Glossary

Automated Collection System

Automated Collection System is a computerized system which is linked to numerous CRT telephone stations. You can identify an account in the ACS system by the IRS phone number listed (800-829-7650). 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. ACS will also place an account into a Currently Not Collectible status when a taxpayer can demonstrate they are in a financial hardship. ACS issues levies and garnishments in order to collect on the back tax liabilities. By contacting ACS, our attorneys can resolve an open case with any IRS agent. 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.

Back Taxes

Back taxes – or tax debt – are unpaid taxes assessed against a taxpayer by a level of government (i.e. Federal, State, Local) that are past due. Internal Revenue Service (IRS) back taxes are past due federal income taxes. 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.

Bank Levy

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. The IRS must give the taxpayer notice. Notice constitutes several letters with the final letter bearing a Final Notice of Levy. After the IRS has sent out the Final Notice of Levy, it can issue a bank levy after 30 days from the date of the letter.

A Notice of Levy is sent to the taxpayer’s bank and it attaches to all accounts in the name of the taxpayer whether a sole or joint account. The bank is legally obligated to honor the levy. The levy freezes the funds on deposit in the account. The bank cannot allow anyone access to the frozen funds for 21 days from the date of receipt of the levy. On the 21st day, the bank must send the frozen funds to the IRS.

Bankruptcy

Bankruptcy is a legal procedure that results in debt relief. Debt relief can be obtained through a process of liquidating assets or reorganizing debt. The release of the debt is referred to as a discharge.
Bankruptcy laws are very specific about the discharge of taxes. The Internal Revenue Service can obtain relief from any protection that a bankruptcy might offer. Not all types of taxes can be discharged. Taxes can only be discharged at certain times. Therefore, it is possible to file for bankruptcy and still have a remaining tax debt.

Collateral Agreement

A collateral agreement is an additional or secondary agreement that the Internal Revenue Service may require before agreeing to settle your back tax liability.

Collection Information Statement

The Collection Information Statement is a form used to provide vital financial information to the IRS. The form generally provides information regarding the taxpayer’s income, expenses and assets. If you owe back taxes, the IRS uses the information on the Collection Information Statement to determine the proper resolution of your tax matter. There are several different version of this form including the 433-A, 433-B and 433-F.

Currently Non-Collectible Status

A taxpayer’s account will be placed on Currently Non-Collectible status in situations where the IRS recognizes that the taxpayer does not have the ability to presently collect the taxes owing via full payment, through an Installment Agreement or by way of an Offer in Compromise. When a taxpayer’s account is placed on Currently Non-Collectible status the IRS does not pursue collection activity against the taxpayer and the statue of limitations on the tax liabilities continue to run. Unless the taxpayer’s financial situation changes for the better, the account should remain on a Currently Non-Collectible status until the tax liabilities expire.

Deed of Trust

an instrument used in some states instead of a mortgage. A deed of trust passes legal title to real property is placed in one or more trustees to secure the repayment of a sum of money or the performance of other conditions.

Dissipated Assets

Dissipated assets occur when money or an asset is used for a purpose other than paying your federal tax liability. For example, an individual with a tax debt takes a second mortgage on his house to pay for replacement of the roof. The Internal Revenue Service may view the funds from the second mortgage as a dissipated asset. The Internal Revenue Service may assert that any dissipated assets should have been used to pay the tax debt and refuse to settle for less than the amount of the dissipated asset. As a result, a dissipated asset may cause the Internal Revenue Service to refuse to negotiate with a taxpayer.

Form 1040

Every person is required to declare the income he or she received during the prior year. The return may be filed jointly with a spouse, single, married filing separately or head of household. Simplified versions of the form 1040 are forms 1040EZ and 1040A.

In order to properly use either form 1040EZ or form 1040A, a taxpayer must meet a number of technical requirements. Below are the more common requirements:

Schedule A – When preparing a tax return, a taxpayer may reduce their taxable income by either opting to subtract a standardized deduction from their income, or to subtract specific tax deductible expenses from their income. If the taxpayer chooses to subtract specific tax deductible expenses, such as home mortgage interest, a percentage of medical expenses, etc. the taxpayer will use Schedule A to list and describe the itemized tax deductible expenses.

Schedule C – If a taxpayer receives income from self-employment, he or she may wish to offset their gross income by the expenses incurred to generate the income. By offsetting business expenses against gross business income the taxpayer will be able to reduce their taxable income, and consequently the overall taxes owed. Self employment income and expenses should be reported on Schedule C. If the taxpayer is operating the business as a corporation, partnership or limited liability company, the taxpayer may not use a schedule C, as business income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.

Schedule D – Almost all physical assets, whether it is for personal or investment purposes is considered a capital asset. If a taxpayer sells their physical asset for more than then they paid for it (minus any applicable depreciation), the taxpayer will be deemed to have received a profit form the sale. This profit is called a capital gain. If the taxpayer had sold the property for less than what they paid for it )minus any applicable depreciation, the taxpayer will be deemed to have incurred a loss from the sale, or a capital loss. There are many rules which specify when a taxpayer may subtract capital losses from income. For a more detailed explanation of these rules, please contact your tax preparer or accountant. Capital gains and losses should be reported on Schedule D.

