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Tax Terms and Definitions

A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X - Y - Z

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Abatement Narrative: See Penalty Abatement Narrative.

Allowable Expenses: Expenses that are deemed necessary to sustain a minimum standard of living which are listed in the IRS National Standards information booklet. Allowable expenses are used to determine disposable income figures for Installment Agreement and Offer in Compromise resolution strategies. For information on IRS National Standards, please ask your Clear Creek Associate for this information.

Appeals Officer: The IRS agent who will work with you once your file has been transferred to the Appeals Division of the Internal Revenue Service.

Automated Collection Service (ACS): Division of the Internal Revenue Service responsible for collections and case overview if a Revenue Officer has not been assigned to your case.

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Cash Flow: Cash Flow typically refers to the money that flows through your personal or business bank account. For additional information regarding cash flow, talk to your CPA or your Clear Creek Associate.

C-Corporation: For income tax purposes, this term includes associations, and trusts that have a majority of corporate characteristics. Consult your Clear Creek Associate for additional information on this type of entity formation.

Certificate of Discharge (COD): The process used by the Internal Revenue Service to remove corporate assets that have been encumbered by a tax lien. This process is primarily applicable to business owners who wish to ‘repurchase’ their assets once their business has been dissolved.

Certificate of Subordination: The process of subordinating the mortgage company’s first position on property to that of the second position behind the IRS in the attempt to pay proceeds from a refinance directly to the IRS. Used primarily if a Tax Lien has been assessed against a property and one desires to subordinate the Tax Lien in order to use the equity to pay down a tax liability.

Civil Penalty – Tax 6672: The term used when a tax liability is assessed to an individual personally or more accurately, to this person’s social security number.

Collection Appeal Process Request (CAP Appeal) - Form 9423: The form and process employed by the IRS to enable persons and companies the right to appeal federal tax liens, levy or notice of levy, seizure, denial of Installment Agreement, termination of Installment Agreement, verbal abuse from a Revenue Officer, and perhaps other aggressive IRS activity. A CAP Appeal is usually heard within 24 hours by the General Manager of the local IRS office.

Collection Due Process Appeal (CDP) – Form 12153: The form and process used by the IRS employed by the IRS to enable persons and companies the right to appeal a tax lien, bank levy, or asset seizure within 30 days from the date of the notice that such action will be forthcoming. If the CDP is filed after 30 days, it will be heard as an Equivalent Hearing.

Compliant: A term used by the taxing authorities which is associated with filing all past due returns. One is compliant when all returns have been filed.

Credit Report: the Report used by creditors to score or determine the risk associated with loaning a business or an individual money. The three major credit bureaus are Equifax, Experion, and Transunion

Current: A term used by the taxing authorities associated with paying all taxes on-time and in-full.

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Disposable Income: Disposable income refers to the money remaining in your possession once all expenses and basic living expenses have been paid. See allowable expenses.

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Electronic Federal Tax Payment System (EFTPS): This is a tax payment system provided free by the U.S. Department of Treasury which enables one to pay federal taxes electronically, on-line or by phone. Visit www.EFTPS.gov to enroll.

Employer Identification Number (EIN): The federal tracking number assigned to a business by the Internal Revenue Service used to monitor tax compliance.

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Fair Market Value: This is the current value associated with an asset in the marketplace. This is most applicable to a vehicle or a piece of property. The fair market value is usually associated with what the market will pay for an asset.

Federal Tax Deposits (FTD): Withholding portion of company’s payroll that must be deposited in the bank monthly or with every payroll depending on the amount of payroll for all W-2 employees. You can make your deposits either electronically, using the Electronic Federal Tax Payment System (EFTPS), or by taking your deposit and Form 8109-B, Federal Tax Deposit Coupon to an authorized financial institution or a Federal Reserve bank serving your area.

Federal Tax Deposit Receipts: Receipt from the bank into which the Federal Tax Deposit has been deposited. Often used to prove the company is current with its payroll tax obligations.

Federal Tax Lien – Form 668(Y): This form serves as notification that the IRS has now encumbered all company or personal assets. Encumbered assets now belong to the US Government until the tax liability is paid in full. A Federal Tax Lien is used to protect the interests of the IRS until the liability is paid in full.

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Good Faith Payments: These are voluntary payments made to the taxing authorities until a formal payment plan or Installment Agreement can be negotiated. Good faith payments should be directed to the Trust Fund portion of the outstanding tax liability. Talk with your Clear Creek associate for assistance with making good faith payments.

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Innocent Spouse: By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse happens to have an ongoing tax liability. The tax, interest, and penalties that qualify for relief can only be collected from your spouse, not you personally. However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. The IRS can collect these amounts from either you or your spouse. You must meet all of the following conditions to qualify for innocent spouse relief: You filed a joint return which has an understatement of tax due to the IRS. You establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.

