When facing a tax audit or IRS notification, or when simply seeking information about taxes, tax audits, and audit defense, the language can be confusing. To help clarify some of the terms and phrases, we’ve provided this glossary.
Form 1040, U.S. Individual Income Tax Return, an IRS form used by taxpayers to file their personal income taxes (see “Tax Return”). Most Businesses cannot use this form. Variations of the Form 1040 are the 1040A, 1040EZ, 1040NR, and 1040X. The1040A and 1040EZ are simplified versions of the Form 1040. The 1040X is a form used to amend a previously filed return (see “Amended Tax Return”).
Form 2848, Power of Attorney and Declaration of Representative, is the IRS form for appointing power of attorney (see “Power of Attorney”).
A common term describing the second notice (see “Second Notice”) from the IRS, called as such because the IRS issues a second notice in a correspondence audit (see “Correspondence Audit”) generally thirty days after the first notice was sent.
Form 4549, Income Tax Examination Changes, used by the IRS to recalculate the taxes due based on proposed IRS changes to a tax return. It is the form the taxpayer signs to conclude an audit when there is an amount due and the taxpayer agrees to the changes.
Form 886-A, Explanation of Items, the form used by the IRS after an examination to document their conclusions, or request additional information.
Form 8821, Tax Information Authorization, authorizes a representative of the taxpayer to inspect documentation or receive confidential information on behalf of the taxpayer. It does not authorize the representative to advocate a position or otherwise represent a taxpayer before the IRS. (Also see “Power of Attorney.”)
Abatement of Penalties
Some types of penalties proposed by the IRS can be waived if the circumstance that gave rise to the penalty had reasonable cause or was beyond the taxpayer’s control. Such a waiver is sometimes called an abatement of penalties if the waiver is granted after the penalty was imposed.
Provides reimbursement to an employee for business expenses incurred by the employee on behalf of a business. An accountable plan requires the individual to submit receipts or other records before the employer reimburses the expense. Example: An employee pays for a meal while traveling on business and then submits a receipt to the employer for reimbursement. Under this type of plan, expenses are not income to the individual, and are deductible expenses for the business.
The amount of basis (see “Basis”) in an asset or investment after tax-related adjustments for items such as depreciation deductions or capital expenditures, have been made.
Adjusted Gross Income (AGI)
Calculated when the IRS adds up gross taxable income and then subtracts certain adjustments. It is the starting point for calculating income tax liability.
Adjustment to Income
Certain items are subtracted from gross income to arrive at the adjusted gross income (see “Adjusted Gross Income”). The adjustments to income are found at the bottom of the first page of the Form 1040 (see “1040 (Form)”) and include IRA contributions, Alimony Paid, Moving Expenses, Student Loan Interest and other deductions.
Acronym for Adjusted Gross Income (See “Adjusted Gross Income”).
Alternative Minimum Tax (AMT)
A tax liability computation that adds back into adjusted gross income certain deductions, credits and other tax preference items that are allowed for calculating regular income tax liability. Its purpose is to ensure taxpayers do not escape income tax liability by claiming deductions in excess of certain thresholds established by Congress. If the tentative alternative minimum tax calculation exceeds the regular tax calculation, then the difference is known as the “Alternative Minimum Tax” or “AMT” and is added to regular tax liability.
Amended Tax Return
Any change to a tax return (see “Tax Return”) originally filed by a taxpayer and accepted by the IRS. A taxpayer may amend a federal income tax return by filing Form 1040X. The IRS may also make changes to the tax return (similar to amending returns) through examination processes.
The amount the taxpayer owes the IRS at the current time. This amount may include tax liability, penalties, and/or interest.
Acronym for the Alternative Minimum Tax. (See “Alternative Minimum Tax.”)
Acronym for an Appeals Officer. (See “Appeals Officer.”)
A request to reconsider a determination made by the IRS in the examination process. Generally, an appeal request is made if the taxpayer believes that the tax code has been followed in the preparation of the tax return and documentation or other substantiation exists to support any adjustments or deductions claimed.