Schedule E – When a taxpayer has income or loss from a trust, estate, real estate rental, royalties, an S-Corporation, or Partnership, this income or loss should be reported on Schedule E. Income from an S-Corporaton or Partnership must be reported even if the taxpayer has not received the income. There are many rules which specify when a taxpayer may deduct Schedule E losses against other income. For a more detailed explanation of these rules, please contact your tax preparer or accountant.

Schedule F – Schedule F, is very similar to Schedule C, noted above, except that Schedule F is used to report farming income and expenses, for self employed farmers. If the taxpayer is operating the farm as either a corporation, partnership or limited liability company, Schedule F should not be used to report income and expenses. Farming income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.

Schedule SE – Self employed individuals are required to pay self employment tax on their net business income. Generally speaking, if a taxpayer expects to owe less than $1,000 in total taxes, the taxpayer may pay the self-employment tax when the return is due. If a taxpayer expects to owe more than $1,000, the taxpayer is required to pay estimated tax payments on at least a quarterly basis. Although quarterly payments are the norm, a taxpayer may wish to pay more frequently in order to avoid a large quarterly payment, or if the taxpayer needs to demonstrate that payments are currently being made. Schedule SE is used to calculate a taxpayer’s self-employment tax, so that proper estimated tax payments may be made for the year.

Form 2848, Power of Attorney

A Power of Attorney is is an authorization to act on someone else’s behalf in a legal or business matter. The person authorizing the other to act is the principal or granter (of the power), and the one authorized to act is the agent or attorney.

In order to have an attorney represent you before the Internal Revenue Service you need to complete an IRS Form 2848, Power of Attorney. The individual you authorize must be a person eligible to practice before the IRS (i.e. attorneys, enrolled agents, certified public accounts, tax preparers, etc.). Your authorization will allow that individual to receive and inspect your confidential tax information and act on your behalf when resolving issues with the Internal Revnue Service.

Attached, please find a PDF of the IRS Form 2848, Power of Attorney. After retaining our law firm, you may print this out, complete it, and fax it to our office for expedited processing and service. We will also send a copy of the form within your introductory packet for you to complete.

Attachment: Form 2848, Power of Attorney

Form 656, Offer in Compromise

Form 656 is the official form that must be used to submit an Offer in Compromise to the IRS. The IRS will not consider an Offer in Compromise submitted on any other form. The form itself spells out all of the requirements and contingencies associated with an Offer in Compromise. The form must be filled out to include the type of tax to be compromised (income tax, payroll tax, tax penalties, etc.), the relevant tax periods or years, the grounds for making the offer and the amount offered. Usually, Form 656 must be submitted with a Collection Information Statement and a $150 processing fee.

Lien Subordination

A lien is a legal right or interest that a creditor has in another’s property, lasting until the debt that it secures is paid or satisfied. A tax lien is a lien on property securing the tax debt and the lien does not relate specifically to a debt owed on that property. IRS Publication 784 relates to lien subordination. When the IRS subordinates a lien they are moving their claim or interest in the property to secondary or lesser position. Generally, the IRS will only subordinate the lien if the property is going to be sold or refinanced and money is going to be paid to the IRS.

Life Estate

A legal arrangement whereby the beneficiary is entitled to possession or income generated from the property for his or her life. After the death of the beneficiary, the property will go to the individual holding remainder interest or to the grantor by reversion.

Notice of Deficiency

A Statutory Notice of Deficiency is not an assessment of tax nor does it require you to make immediate payment. It is a proposed deficiency which generally gives you 90 days, (150 days if the notice was addressed to a person outside the United States), to either agree to the deficiency or file a petition with the United States Tax Court for a redetermination of the deficiency. Once the notice of deficiency is issued, the 90 or 150-day period cannot be suspended or extended. During this period, you may ask Appeals to reconsider the case. However, the reconsideration does not extend the 90 day period you have for filing a petition with the Court. The Notice of Deficiency can be rescinded under certain circumstances if both parties agree.

Profit and Loss Statement

A profit and loss statement (a/k/a income statement) is a financial statement primarily created and used by self-employed individuals and sole proprietorships to determine the business’s profitability. The profit or loss (a/k/a net income) is derived from a simple calculation: revenue generated (i.e. income received, gross receipts, etc.) minus expenses incurred to create the revenue (i.e. wages paid, equipment/supplies purchased, etc.). In the business world, revenue generated is distinguished from the profit or loss in comparison to where they are found on the statement. “Revenue generated” is often referred to as the “top line” versus “profit or loss” which is referred to as the “bottom line”.

For your reference. Please find sample profit and loss statements below. One version is a profit and loss statement for rental income. The other version is a profit and loss statement for business income. The profit and loss statements are in PDF format. They are for your reference only.