Installment Agreement - Form 433-D: Installment Agreements generally require equal monthly payments. Installment Agreements in some instances may be negotiated based on seasonal fluctuations or Tiered payment plans that are increased over time as the business rehabilitates. The amount of an Installment Agreement payment will be based on the amount owed and on the taxpayer’s ability to pay that amount within the time legally available for the IRS to collect. By law, the IRS has the authority to collect outstanding federal taxes for ten years from the date of assessment, however this ten year timeframe may be extended under certain conditions. For taxpayers that enter into an Installment Agreement, the IRS may require a signed waiver (Form 2750) to extend the time the IRS can collect.

  • Interest: Interest is most likely to compound daily for most IRS and state tax debts.
  • Tax lien: The lien gives the IRS or State Taxing Authority a legal claim to your property as security for payment of your tax liability.

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Levy – (IRS Levy): Levy refers to the aggressive means by which the Internal Revenue Service will collect a past due tax. A bank levy will freeze your account and be attached to the funds that are in the account at the time the levy is received by the bank and will be held for 21 days unless this levy is released. On the 21st day the funds will be turned over to the IRS. An account receivable levy is attached to receivables that are due to you from your client. These funds will be held for 21 days unless this levy is released from the IRS. On the 21st day the funds will be turned over to the IRS. A wage garnishment levy deducts your wages on each paycheck until the liability is paid in full or until the wage garnishment levy is released. The proceeds from these levies are applied to the outstanding tax liability.

Levy – (State Levy): State levy practices differ from state to state. For specific information regarding the collection process associated with a specific type of state levy, contact your state revenue agent or call your Clear Creek Associate.

Limited Liability Company (LLC): Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs include management flexibility, and the benefit of pass-through taxation. Consult your tax director for additional information or your Clear Creek Associate.

Limited Liability Company Conversion: A resolution strategy sometimes employed by companies if the new entity is going to be substantially different from the closed, tax burdened company. Converting an existing C-Corporation or S-Corporation into a LLC (Limited Liability Company) will eliminate penalties and interest associated with the tax liability, however, one must still purchase the assets if they are desired through a formal Certificate of Discharge. The proceeds from the assets will be applied to penalties and interest unless it is negotiated that this voluntary shut down of the company and therefore voluntary payment to the IRS should be applied to the Trust Fund portion of the tax liability.

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National Standards: National Standards are used to determine disposable income figures for Installment Agreement and Offer in Compromise resolution strategies. National Standards can be found at www.irs.gov or sent to you from your Clear Creek Associate. National Standards refers to the monthly living expenses deemed necessary by the IRS to sustain a minimum standard of living in your geographic region. These tables also take into consideration the number of members per household.

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Offer in Compromise – Form 656: IRS process used to settle a tax liability that cannot be paid in full. The formula for an Offer in Compromise follows: Offer in Compromise settlement amount equals the net equity in assets plus net equity of monthly disposable income multiplied by 60 months (5 years). Please ask your Clear Creek Associate for additional information regarding this resolution strategy.

Original Tax Return: This refers to a tax return that is dated and signed with the original signature. This does not include a copy or a faxed original. In some instances, a Revenue Officer may request that you sign it in blue ink to ensure that it is an original tax return. If the return was lost and you must file this return again, be sure to sign and date it in blue ink which is also referred to as being ‘wet signed.’

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Partnership: A corporate structure that typically consists of two or more partners. This structure does not provide the personal liability protection of a corporation. Consult your tax director or Clear Creek Associate for more information.

Penalties: Penalties are assessed to nearly all outstanding tax balances. For exact figures, contact your Clear Creek Associate, Revenue Officer or visit www.irs.gov.

Penalty Abatement Narrative: The process of appealing the penalties that have been charged to your outstanding tax liability by the IRS.

Power of Attorney (POA) – Form 2848: This IRS Form is used to appoint an individual to represent you before the IRS specific to the tax matters on the Form 2848.

Principal: The principal is the tax portion of the outstanding liability which does not include penalties or interest.

Professional Service Corporation: A corporate structure primarily used for accountants, dentist, doctors, etc. Consult your Clear Creek Associate or tax director for more information.

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Quick Sale Value: This is the value associated with selling an asset immediately. For example, the IRS may assess your property a quick sale value by calculating 80% of the property’s fair market value.

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Record of Account: Record of Account itemizes the detailed tax history of your Social Security Number or business Employment Identification Number on record with the Internal Revenue Service. Record of Account information is also referred to as ‘Transcripts’ and are ordered free of charge from the Tax Practitioner Hotline. Talk to your Clear Creek Associate to order an updated Record of Account.

Resolution Strategy: Refers to the path that will be taken to reduce and fully resolve a tax liability.