Appeals Officer (AO)
A representative of the tax court. Most tax court cases go first to an appeals officer for evaluation before being forwarded to trial. (See “Pre-trial Conference.”)
A thorough examination of a tax return or certain items on a tax return by the IRS (or another state or local taxing agency) to ensure accuracy. In an audit, the IRS may require proof that the taxpayer correctly stated the filing status, dependent(s), taxable income, adjustments, deductions, credits, etc. The IRS may also conduct its own investigation of a taxpayer’s return and other records such as bank statements. If the IRS determines there is a discrepancy between the tax return filed and their examination they may assess additional taxes, penalties, and interest. In some instances, criminal charges may also be filed through the U.S. Attorney’s office, although this is uncommon.
A notification from the IRS that a tax return has been selected for audit. Generally, the letter will outline what year(s) the IRS is examining, what item(s) on the return is(are) being examined, and how the examination will take place. The IRS does not generally use the word “audit” in these letters.
Request for the IRS to reconsider a previously made examination determination after an audit has been closed and a final tax assessment issued. The IRS is not under obligation to grant an Audit Reconsideration, but may do so if the taxpayer has additional substantiation not previously considered. Other reasons to request reconsideration would be if the taxpayer was not present at the examination or if the taxpayer had moved and did not receive IRS correspondence.
If a taxpayer is audited, the IRS requests the taxpayer to respond to the audit notice by appearing at an examination or responding to the audit notice by mailing documentation. With power of attorney (see “Power of Attorney”) from the taxpayer, a tax professional may appear and advocate for the taxpayer either by personal appearance or through correspondence. Such professionals may include tax attorneys, CPA’s, or Enrolled Agents. (See “Certified Public Accountant” or “Enrolled Agent.”)
Acronym for the Automated Under Reporter division of the IRS. (See “Automated Under Reporter”)
Automated Under Reporter (AUR)
The division of the IRS that issues notices (see “Notice”) and handles the responses to those notices.
Another term for any calculated additional tax liability on a previously filed return or unpaid taxes owed the IRS.
A legal process entered into when debts exceed the ability of an individual or entity to pay. A bankruptcy allows an individual to eliminate or reorganize the debt (work out an acceptable payment plan). Bankruptcies are generally conducted under Title 11 of the United States Code, but may take different processes known as Chapters. Chapter 7 allows for the liquidation of certain property to satisfy creditors and discharges those types of debts that may be discharged. Chapter 13 provides for partial payment and equitable discharge of debts. Chapter 11 applies only to businesses. Federal income taxes may be discharged or forgiven through bankruptcy when certain requirements are met.
Basis is the amount of investment in an asset for tax purposes. The basis is used to figure depreciation, amortization, depletion, casualty losses, any gain or loss on the sale, and exchange or other disposition of the property. Basis should be adjusted to account for certain events while the asset is owned. For example, if an improvement is made to the asset that adds to the value, then the basis would be increased.
Basis in a retirement plan is any amount of after-tax money previously invested in the plan. After-tax money is money on which income taxes have been paid, and would not include pre-tax payroll deductions or contributions that are adjustments to income (see “Adjustments to Income”) on the tax return. Examples of contributions without basis would be contributions made to deductible IRA’s or 401(k) contributions not included in W-2 wages.
Acronym for bankruptcy. (See “Bankruptcy.”)
Burden of Proof
A legal term describing who the responsibility to substantiate or prove a position. From a tax standpoint, when the IRS audits a return, it is the taxpayer who must be able to support or “prove” the amounts included on the return. Thus, the burden of proof rests on the taxpayer.
Income derived from the operation of a business. Generally, if a taxpayer provides goods or services, any non-employee income (see “Self Employment”) or value derived from providing those goods or services is considered business income.
C Corporation (C Corp)
A form of business organization, a C Corporation is a separate legal entity. A C Corporation issues stock, and profits are disbursed to the shareholders through dividends. This results in what is considered double taxation (the C Corporation is taxed on the income and the shareholder is taxed on the dividend). As a result, C Corporations are not often the preferred organization for small businesses.
The use of the term “Capital Asset” varies somewhat between the tax world and other accounting or financial disciplines. From a tax standpoint, a capital asset is any asset owned that is personal property or investment property. It is usually subject to capital gain and loss when sold.
