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Glossary of Tax Terms

The IRS and people that work in the tax profession use vocabulary specific to taxes. As an aid to help you better understand your tax situation, we have provided you with a glossary of commonly used tax terms

Back Taxes
Back taxes are past due unpaid taxes assessed against a taxpayer by a level of government (i.e. Federal, State, Local). Back taxes are assessed either by not paying taxes when they become due, failing to report all income and taxes on a return, or failing to file a return. Internal Revenue Service (IRS) back taxes are past due federal income taxes. Back taxes may also be referred to as tax debt.
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Bank Levy
A bank levy is a legal seizure of the money in a taxpayer’s bank account to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt. After notice is given to the taxpayer, the IRS has the right to issue a bank levy on an account that bears the name of a taxpayer who owes the IRS money. Notice will be in the form of several letters with the final letter stating it is a Final Notice of Levy. 30 days from the letter date on the Final Notice of Levy, the IRS can issue a bank levy. The IRS sends the Notice of Levy to the taxpayer’s bank and the bank is forced to attach the levy to all accounts in the name of the taxpayer whether a sole or joint account. The bank is legally required to honor the levy. The levy prohibits the money on deposit in the account(s) from being withdrawn or accessed by anyone. The bank holds the funds for 21 days from the date of receipt of the levy. On the 21st day, the bank must send the held funds to the IRS.
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Bankruptcy
Bankruptcy is a legal procedure that results in debt relief through a process of liquidating assets or reorganizing debt. The release of the debt is generally referred to as a discharge. Bankruptcy laws are very specific about the discharge of taxes and not all types of taxes can be discharged. Therefore, it is possible to still have remaining tax debt after filing for bankruptcy.
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Collateral Agreement
A collateral agreement is a written agreement stating that the taxpayer has agreed to pay funds in addition to an agreed upon Office in Compromise. There are several types of collateral agreements. The most common type of collateral agreement is for future income. A future income collateral agreement usually provides 20% to 50% of the taxpayer’s annual income above ordinary and necessary living expenses.
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Collection Information Statement
The Collection Information Statement can also be referred to as forms 433-A, 433-B and 433-F. This form is used to provide financial information to the IRS regarding the taxpayer’s income, expenses and assets. The IRS uses the information on the Collection Information Statement to determine the proper resolution of your tax issues.

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Currently Non-Collectible Status
The IRS will place a taxpayer’s account in Currently Non-Collectible status if the taxpayer does not have the ability to pay the taxes owed in full, through an Installment Agreement or by way of an Offer in Compromise. The IRS does not pursue collection activity against the taxpayer when the taxpayer’s account is placed on Currently Non-Collectible status. During the time the taxpayer’s account is on a Currently Non-Collectible status the statue of limitations will continue to run on the tax liabilities. The account should remain on a Currently Non-Collectible status until the tax liabilities expire, unless the taxpayer’s financial situation changes for the better.
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Deed of Trust
A deed of trust is used in some states in place of a mortgage. A deed of trust is a document wherein a trustee holds specific financial interest in the title to real property as security for a loan.
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Dissipated Assets
Dissipated assets occur when the taxpayer sells, spends or disposes of an asset, after the tax liability accrues, in which the money could have been used to pay their tax liability. For example, an individual wins $15,000 from playing the state lottery and then spends the winnings on a vacation, new television set and/or clothes rather than paying the money toward their tax liability. In this situation the IRS may view the lottery winnings as a dissipated asset and will probably not accept an Offer in Compromise for less than $15,000. The IRS may declare that any dissipated assets should have been used to pay the tax debt and refuse to accept an offer for less than the amount of the dissipated asset. As a result of the dissipated asset, the IRS may refuse to negotiate with a taxpayer.
