Tax Help Definitions

Abatement A partial or complete cancellation of taxes, penalties or interest owed by a taxpayer.

ACS See Automated Collection System.

Automated collection System (ACS) A computerized collection process for IRS collectors to contact delinquent taxpayers by telephone and mail.

Collateral Agreement An agreement sometimes secured by the IRS prior to acceptance of an Offer in Compromise when the IRS wants to cover a future, reasonably possible event, such as a significant increase in income.

Collection Division Tax collectors who work out of the IRS Service Center, Automated Collection or District Office.

Collection Information Statement (IRS Forms 433-A, 433-B, and 433-F) IRS financial statements which require disclosure of personal information, particularly assets, income and expenses.

Correspondence Audit A correspondence audit is done by mail. The IRS sends you a letter either alleging you forgot some item of income or requests to see the documentation to substantiate a deduction you have taken on your tax return. The most common type is the CP2000 notice, a computer generated notice that you failed to report an item of income. These must be checked closely since the reporting agency, often time the Social Security Administration for W2’s, can make typographical errors. If you fail to properly dispute these errors the IRS is free to assess and collect the tax they believe is owed. And if ignored long enough, your only recourse is to pay the tax, penalty, and interest and then sue the IRS in court, an expensive proposition.

Current Market Value The amount you could reasonably expect to be paid for the asset if you sold it today. You can find out the value from realtors, used car dealers, publications, furniture dealers, or other experts on specific types of assets. You are advised to include o copy of any written estimate with your Collection Information Statement.

Delinquent Return A tax return not filed by the due date (April 15) or by the dates allowed through the IRS extension periods (August 15 and October 15).

Examination Official IRS term for an audit.

Expenses Not Generally Allowed Expenses not allowed such as claim tuition for private schools, public or private college expenses, charitable contributions, voluntary retirement contributions, payments on unsecured debts such as credit card bills, cable television charges and other similar expenses as necessary living expenses. These expenses can be allowed when you can prove that they are necessary for the health and welfare of you or your family or for the production of income.

Fair Market Value The price a willing buyer and seller of property would agree on as fair; neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.

Federally Authorized Only Enrolled Agents, CPA’s and Attorneys are allowed to represent taxpayers before the IRS. An unenrolled tax preparer can defend a client for whom he prepared a tax return during audit but cannot take it to appeals or represent the taxpayer before the collections division. Our members are all federally authorized to represent all taxpayers. We are not affiliated with nor are employees of the IRS. We work exclusively to provide you with the best representation possible in your controversies with the IRS.

Field & Office Audits Audits are an examination of the tax return you filed with the IRS. The examiner, typically a Revenue Agent, looks for undocumented income and unsubstantiated expenses or deductions. If the audit is performed in the IRS office, it is considered an office audit. These are common for wage earners. If the audit is conducted at the taxpayer’s home or place of business, these are field audits. For our clients, field audits are typically conducted in our offices. It is generally too disruptive to have an IRS auditor or examiner hanging around your office for several days.

Freedom of Information Act A federal law giving citizens the right to see governmental documents, including their IRS files.

Future Income The amount the IRS could collect from your future income by subtracting necessary living expenses from your monthly income over a set number of months. For a cash offer, you must offer what you could pay in monthly payments over forty-eight months (or the remainder of the ten-year statutory period for collection, whichever is less). For a short-term deferred offer, you must offer what you could pay in monthly payments over sixty months (or the remainder of the statutory period for collection, whichever is less). For a deferred payment offer, you must offer what you could pay in monthly payments during the remaining time we could legally receive payments.

Garnishments Garnishments are ongoing levies. Most common is the wage garnishment in which the IRS takes all but a pittance of your take home pay. The IRS would serve its garnishment on your employer. The employer is required to leave you a preset amount to live on (although you couldn’t live on the amount the IRS authorizes) and send the balance to the IRS toward your tax debt. The garnishment is one of the most effective tools the IRS has to get you to the bargaining table. And most employers hate garnishments since it creates a lot of extra work for their payroll department. Some employers have policies against having unresolved tax debts. We have a strong track record of getting the IRS to release the garnishment.