Any gain realized on the sale of a capital asset. (See “Capital Asset.”) A taxpayer may also have capital gains realized when an investment (mutual fund, stock, bond, etc) in which he or she is a shareholder is sold or—in the case of a mutual fund—has capital gains within the fund. These gains are classified as either short-term or long-term depending on the holding period.
Any loss realized on the sale of a capital asset. (See “Capital Asset.”) Capital losses on the sale of personal use property are nondeductible losses. In addition, capital losses on personal returns are generally limited to $3,000 in aggregate per year.
Certified Public Accountant (CPA)
An accountant certified by a state examining board as having fulfilled the requirements of state law to be a certified public accountant. Certified Public Accountants may prepare taxes and advocate for taxpayers before the IRS.
Tax deductible donations made to specific IRS recognized charitable organizations.
Organizations to which the IRS will allow tax deductible donations to be made. Such organizations include 501(c)(3) corporations, schools, youth organizations, etc. It does not include political or lobby organizations, nor organizations which are employment-related, such as unions.
Property acquired while two individuals are married and domiciled in a community property state or property that cannot be identified as separate. Both spouses have an undivided half-interest in such property. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Stands for the letters found on different types of IRS correspondences. These letters often appear in front of the numbers of computer generated notices or advisements. For example: A CP24 notice (see “Notice”) advises taxpayers that the IRS has changed the amount of refund.
An audit the IRS conducts without requiring a meeting with the taxpayer(s). (See also “Desk Audit” and “Field Audit.”)
Examination conducted as the result of a correspondence audit. (See “Correspondence Audit.”)
Acronym for computer paragraph. (See “Computer Paragraph.”)
Acronym for Certified Public Accountant. (See “Certified Public Accountant (CPA).”)
A calculated amount allowed as a subtraction to tax liability (see “Non-Refundable Credit”) or as an additional tax payment (see “Refundable Credit” and “Payment”). Credits are often more advantageous from a tax standpoint than deductions, since they are taken into account after the tax liability has been calculated.
Documents received from the Tax Court after a decision has been made, either by stipulation or decision.
Reductions to taxable income that may be included on a tax return. Generally, deductions reduce taxable income before tax liability is calculated. However, in some years the deductible amount is subject to phase-out and some expenses are not deductions on a return unless the expenses exceed a certain “floor.” For example, only the total out of pocket employee expenses that are greater than 2% of the adjusted gross income would be deductible. Also, many types of deductions are not taken into consideration when calculating the alternative minimum tax. (See “Alternative Minimum Tax.”)
Department of the Treasury
The department of the United States government under the Executive Branch of which the IRS is a part.
A person who qualifies a taxpayer to claim an exemption (see “Exemption”) on a tax return. Other tax benefits may be available or enhanced by having dependent(s). The IRS (see “Internal Revenue Service”) has strict guidelines and rules on whom a taxpayer may claim as a dependent. To be a dependent on a tax return the person must be either a “Qualifying Child” or a “Qualifying Relative” of the taxpayer or spouse. In addition, a taxpayer or spouse may not be a dependent of each other or anyone else. Other dependency rules or determinations may apply in certain circumstances.
A calculated amount allowed as a business expense to account for wear, tear and decline in value of tangible assets over time.
An audit (see “Audit”) in which the IRS, in order to conduct the audit, requires the presence of the taxpayers or their representatives.
A business organization or form treated as not existing separately from its owner for purposes of income tax. Example: A taxpayer and spouse may form an LLC in a community property state and file as a joint venture sole proprietorship. The partnership between the husband and wife (which would have been filed on a Form 1065 and Schedule K-1’s issued) is a “disregarded entity” and the tax treatment is that of a sole proprietorship (filed on a Schedule C with the Form 1040).
An amount or item given to a recognized charitable organization for which, generally, no goods or services are expected in return.
The date by which the IRS expects to receive returns, forms, documentation, or similar documents. Due dates may be set by either statute or IRS regulations.
Acronym for an Enrolled Agent. (See “Enrolled Agent.”)