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Form 1040 – U.S. Individual income tax return
Every person receiving income in the prior year is required to declare their income by filing a tax return. Tax returns may be filed with one of four filing statuses depending on the tax payer’s individual/family situation. The different filing statuses are single, married filing jointly with a spouse, married filing separately or head of household. Short or easy versions of the form 1040 are forms 1040EZ and 1040A. When filing an annual tax return a taxpayer may have specific income and/or expense situations requiring additional IRS forms to be completed. Definitions for the more common IRS schedules that may be required to be filed are listed below:
Schedule A
Schedule B
Schedule C
Schedule D
Schedule E
Schedule F
Schedule SE

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Form 2848 - Power of Attorney
A Power of Attorney is permission to act on another parties’ behalf in a legal or business matter. The person permitting the other to act is the principal or granter (of the power), and the one permitted to act is the agent or attorney. In order to have an agent represent a taxpayer before the Internal Revenue Service (IRS) the taxpayer needs to complete an IRS Form 2848 - Power of Attorney. The individual the taxpayer permits or authorizes must be a person eligible to practice before the IRS (i.e. attorneys, enrolled agents, certified public accounts, etc.). The taxpayer’s authorization will allow that individual to receive and inspect confidential tax information and act on the taxpayer’s behalf when resolving issues with the IRS. *Note: Form 2848 – Power of Attorney will not be honored for any purpose other than representation before the IRS.
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Form 656 - Offer in Compromise
In order to submit an Offer in Compromise to the IRS a Form 656 must be completed. Form 656 is the only form the IRS will consider when reviewing an Offer in Compromise. An application fee and payment of $150 must be attached when submitting this form. All items on the Form 656 must be completely answered and typically a Collection Information Statement (Form 433-A or 433-B) is required. If the required forms are not completed properly or are incomplete the IRS will not accept the Offer in Compromise.
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IRS Automated Collection System (ACS)
The IRS Automated Collection System (ACS) is a computerized system which is linked to IRS employees to work the taxpayer’s case if someone answers the taxpayer’s phone. The ACS system is updated and downloaded every evening. Many taxpayers which have a back tax liability are monitored through ACS. ACS’ primary function is to collect on a back tax liability through full payment of the tax or through monthly installment agreement payments. If a taxpayer can demonstrate they are in a financial hardship, ACS will also place an account into a Currently Not Collectible status. ACS issues levies and garnishments in order to collect on the back tax liabilities. Our staff can effectively resolve an open case with any IRS agent by direct contact to with IRS. Based on the taxpayer’s situation, the resolution of a particular case may be a release of garnishment, the implementation of an installment agreement, or having the taxpayer’s account being placed into a Currently Not Collectable status.
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Lien Subordination
A lien is a form of security interest granted over property to secure the payment of debt until the debt is paid in full or satisfied. A tax lien is a lien placed on a taxpayer’s property by the IRS securing the tax debt. A tax lien does not relate specifically to a debt owed on that property. A lien subordination occurs when the IRS moves their claim or interest in the property to secondary or lesser position typically because the property is going to be sold or refinanced and money is going to be paid to the IRS.
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Notice of Deficiency
A Notice of Deficiency is also referred to as a 90-day letter. This notice tells the taxpayer of the tax the IRS has assessed plus the interest and penalties the taxpayer owes. A Notice of Deficiency is required by law and is to advise the taxpayer of their right to appeal to the U.S. Tax Court. The notice also states that the taxpayer must submit one of the following within 90 days: completed and signed Form 1040 including all schedules and forms with a cover letter, signed and dated Consent to Assessment and Collection Form, or a statement explaining why the taxpayer believes they are not required to file or information the taxpayer would like for the IRS to consider. If the notice is addressed to a person outside of the United States that taxpayer has 150 days to respond. The 90 or 150-day period cannot be suspended or extended once the notice is issued.
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Profit and Loss Statement
A profit and loss statement (also referred to as an income statement) is a financial statement used by businesses to determine the profitability. The profit or loss is calculated by gross revenue generated (i.e. income received, gross sales, etc.) minus expenses incurred to generate the revenue (i.e. wages paid, supplies purchased, utilities paid, etc.). The profit or loss is also referred to as net income.