Revenue Officer: An employee of the Collection Division of the Internal Revenue Service trained in psychology and debt collection. Revenue Officers are assigned cases or companies and individuals who have outstanding tax liabilities. Revenue Officers also collect information necessary to resolve the liability in full.

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S-Corporation: The S-Corporation is similar to the C-Corporation, however, taxes typically flow through the company and to the owner(s) and are recorded on that individual’s 1040-S Tax Filing Form. Consult your tax director for additional information.

Social Security Number: The tracking number assigned to an individual by the Internal Revenue Service used to monitor tax compliance.

Sole-Proprietorship: A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from the owner. The entity’s liabilities are in essence personal liabilities and the sole proprietor undertakes the risks of the entity’s assets and liabilities. All income and expenses of the entity’s cash flow are filed through the sole proprietor’s personal tax return. Consult your Clear Creek Associate or tax director for additional information.

Sole-Proprietorship Conversion: A resolution strategy sometimes employed by companies if the new entity is going to be substantially different from the closed, tax burdened company. Converting an existing C-Corporation or S-Corporation into a sole proprietorship may eliminate penalties and interest associated with the tax debt, however, one must still purchase the assets if they are desired by filing a Certificate of Discharge. The proceeds from the assets will be applied to penalties and interest unless it is negotiated that this voluntary payment should be applied to the Trust Fund portion of the tax liability. Under this type of entity formation, the owner, sole proprietor will be responsible for all future tax obligations personally, including all penalties and interest.

Specific Balance Due Installment Agreement: A formal agreement issued by the IRS committing the taxpayer to monthly payments until the liability is paid in full. This resolution is normally used in conjunction with Form 2750 which extends the statute of limitations beyond five years, and holds the willful and responsible parties personally responsible for full payment of the tax liability.

State Tax Lien: This form serves as notification that the state has now encumbered all company or personal assets. Encumbered assets now belong to the state until the tax liability is paid in full. A State Tax Lien is used to protect the interests of the state until the liability is paid in full.

Statute of Limitations: This term most often refers to the five year period of time in which you have to pay your outstanding tax liabilities. For a more comprehensive understanding of other IRS statutes, please consult with your Clear Creek Associate or visit: www.irs.gov.

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Taxpayer Advocacy Office (TAO) – Form 911: The Taxpayer Advocate Service is a non partial division of the IRS that can be requested by the taxpayer to assist in instances when tax problems cannot be resolved through normal channels or directly with your assigned Revenue Officer. Each state has at least one local Taxpayer Advocate, who is independent of the local IRS office and reports directly to the National Taxpayer Advocate. The goals of the Taxpayer Advocate Service are to protect individual and business taxpayer rights and to reduce taxpayer burden. The Taxpayer Advocate independently represents your interests and concerns within the IRS.

Tax Liability: A tax liability consists of the tax or principal, however, a past due tax will most likely also include penalties, and interest.

Tax Practitioner Hotline: A division of the Internal Revenue Service that will provide a ‘Record of Account’ or ‘Transcripts’ of your tax history. One calls this service center to obtain information on outstanding tax balances due, returns that may need to be filed or other information to ensure your account is current and compliant. This division can also be helpful in determining if some tax returns have been misfiled or allocated incorrectly to the wrong period of liability.

Tiered Installment Agreement: A type of Installment Agreement (Form 433D) payment plan that commences with small payments, and as future positive cash flow increases, the payments become larger so that the entire outstanding balance is still paid off within the five year Statute of Limitations.

Transcripts: Transcripts itemize the detailed tax history of your Social Security Number or business Employment Identification Number on record with the Internal Revenue Service. Transcripts information is also referred to as ‘Record of Account’ information and are ordered free of charge from the Tax Practitioner Hotline.

Trust Fund: Trust Fund taxes include withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes. The income tax and employees' share of FICA (social security and Medicare) that is withheld from employees' paychecks are part of their wages that the employer pays to the Treasury instead of to its employees. These taxes are called Trust Fund taxes because the employer actually holds the employee's money in trust until the employer makes the federal tax deposit in that amount. Employees trust that their employer is paying the withheld portion of their paycheck to the Treasury by making timely Federal Tax Deposits. This is why this type of tax is referred to as a trust fund tax.

Trust Fund Recovery Penalty: If a person responsible for withholding, accounting for, depositing, or paying specified taxes including withholding and employment taxes, and willfully fails to do so, this individual can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. "Willfully" in this case means voluntarily, consciously, and intentionally.

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Uniform Commercial Code Lien (UCC): A standardized program and method of administering, legalizing, and recording lien instruments adopted now by all states except Louisiana.

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Wage Garnishment – Form 668(W): Notice of Levy, continuous levy of wages

Willful and Responsible: See Trust Fund Recovery Penalty

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