Acronym for unreimbursed Employee Business Expenses. (See “Employee Business Expenses.”)
Employee Business Expenses
Expenses incurred by an employee as a result of—or in the pursuit of—employment. Also called job-related expenses. In order to be deductible, these expenses have to be ordinary and necessary for performing the job, and they must also be incurred for the convenience of the employer.
Generally, a person is considered employed as an employee when they are paid wages or salary and the employer controls to a large degree the taxpayer’s actions or the taxpayer acts as an agent for the employer. When there is a dispute over whether a person is employed or self-employed (see “Self-Employed”), the IRS applies a common law test and looks at the totality of all the facts and circumstances to make the determination. This determination has an impact on who is responsible for employment taxes. (See “FICA Taxes,” “FUTA Taxes,” and “Self-Employment Tax.”)
An Enrolled Agent is a federally-authorized tax practitioner with expertise in the field of taxation and who is authorized by the U.S. Department of the Treasury (see “Department of the Treasury”) to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.
A word often used for audit. (See “Audit.”)
The report issued by the IRS explaining its findings, proposed changes made to a filed return, and the reasons for making these changes. It is often accompanied with a Form 886-A, “Explanation of Items,” and Form 4549, “Income Tax Examination Changes.” If the IRS has conducted an examination and concluded that no changes are necessary to the final return it will usually issue a “No Change” letter. (See “No Change Letter.”)
A word used to describe the IRS agent(s) who conducts a tax return examination.
A general name for a tax that is levied on certain goods and commodities which are produced and sold within a country or on licenses the government grants to conduct certain activities.
A base amount exempt from income taxes. This amount is calculated based on the number of exemptions and subtracted from adjusted gross income after the Standard Deduction or Itemized Deductions are subtracted (see “Adjusted Gross Income (AGI)”) before income tax liability is calculated. Usually, exemptions are based on filing status and number of dependents, with one exemption being allowed per taxpayer, spouse, and dependent.
An audit or examination during which the IRS decides to audit other areas of the tax return or tax years not specified in the original audit letter. (See “Audit Letter.”)
Time granted by the IRS to postpone a due date. (See “Due Date.”) Generally, extensions must be requested, but some are automatic depending on the taxpayer’s circumstances.
Acronym for “Federal Insurance Contributions Act.” Taxes collected for the Social Security and Medicare programs.
An audit conducted wherein the IRS agent will visit the taxpayers or their representative at the taxpayers’ home or place of business.
The category that a taxpayer qualifies for and selects on a tax return. Examples include “Single,” “Married Filing Joint,” “Head of Household,” etc.
The first audit letter or notice (see “Audit Letter” and “Notice”) received by the taxpayer.
Fiscal Tax Year
A tax accounting period (see “Tax Year”) other than a calendar year that ends on the last day of any month other than December. Generally, a tax year is twelve months in duration, although short years may be encountered when a business entity starts or ends.
Forms are standardized documents approved by the IRS. They may be attached to a return or they may be notifications from either the taxpayer to the IRS or vice versa. Generally, forms, when properly executed, are considered legal documents. IRS forms are numbered or lettered, and are often referenced by their form or schedule number.
Acronym for “Federal Unemployment Tax Act.” These taxes help provide for payments of unemployment compensation to workers who’ve lost their jobs. These taxes are assessed on business entities that have employees. Note: An owner may be an employee of the business.
From a tax standpoint, a hobby is an activity for which a taxpayer may receive income, but is not engaged in for the primary purpose of profit. Deductions allowed for expenses in connection with a hobby may not be greater than the reported income derived and are allowed only as personal itemized deductions. If, during an audit or examination, the IRS decides a business is not likely to generate taxable income, the activity may be reclassified under the hobby loss rules, with expenses in excess of the income disallowed.
A tax on income. What is taxable income in the United States is generally defined by Congress through the Internal Revenue Code. (See “Internal Revenue Code.”)
Acronym for Information Document Request. (See “Information Document Request.”)
Information Document Request
A detailed request involving a tax matter from the IRS for information or supporting documentation. Requests may be made on an IRS Form 4564 Information Document Request or as part of an audit letter. (See “Audit Letter.”)