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Proposed Tax Change Notice
A Proposed Tax Change Notice (Notice CP 2000) is sent by the IRS to a taxpayer because the information reported on their tax return does not match information that was reported to the IRS employers, banks, businesses, and other payers. Based on the differences stated in the letter, the IRS is proposing changes to the tax return. The notice contains a detailed explanation for each of the changes proposed and the reason for the change. The IRS provides a page for the taxpayer to agree with the changes or disagree with the proposed changes. If the taxpayer disagrees with the IRS’ proposed changes whether entirely or partially, they must submit documentation to the IRS substantiating their position. It is important for the taxpayer to know that this notice is not a bill. Once the taxpayer responds to the IRS by submitting documentation supporting their tax position the IRS will then recalculate taxes, interest and penalty owed (if any).
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Retired Debt
A retired debt is a debt that has been paid in full or satisfied. When the IRS is evaluating all information concerning an Offer in Compromise they will look at all allowable expenses and determine if any of those expenses will be paid off in the near future or satisfied. As a result of this evaluation the IRS may disregard the debt that will be paid off in a short period of time in order to calculate the taxpayer’s future ability to pay their tax liability. Many times during the taxpayer’s debt analysis the IRS will identify a debt that will be retiring soon and will either reject or significantly increase payments for an Offer in Compromise.
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Reverse Mortgage
A reverse mortgage is a special type of home loan in which the homeowner does not have to make a payment on the loan as long as they use the house as their principal residence. In order to qualify for a reverse mortgage, a homeowner must be at least 62 years of age or older, own the home outright, or have a low mortgage balance that can be paid off a closing. Also, an income is not required to qualify for this type of mortgage. The homeowner can receive the loan amount in different ways:
Tenure – equal monthly payments as long as one of the borrowers lives and continues to occupy the property as a principal residence. Term – equal monthly payments for a fixed period of months pre-determined.
Line of Credit – payments/installments paid out when requested until the line of credit is exhausted. Modified Tenure – combination of a line of credit and monthly payments for as long as one of the borrowers remains in the home.
Modified Term – combination of line of credit and monthly payments for a fixed period of months pre-determined by the borrower. Generally, a reverse mortgage does not need to be paid back until the homeowner dies, sells the home or permanently moves out of the home. There are no monthly payments to be made.
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Schedule A
Each tax year a taxpayer may reduce their taxable income by electing to subtract a standard deduction from their income, or to subtract specific itemized tax deductible expenses from their income. If the taxpayer chooses to deduct itemized expenses, such as home mortgage interest, real estate taxes, a percentage of medical expenses, etc. the taxpayer will use Schedule A to document and describe the itemized tax deductible expenses.
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Schedule B
Taxpayers should report any interest income from 1099-INT(s) and/or ordinary dividends from 1099-DIV(s) received on Schedule B. The Schedule B can be located on the back on the Schedule A used to itemize deductions.
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Schedule C
A Schedule C should be filed with a Form 1040 if a taxpayer receives income from self-employment. He or she may wish to offset gross income by the expenses paid to generate income. By subtracting business expenses from gross business income the taxpayer will be able to reduce their taxable income, hence reducing their tax liability. Both self-employment income and expenses are to be reported on Schedule C. If the taxpayer has formed a corporation, partnership or limited liability company, the business income and expenses should be reported on a Form 1120 or Form 1120S for a corporation, or a Form 1065 for a partnership or limited liability company.
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Schedule D
A Schedule D is used to report capital gains and losses. The most common use of this form is for the sale of stocks or property regardless of whether or not a gain or loss was incurred. In order to complete this form you will need the description of property, date of purchase, purchase cost, date of sale and the sales price. If a taxpayer sells their physical asset for more than then the purchase cost (less any applicable depreciation) the taxpayer will be deemed to have received a capital gain from the sale. If the taxpayer sells the property for less than the purchase cost (less any applicable depreciation) the taxpayer will have incurred a capital loss from the sale. The IRS has many rules associated with the treatment of capital losses. For a detailed explanation of how to treat a capital loss, contact your tax professional or expert.