Installment Agreement The installment agreement is a payment plan between you and the IRS. The IRS has some flexibility regarding the payment amount as long as the debt will be paid off before the statute of limitations expire. If the amount due is small and you are offering large payments, it can be quite simple to get an installment agreement. The agreement comes with some strings attached, such as staying current on the filing and paying of future tax returns for as long as the agreement is in place. Penalties and interest will continue to be charged although the penalty rate is currently reduced during the installment agreement. The IRS charges a nominal fee to setup an installment agreement. For larger debts or those debts involving payroll tax issues the IRS may elect to assign a Revenue Officer (debt collector) to determine the maximum payment they can bet from you.

Jeopardy Assessment An expedited procedure by which the IRS imposes a tax liability without notifying you first. A jeopardy assessment is rare and used when the IRS believes the taxpayer is about to leave the country or hide assets.

Levies A levy is the taking of an asset. Most common is the bank levy. The IRS serves a levy notice on your bank for money held in your account. The account is frozen for an amount of money up to the amount owed to the IRS. If there is less in the account than you owe, the whole account is frozen for 21 days. During that time the original amount in the account is locked up. Any new money added is not part of the original levy. At the end of the 21 days the money is transferred to the IRS unless you have obtained a release from the IRS. Most levies are one-shot deals but the IRS can continue to get new levies on a daily basis. They generally don’t. Part of resolving tax debts is to obtain from the IRS a release of the levy.

Liens A lien is merely a statement alleging that you owe a tax debt. It is legally created anytime you owe taxes. It can show up on your credit report, and if the IRS locates property you own, it can be filed against the property. The most common example is a lien filed against your home. Once filed, you cannot sell the asset until the lien is paid off. For houses, the payoff is part of closing. And if you don’t have sufficient equity to payoff the mortgage(s) and lien, you can only sell your home by bringing your own money to closing.

Liquidation Value The amount the IRS can get from a distress sale of a taxpayer’s assets, usually a public auction (typically 70% of fair market value).

National Standards Allowances for food, clothing and other items, known as the National Standards, apply nationwide except for Alaska and Hawaii, which have their own tables. Taxpayers are allowed the total National Standards amount for their family size and income level, without questioning amounts actually spent.

Necessary Expenses The allowable payments you make to support you and your family’s health and welfare and/or the production of income. This expense allowance does not apply to business entities. Publication 1854, How to Prepare a Collection Information Statement (Form 433-A), explains the National Standard Expenses and gives the allowable amounts. We derive these amounts from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. We also use information from the Bureau of the Census to determine local expenses for housing, utilities, and transportation. Note:If the IRS determines that the facts and circumstances of your situation indicate that using the scheduled allowance of necessary expenses is inadequate, we will allow you an adequate means for providing basic living expenses. However, you must provide documentation that supports a determination that using national and local expense standards leaves you an inadequate means of providing for basic living expenses.

Notice of Deficiency An IRS notice informing a taxpayer that he or she owes the IRS the amount listed, which is the excess of the taxpayer’s correct tax liability for the taxable year over the amount of taxes already paid for such year.

Offer in Compromise (OIC) The “pennies on the dollar” program allows taxpayers to settle their tax debt for something less than full payment. The criteria is fairly rigid and was designed by Congress, not the IRS. It is a pure business decision. The IRS determines what it could liquidate you for and adds to that what it could collect over the next 48 months and arrives at a minimum amount it might accept. The OIC program is a great program for those that qualify. But don’t use it lightly since it stops the running of the statute of limitations on collections. Proper preparation of IRS financial statements is the key to a good OIC. And since the IRS is back-logged with Offers, patience is a virtue. But for those that qualify, this is a great program. Offers can be made with a lump sum payment or payments over time (much like an installment agreement). Acceptance by the IRS of an offer does come with strings attached, such as staying current with filing and paying for five years after the offer is accepted.

Penalties The IRS assesses two types of penalties on late filed income tax returns. The first and most expensive is the failure to file. Any tax return filed after the due date, including extensions, is considered late. The penalty is based upon the balance due with the tax return. The second penalty is the failure to pay. This is also based upon the amount due with the tax return and is calculated from the due date of the return, without regard to extensions. Some people erroneously believe that since they have a refund they don’t need to worry about filing on time. However, if the return is ever audited and the result is a balance due, the penalties will be based upon the due date of the return, even if the audit occurs 2 years later.