A taxpayer who files a joint return, and all or part of a refund due is expected to be applied against the debts of the other spouse.
Taxpayers who file joint returns are jointly and individually liable for any income tax or other liabilities that may arise from that jointly filed return. Taxpayers seeking relief from tax liability under the innocent spouse provision need to show that the tax liability was caused by activities of their spouse of which they were ignorant.
A financial condition in which an individual or entity’s liabilities exceed the value of assets.
An agreement reached between the IRS and a taxpayer by which the taxpayer agrees to pay off a tax debt for back taxes (see “Back Taxes”) by making equal payments monthly.
An amount added to corpus or principal for the use of money. When a taxpayer receives interest it is income that is generally includable on the tax return. Interest paid may or may not be deductible, depending on the underlying loan and the circumstances of that loan. For example, the interest on the first $1,100,000 in home mortgage debt is deductible, and interest attributable to amounts greater than that is not. The IRS also charges interest (nondeductible) on past due tax liabilities.
Internal Revenue Code (IRC)
The portion of the United States Code (Title 26) consisting of the tax laws.
Internal Revenue Service
The branch of the U.S. Department of Treasury (see “Department of the Treasury”) responsible for the collection of federal taxes and enforcement of the Internal Revenue Code.
Acronym for the Internal Revenue Code. (See “Internal Revenue Code.”)
Acronym for the Internal Revenue Service. (See “Internal Revenue Service.”)
Deductions for allowed personal expenses claimed on the Form 1040 (see “1040 (Form)”) Schedule A.
Job Related Expenses
See “Employee Business Expenses.”
The schedule issued by partnerships (see “Partnership”), Limited Liability Companies (LLC), Trusts, Estates and S Corporations (see “S Corporation”) to report an individual partner, member, beneficiary, or shareholder’s share of the income and expenses from the partnership, LLC, trust, estate or S Corporation. The schedule also shows the tax nature of the income and expenses.
Income from whatever source is considered taxable income. Any adjustments, deductions and credits that are available to reduce taxable income or tax liability are at the discretion of, and granted by, Congress.
Marginal Tax Bracket
The tax bracket (see “Tax Bracket”) in which the last dollar of a taxpayer’s taxable income falls. It is sometimes referred to as the marginal tax rate.
Marginal Tax Rate
See “Marginal Tax Bracket.”
Miscellaneous Deduction Not Subject to 2%
A personal itemized deduction (see “Itemized Deductions”) that may be claimed without regard for whether the amount of the deduction exceeds 2% of adjusted gross income (see “Adjusted Gross Income (AGI)”).
Miscellaneous Deduction Subject to 2%
A personal itemized deduction (see “Itemized Deductions”). The total of all deductions in this category must be greater than two percent of adjusted gross income (see “Adjusted Gross Income (AGI)”) to be deductible. The part that exceeds the two percent is added to the total of other personal itemized deductions.
Income reported to the taxpayer on a 1099-MISC form and income not reported on an IRS form but received by the taxpayer. Such income may include, but are not limited to, self-employment income, rental income, and hobby income.
National Research Program
A term used by the IRS to describe programs designed to gather information or data relating to taxpayer compliance with reporting requirements, income classification, etc. The IRS claims it uses this information to improve their forms, audit selection, and other internal processes. These programs select tax returns for audits based on random samplings and not on suspected misstatements on the taxpayer’s return. Consequently, such audits may be more extensive than other types of audits.
Ninety Day Letter
Another term for the Notice of Deficiency. (See “Notice of Deficiency.”)
No Change Letter
A letter issued by the IRS as the result of a notice, examination, or audit, stating they have accepted the return as filed and propose no changes to the tax liability. This is a closing letter, and generally concludes the examination or audit.
Acronym for a Notice of Deficiency. (See “Notice of Deficiency.”)
Non Cash Charitable Contributions
Assets donated to charitable organizations that are not money contributions. (See also “Charity (Recognized)” and “Donation.”)
Non Community Property
Property that cannot be identified as Community Property. (See “Community Property.”)