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Schedule E
When a taxpayer has income or loss from real estate rental, royalties, an S-Corporation, a Partnership, a trust, or an estate that income or loss should be reported on Schedule E. Income from an S-Corporation or Partnership must be reported even if the taxpayer has not received the income. The IRS has many rules which apply to the treatment of Schedule E losses. For a detailed explanation of the rules associated with Schedule E losses, contact your tax professional or expert.
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Schedule F
A Schedule F is used by self-employed farmers to report farming income and expenses. If the taxpayer has formed a corporation, partnership or limited liability company, the farm income and expenses should be reported on a Form 1120 or Form 1120S for a corporation, or a Form 1065 for a partnership or limited liability company.
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Schedule SE
Schedule SE is used to calculate a taxpayer’s self-employment tax from their net business income (gross business income less business expenses). If a taxpayer anticipates owing less than $1,000 in total taxes, the self-employment tax can be paid by the taxpayer when the return is due. However, if a taxpayer anticipates owing more than $1,000, estimated tax payments should be made at least quarterly by the taxpayer. A taxpayer may choose to pay more frequently than quarterly so that they can avoid making a large quarterly payment, or so that they can demonstrate that payments are currently being made.
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Substitute For Returns
All individuals and entities are required to file annual tax returns with the IRS. If a taxpayer fails to file a tax return, the IRS may file a substitute return for the taxpayer based on the tax documents received from employers, banks, businesses, etc. The IRS will request that the taxpayer voluntarily file the missing return(s) before filing a substitute return. If the taxpayer does not file voluntarily, the IRS will prepare the substitute return(s). Usually the taxpayer must be delinquent by two or more years before the IRS will file a substitute return. In order to file the substitute return(s) the Internal Revenue Service will gather income information reported to the taxpayer by W-2 forms and Form 1099s. If the taxpayer is self employed or unusual circumstances are present, the IRS may also base the return on bank statements, ledger sheets, the standard of living of the taxpayer, or any other information which implies the taxpayer’s income. The IRS will often prepare substitute returns that are least favorable to the taxpayer reflecting a much higher tax liability than if the taxpayer would have voluntarily filed their tax return.
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Trust
A trust is an arrangement where property or assets are managed by one person (trustee) for the benefit of another person (beneficiary). A trust is governed by the terms of the trust documents and is also governed by local law. The trustee holds the title to the property and owes a fiduciary duty to the beneficiary.
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Wage Garnishment
A wage garnishment is a levy the IRS sends to an employer of a taxpayer who has a federal tax debt. The IRS must give proper notice to a taxpayer before it can actually issue the wage garnishment. Proper notice is several form letters ending with a letter of Final Notice of Levy attached. Once the proper notice has been issued to the taxpayer, the IRS can send a wage garnishment 30 days after the date of the letter of Final Notice of Levy. An employer is legally required to comply with the terms of the wage garnishment notice. In the wage garnishment notice the IRS provides the employer a chart or calculation method that informs the employer of how much they need to withhold from the employee/taxpayer and send to the IRS on a per pay period basis. If the taxpayer is no longer employed or for some other reason the employer does not owe the taxpayer money, the employer does not have to honor the garnishment and must notify the IRS. If the taxpayer returns to work for the employer, then the employer is again required to withhold money based on the terms of the garnishment. The wage garnishment is ongoing until the taxpayer pays the tax debt in full or can contact the IRS and negotiate a release of the garnishment. The IRS will agree to release a wage garnishment in full if the taxpayer agrees to pay the tax debt in full, agrees to a payment plan, or can show that the garnishment is causing an economic hardship. The employer can not stop garnishment deductions until they receive a notice from the IRS.
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