Pending, offer An offer pending starting with the date an authorized IRS official signs Form 656 and accepts your waiver of the statutory period of limitation, and remains pending until an authorized IRS official accepts, rejects or acknowledges withdrawal of the offer in writing.

Petition A form filed with the US . Tax Court requesting a hearing to contest a proposed IRS tax assessment.

Power of Attorney (IRS Form 2848) A form appointing a tax representative to deal with the IRS on your behalf

Protracted Installment Agreement An installment agreement that extends beyond the period allowed under IRS issued guidelines.

Quick Sale Value The amount that can be realized from the sale of a taxpayer’s assets when financial and other pressures force the taxpayer to sell quickly—typically in ninety days or less. This amount generally is less than current value, but may be equal to or higher, based on local circumstances—typically 80% of fair market value.

Realizable Value The quick sale value amount minus what you owe to a secured creditor. The creditor must have priority over a filed Notice of Federal Tax Lien before we allow a subtraction from the asset’s value.

Reasonable Cause There are a variety of reasons why taxpayers don’t file or pay. Divorce, job loss, death of family members, mental or physical diseases, drug and alcohol problems, dog ate the homework, etc. are many of the reasons why taxpayers fail to file or pay. The law allows for the abatement (removal) of penalties for reasonable cause. Obviously, it is very subjective.

Reasonable Collection Potential (RCP) The total realizable value of your assets plus your future income. The total is generally your minimum offer amount.

Reconsideration Audit reconsiderations are discretionary on the part of the IRS. However, we have been successful in convincing the IRS to reopen an audit where the taxpayers were poorly represented or new information is now available that was not available at the original audit.

Local Standards Maximum allowances for housing and utilities known as Local Standards, vary by location. Unlike the National Standards, taxpayers are allowed the amount actually spent, or the standard, whichever is less. There are separate allowance amounts for transportation expenses.

Running Out The IRS has 10 years to collect on back taxes unless the time period has been extended, either by consent of the taxpayer or by certain actions of the taxpayer. The most common reason for the statute of limitations to collect to have been extended is when the IRS has no ability to collect on the debt. Typically, this is because the taxpayer was out of the country, had made an Offer in Compromise, or was under the bankruptcy court. During the time the IRS could not legally collect the running of the 10-year statute of limitations is stopped (tolled). Knowing what has happened during the 10 years is critical to knowing when the IRS can no longer dun you for the debt. It is not uncommon for a tax debt to be removed because the time to collect has expired. The IRS is allowed to accept payments from you but they can’t dun you for any debt that is outside the statute of limitations for collections.

Statute of Limitation Legal limits imposed on the IRS for assessing and collecting taxes, and on the Justice Department for charging taxpayers with tax crimes. The current statute of limitation for collection is 10 years from the date of assessment. However, the statute can be extended by certain actions of the taxpayer.

Substitute for Return (SFR) The law allows the IRS to take the income reported to it under your social security number and file a tax return for you. If you were single the prior year, they will file you as single. If you were married the prior year, they will file a return for you as married filing separate. They will not take any itemized deductions you might be legible for nor will they deduct for any dependents you might be entitled for. It will be a very basic return designed to produce the highest amount of tax allowed to the IRS. It is rarely in your best interest. And since you didn’t file the return yourself, the year remains open (subject to assessment and collection) forever.

Taxpayer Advocate Service An IRS program that provides an independent system to assure that unresolved problems are promptly and fairly handled.

Trust Fund Recovery Penalty (formerly called 100-percent Penalty) A penalty incurred by the responsible person(s) of a business for failure to pay Withholding and Federal Insurance Contributions Act Taxes (Social Security taxes)

Uncollectible A temporary designation by the IRS meaning a taxpayer does not have significant assets or available income, at the present time, from which to satisfy an IRS debt in part or in full. This designation takes a case out of collection, until a taxpayer has an ability to pay.

Waiver Voluntarily surrendering a legal right, such as the right to have the IRS collection period on a delinquent tax debt expire at the end of the statutory time period. The IRS may require waivers in exchange.

More Tax Help, IRS News and Tax Relief Tips:

  1. Frequently Asked Tax Problem Questions
  2. Guide to Tax Resolution: Solving IRS Problems

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2 Responses to “Tax Help Definitions”

  1. Awesome post! Says:

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  2. Michael Says:


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