A credit that reduces the calculated tax liability on a tax return, but not below zero. If the credit exceeds the liability it is either lost or carried forward, depending on which credit it is.
A notification from the IRS that its computers have found an inconsistency between the information reported to it from other sources and the information on a tax return, or that the IRS has changed the return based on its information. Responses, if necessary, may vary depending on the type of notice and the taxpayer’s circumstances. Generally, the notice requests either an explanation for the inconsistency or payment of the amount due, if any. Usually notices are issued by the AUR unit (see “Automated Under Reporter” or “AUR”), which effectively means the notice is issued by computer and not reviewed until the taxpayer response is received.
Notice of Deficiency (NOD)
Commonly called an “NOD” or “Stat Notice.” Generally, the final notice issued by the IRS. The notice includes the additional taxes due as the result of a notice, examination, or audit. The NOD also informs the taxpayer that without response the IRS will assess the additional taxes and turn the case over to the collections process. The NOD gives the taxpayer ninety days to submit additional substantiation and/or petition the tax court should they disagree with the IRS examination report.
Offer in Compromise
An agreement between the IRS and a taxpayer whereby the IRS accepts a lesser amount owed for back taxes (see “Back Taxes”) in lieu of the full amount. Whether or not the IRS will accept an OIC and reach an agreement with the taxpayer is at the discretion of the IRS. The IRS must generally determine if there is a doubt as to collectability, a doubt as to the liability, or a doubt as to whether collecting the tax is effective tax administration.
Acronym for “Offer in Compromise.” (See “Offer In Compromise.”)
Income that is not subject to special tax rates. Example: When an investment asset is sold that was held long-term, the gain is taxed at capital gains (see “Capital Gain”) rates, but when it is held for a year or less the gain is taxed at “ordinary income” rates just as W-2 wages would be.
A person who prepares—or assists in preparing—income tax returns for compensation. The IRS now requires all paid preparer’s to have PTIN numbers. (See “PTIN.”)
Partial Payment Installment Agreement
An Installment Agreement wherein the IRS accepts a lesser amount over time in lieu of the full amount owed for back taxes.
A form of business organization consisting of two or more persons or entities in which all parties (partners) have an ownership interest, and the business is not organized as a corporation under local law. A partnership generally files a partnership return (see “Partnership Return”), but under certain circumstances a husband and wife are allowed to report the business as qualified joint venture on their personal tax return.
The tax return filed by a partnership is IRS Form 1065. This return is generally informational only. Individual partner’s share of income and expenses is reported to the partner on a Schedule K-1. (See “K-1 (Schedule).”)
From a tax standpoint, an amount tendered to the IRS associated with a tax identification number (see “Tax Identification Number”) for a specified tax year. Payments can result from withholding on a paycheck or retirement plan distribution, or amounts withheld by brokers, banks or other financial institutions, or the government themselves such as with Social Security benefits. They may also result from tax credits (see “Credit”), refunds (see “Refund”) from a previous year applied to the current tax year, estimated tax payments, or other checks written to the IRS by the taxpayer. On the Form 1040 (see “1040 (Form)”) payments are netted against the tax liability to determine whether the taxpayer owes more in taxes or is due a refund.
An amount charged by the IRS as an additional assessment when a taxpayer has violated the Internal Revenue Code. (See “Internal Revenue Code.”) There are many different types of penalties imposed by the IRS. Some of these are mandatory penalties that must be assessed by statute, and others are added at the discretion of the IRS.
A waiver or partial waiver of an imposed penalty (see “Penalty”).
Certain deductions or credits are available to the taxpayer until a certain income level is reached. The available credit or deduction amounts are reduced as income increases and are eliminated when the income reaches the phase out amount. This is known as being phased out.
Acronym for Power of Attorney. (See “Power of Attorney.”)
Power of Attorney (POA)
A legal document which allows one person to act in the place of another for certain specified purposes. A Power of Attorney may be unlimited or the document may contain limitations on what the person with the Power of Attorney may do. The IRS requires a Power of Attorney form to be on file with them in order for a third party to represent a taxpayer before the IRS. The form the IRS uses for this is Form 2848. (See “2848 (Form)”). Most, if not all, states also require a Power of Attorney in order to allow another person to represent a taxpayer.
