Foreign Bank and Financial Accounts (FBAR) is required to be filed by taxpayers with a financial interest in or signatory authority over a foreign financial account. The IRS is tasked with enforcing FBAR filing requirements and can assess severe penalties for non-compliance. The IRS can even pursue criminal prosecution in some cases.

Foreign Account Tax Compliance Act (FATCA): Imposes reporting requirements on individual taxpayers holding specified foreign financial assets when the value of those assets exceeds specified. FACTA also imposes reporting requirements on participating foreign banks with U.S. depositors and withholding requirements on transactions with non-participating banks.

Foreign Tax Credit: A credit granted for foreign income taxes paid on foreign sourced income. The foreign tax credit is intended to provide relief from the burden of double taxation when foreign source income is taxed by both the United States and the foreign country.

Individual Taxpayer Identification Number (ITIN): An ITIN is a tax processing number issued by the IRS to individuals who do not have a Social Security number for the purpose of income tax filing. ITINs are for federal tax reporting only and are not intended to serve any other purpose.

Information Document Request: The IRS uses the Information Document Request, Form 4564, to request information and documents from taxpayers during an audit.

Installment Agreement: An agreement between the IRS and a taxpayer requiring monthly payments to resolve a tax delinquency in whole or in part. There are different types of Installment Agreements including the Streamlined Installment Agreement and Partial Pay Installment Agreement.

Intergovernmental Agreement (IGA): An agreement between the United States and another country for the exchange of banking data. The IRS is using IGAs as part of its implementation of FATCA.

Internal Revenue Manual (IRM): A compilation of IRS policies and procedures.

Lien: A legal claim against all your current and future property and rights to property. A federal tax lien automatically comes into existence if a tax debt is not paid within a specified time after receiving the first bill.

Levy: A legal seizure of property or rights to property to satisfy a tax debt.

National Research Program (NRP): NRP is a comprehensive effort by the IRS to measure compliance for different types of taxes and various sets of taxpayers. Under the NRP, the IRS will conduct studies, which include rigorous examinations of a sampling tax return in order to compile data on tax compliance.

Notice of Deficiency: A notice of deficiency, also called a “statutory notice of deficiency” or “90 day letter,” is a legal notice in which the IRS notifies a taxpayer of its determination to assess additional tax following certain types of tax examinations – income, estate, gift, and certain excise taxes. The notice of deficiency will also notify the taxpayer of the last date to petition the U.S. Tax Court to contest the IRS’ proposed assessment.

Notice of Federal Tax Lien: A public notice to creditors. It notifies them that there is a federal tax lien that attaches to all current and future property and rights to property.

Offer in Compromise (OIC): Allows qualifying taxpayers to settle their tax debts for less than the full amount owed. The three types of OICs are doubt as to collectability, doubt as to liability, and effective tax administration.

Offshore Voluntary Disclosure Program: An IRS program allowing taxpayers with unreported foreign financial accounts to come forward voluntarily and granted in exchange specified penalties substantially lower than the applicable civil and criminal penalties that would otherwise apply.

Partial Pay Installment Agreement (PPIA): An Installment Agreement that will not fully pay tax, interest, and penalty before the CSED resulting in payment of only partial payment of what is owed.

Penalty Appeals Program (PENAP): An appeal procedure applicable to certain assessed penalties.

Power of Attorney: A legal document that allows someone else to act on your behalf, in matters that you specify in the Power of Attorney document.

Practitioner Priority Service (PPS): A toll-free IRS telephone line designated for only tax practitioners. PPS is limited to tax practitioners (individuals and businesses) who provide tax advice, prepare income taxes or act on the taxpayer’s behalf and who are calling in regards to an account-related issue before the IRS. This includes, but is not limited to, preparing and filing documents or corresponding and communicating with the IRS regarding the tax matter(s).

Profit and Loss Statement: A financial statement that summarizes income and expenses of a business, showing the business’ net profit or net loss for a specified period of time.

Protest: A form of an administrative appeal to contest the findings of a tax examination.

Private Letter Ruling (PLR): A letter ruling, or private letter ruling (PLR), is the IRS’ response to a taxpayer’s request for guidance on the tax treatment of a specific scenario. PLRs are confidential and binding on the IRS with respect to the requesting taxpayer. However, the IRS publishes a redacted version of the PLR to provide guidance to similarly situated taxpayers seeking guidance.

Reasonable Collection Potential (RCP): Is the taxpayer’s ability to pay a tax delinquency. The RCP includes the value the IRS would realize from assets and future income minus basic living expenses.

Revenue Officer: An IRS employee who focuses on the collection of delinquent taxes and functions related to that work such as securing delinquent tax returns, conducting investigations, determining accuracy of assessed liabilities, assist with compliance programs, etc.

Revenue Agent: An IRS employee who examines and audits taxpayer records to determine the accuracy of tax returns.

Retired Debt: An expected decrease in allowable expenses, which increases a taxpayer’s ability to pay or reasonable collection potential. A common example of retired debt is a vehicle payment expiring within a relatively short period of time.

Streamlined Installment Agreement (SIA): An Installment agreement that can be established without disclosing financial information when the assessed balance owing is less than a specified threshold and the balance including accruals is paid within a specified period of time.

Summary of Taxpayer Contact: The IRS uses the Summary of Taxpayer Contact, Form 9297, to request information and documents from taxpayers that owe taxes. The items requested typically relate to unfiled tax returns and information necessary to help the IRS evaluate the taxpayer’s ability to pay delinquent taxes.

Summons: A summons legally compels a taxpayer or third party to meet with the IRS and provide information, documents, or testimony.

Tariff: A tax on goods imported from foreign countries.

Trust Fund Recovery Penalty (TFRP)A penalty against any responsible person required to collect and pay over certain types of taxes held in trust who willfully fails to do so. Most commonly the TFRP applies to the trust portion of employment taxes. The IRS can collect the unpaid TFRP sums directly from the responsible person’s assets and/or income.

U.S. Tax Court: The U.S. Tax Court is an Article I court of limited jurisdiction which is primarily to adjudicate tax deficiencies proposed by the IRS.

Whipsaw Assessment: Used when the subjects of the examination refuse to cooperate with the Service and the Service is unable to accurately determine the correct and agreed tax owed by each entity. The Service will issue notices of deficiency (one to the individuals, one to the business trust, and one to the family trust), taxing the same income to each entity.