It is common practice that after a petition (see “Tax Court Petition”) has been filed with the Tax Court (see “Tax Court”), for the taxpayer’s documentation and/or tax position to be evaluated by an Appeals Officer (see “Appeals Officer”) prior to a trial date being set. The Appeals Officer will meet with the taxpayer or representative after this evaluation in an effort to settle the dispute prior to going to trial. This meeting is called the Pre-Trial Conference.
Acronym for Preparer Tax Identification Number. (See “Paid Preparer.”)
Acronym for a Qualified Domestic Relations Order. (See “Qualified Domestic Relations Order.”)
Qualified Domestic Relations Order
A type of a court-ordered judgment or decree that is made according to a state’s domestic relations laws which may relate to provisions for child support, alimony payments, or marital property rights. The QDRO is a court-ordered demand for payment from one party’s qualified retirement plan for the benefit of a second party. A state authority–generally a court–must issue the judgment, order, or decree, or otherwise formally approve the property settlement agreement before it can be a considered a QDRO. Such a payment is not a taxable event if made under the auspices of a QDRO.
Acronym for a Revenue Agent. (See “Revenue Agent.”)
An amount due a taxpayer from the IRS. Refunds are generally the result of overpayments (see “Payment”), refundable credits (see “Refundable Credit”) in excess of payments and tax liability, or adjustments to tax liability.
A tax credit (see “Credit”) that is added to the taxpayer’s payments rather than being subtracted from the tax liability. The amount of the credit may be received by the taxpayer as a refund, even if the taxpayer does not owe any tax.
A type of IRS tax examiner. (See “Examiner.”) Revenue Agents tend to be assigned to field audits and other more complicated cases.
A form of business organization. An S Corporation is a separate legal entity. An S Corporation is considered a pass-through entity, in that income and losses are passed through to the shareholder(s). This allows for any income to be taxed only once on the shareholder’s tax return, unlike a C Corporation. (See “C Corporation (or C Corp).”)
A tax collected on the purchase of a new item (intended to be used by the purchaser and not resold) that is based on a percentage of the sales price. Amounts collected on the purchase of used items or items purchased in another tax jurisdiction are known as “Use Taxes.” The tax treatment of sales taxes and use taxes are usually identical, and oftentimes no distinction is made.
Sales Tax Table
A calculated table used to determine the amounts allowed as a sales tax deduction when a taxpayer chooses to claim sales taxes (see “Sales Tax”) paid as a personal itemized deduction instead of state and local income taxes. The calculated amount is based on the taxpayer’s income, sales tax rates in the taxpayer’s place of residence, and the amount of time the taxpayer resided in an area. Generally, the taxpayer has a choice of claiming the sales tax table amount, the actual sales taxes paid, or state and local income taxes (see “Income Tax”) as an itemized deduction.
Acronym for self-employment taxes. (See “Self-Employment Tax.”)
In a correspondence audit (see “Correspondence Audit”), the IRS issues an initial notice, and then will issue a second notice. The first notice generally notifies the taxpayer that the tax return is being examined. The second notice generally disallows the deduction(s) under examination and notifies the taxpayer of the proposed amount due.
If a person is engaged in a for-profit trade, activity, or business, and is not paid as an employee (i.e., wages or salary), then that person would be considered self-employed. In cases that are in dispute as to whether a taxpayer is self-employed or employed (see “Employed”), the IRS applies a common law test and looks at all of the facts and circumstances to make this determination. This determination has an impact on who is responsible for employer-related taxes. (See “FICA Taxes,” “FUTA Taxes,” and “Self-Employment Tax.”)
Tax calculated on income derived from self-employment activities. (See “Self-Employed.”) This tax is the equivalent of FICA taxes (see “FICA Taxes”) assessed on wages and salaries.
A person who conducts a sole proprietorship (see “Sole Proprietorship”) business activity.
A form of business organization in which the taxpayer is the sole owner and has not registered the business as a formal business organization with the appropriate state authority (usually the Secretary of State or Director of Corporations, or equivalent).
A deduction (see “Deduction”) amount determined by Congress, allowed if the taxpayer does not itemize deductions. (See “Itemized Deductions.”) In some instances, a taxpayer may be required to claim the standard deduction, or in other instances to itemize personal deductions, but generally the taxpayer will claim whichever amount is greater. Most tax programs automatically assign the greater deduction unless an election is made not to do so.
Another term for a Notice of Deficiency. (See “Notice of Deficiency.”)
Documents that support or prove an expense or deduction. For example, a credit card statement is generally accepted by the IRS as proof of payment, but a receipt is also necessary to prove the expense. Therefore, the credit card statement is a supporting document, and the receipt is substantiation.
A cite the IRS will accept to uphold a tax position or interpretation of the Internal Revenue Code. (See “Internal Revenue Code.”) District Court decisions, Tax Court decisions, the IRC (see “IRC”), and Treasury Regulations are all considered substantial authority. Other lesser forms of substantial authority are Congressional Registers, committee minutes, private letter rulings (unless the ruling is used by the individual or entity to whom it was written, in which case it is conclusive substantial authority).
Acronym for the Taxpayer Advocate Service. (See “Taxpayer Advocate Service.”)
Points at which Congress has predetermined a tax rate begins and ends. For example, if income amounts between $12,000 and $20,000 are assessed at a 15% rate, the income range is known as the 15% tax bracket.
A court of record where a taxpayer may dispute a tax deficiency as determined by the IRS before paying any disputed amount. They may also handle other items relating to the Internal Revenue Code. Taxpayers may also appeal a case to U.S. District Courts (or U.S. Court of Federal Claims), but in that case the tax must first be paid and the filing is a request to recover the contested amount claimed. Tax Court decisions are not binding on U.S. District Courts, although District Court decisions are binding on the Tax Court. Tax Court decisions are considered substantial authority (see “Substantial Authority”).
Tax Court Petition
The document that must be filed with the tax court in order for a disputed tax matter to be considered and decided by the court. Generally, the petition must be filed within a 90-day period following the IRS issuance of a notice of deficiency. (See “Notice of Deficiency.”)
Tax Identification Number
A number issued by a governmental agency that the IRS uses as an identifying number on tax returns and other tax documents. For U.S. citizens, this is the social security number issued by the Social Security Administration. Other tax identification numbers are ITIN’s (Individual Taxpayer Identification Number), ATIN’s (Adoptee Taxpayer Identification Number), and EIN’s (Employer Identification Number). Also known as a Tax ID Number.
Document consisting of all necessary forms and supporting schedules that is filed with the IRS stating all income, expenses, deductions, adjustments, tax liability, credits, tax payments, and taxes owed or refund due. Tax returns are filed by individuals (see “1040 (Form)”) and legally recognized business forms for entities such as partnerships or corporations.
The twelve-month period on which an individual or entity’s annual tax return is based and on which the income tax liability is calculated. For most taxpayers this is the calendar year, but some businesses have fiscal tax years. (See “Fiscal Tax Year.”) Generally, a tax year is twelve months in duration, although short years may be encountered when a business entity starts or ends.
Taxpayer Advocate Service
An independent office of the IRS, also known as TAS or Office of the Taxpayer Advocate. If a taxpayer is experiencing problems in dealing with the IRS and is in danger of economic harm, the TAS office may assist the taxpayer in resolving the issues between the taxpayer and the IRS. The taxpayer or their representative (see “Audit Representation”) has to request the assistance of the TAS office, and whether or not TAS will provide assistance is at the discretion of TAS.
Taxpayer Bill of Rights
A brief statement of certain rights the taxpayer has in dealing with the IRS. Some of these rights were codified. (See “Internal Revenue Code.”)
The department of the United States government of which the IRS is a part.
See “Sales Tax.”
The form used by a United States employer to report to an employee, the IRS, and state and local taxing agencies total annual earned income, tax payments withheld from income, and certain other deductions taken from gross income from an employee (see “Employed”).
A reference to income received from being an employee, either as wages or salary. (See “W-2 (Form).”)