Profit and Loss – Rental Income
Profit and Loss – Business Income

Proposed Tax Change Notice

A Proposed Tax Change Notice (Notice CP 2000) shows proposed changes to your income tax return. The proposal is based on a comparison of the income, payments, credits, and deductions reported on your tax return with information on these items reported to the Internal Revenue Service by employers, banks, businesses, and other payers. The Proposed Tax Change Notice also reflects any corrections the Internal Revenue Service made to your original return when it was processed. It is not a bill. The Proposed Tax Change Notice provides you the opportunity to disagree, partially agree, or agree with the proposed changes. The Proposed Tax Change Notice will provide an explanation of how to respond.

Retired Debt

If a taxpayer has a debt for an allowable expense, which will be paid off in a relatively short period of time, the IRS may partially disregard the debt when calculating the taxpayer’s long term ability to full pay his or her outstanding Federal tax liability. When calculating a taxpayer’s future ability to full pay their current outstanding Federal tax liability, the IRS will take into account all factors which influence a taxpayer’s future ability to pay on their outstanding Federal tax liability. One such factor deals with fixed liabilities owed by the taxpayer. Specifically, when a taxpayer has a fixed liability, the IRS will take into consideration how much longer the taxpayer will be paying on the debt. Retired debt analysis is an important fact the IRS examines when determining a taxpayer’s reasonable collection potential.

Reverse Mortgage

A reverse mortgage is a loan against a home in which the homeowner does not have to make a payment on the loan as long as they live in the house. In order to qualify for a reverse mortgage, a homeowner generally must be at least 62 years of age. Also, an income is not required to qualify for this type of mortgage. The home must have a very low mortgage balance or be owned free and clear.

The homeowner can receive the loan amount in different ways:

A single lump sum amount
A regular monthly amount
An account that lets the homeowner(s) decide when and how much of the available amount is paid to them
A combination of the above methods

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.

Schedule A

When preparing a tax return, a taxpayer may reduce their taxable income by either opting to subtract a standardized deduction from their income, or to subtract specific tax deductible expenses from their income. If the taxpayer chooses to subtract specific tax deductible expenses, such as home mortgage interest, a percentage of medical expenses, etc. the taxpayer will use Schedule A to list and describe the itemized tax deductible expenses.

Schedule C

If a taxpayer receives income from self-employment, he or she may wish to offset their gross income by the expenses incurred to generate the income. By offsetting business expenses against gross business income the taxpayer will be able to reduce their taxable income, and consequently the overall taxes owed. Self employment income and expenses should be reported on Schedule C. If the taxpayer is operating the business as a corporation, partnership or limited liability company, the taxpayer may not use a schedule C, as business income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.

Schedule D

Almost all physical assets, whether it is for personal or investment purposes is considered a capital asset. If a taxpayer sells their physical asset for more than then they paid for it (minus any applicable depreciation), the taxpayer will be deemed to have received a profit form the sale. This profit is called a capital gain. If the taxpayer had sold the property for less than what they paid for it )minus any applicable depreciation, the taxpayer will be deemed to have incurred a loss from the sale, or a capital loss. There are many rules which specify when a taxpayer may subtract capital losses from income. For a more detailed explanation of these rules, please contact your tax preparer or accountant. Capital gains and losses should be reported on Schedule D.

Schedule E

When a taxpayer has income or loss from a trust, estate, real estate rental, royalties, an S-Corporation, or Partnership, this income or loss should be reported on Schedule E. Income from an S-Corporaton or Partnership must be reported even if the taxpayer has not received the income. There are many rules which specify when a taxpayer may deduct Schedule E losses against other income. For a more detailed explanation of these rules, please contact your tax preparer or accountant.

Schedule F

Schedule F, is very similar to Schedule C, noted above, except that Schedule F is used to report farming income and expenses, for self employed farmers. If the taxpayer is operating the farm as either a corporation, partnership or limited liability company, Schedule F should not be used to report income and expenses. Farming income and expenses should be reported on ether form 1120 or 1120 S for a corporation, or form 1065 for a partnership or limited liability company.

Schedule SE

Self employed individuals are required to pay self employment tax on their net business income. Generally speaking, if a taxpayer expects to owe less than $1,000 in total taxes, the taxpayer may pay the self-employment tax when the return is due. If a taxpayer expects to owe more than $1,000, the taxpayer is required to pay estimated tax payments on at least a quarterly basis. Although quarterly payments are the norm, a taxpayer may wish to pay more frequently in order to avoid a large quarterly payment, or if the taxpayer needs to demonstrate that payments are currently being made. Schedule SE is used to calculate a taxpayer’s self-employment tax, so that proper estimated tax payments may be made for the year.

Substitute For Returns

All individuals, and taxpaying entities, are required to file tax returns to calculate their own taxes. However, if a taxpayer fails to file a tax return, the Internal Revenue Service may file the return on behalf of the taxpayer. Prior to filing a substitute return, the Internal Revenue Service will request that the taxpayer voluntarily file the missing return(s). If the taxpayer has still not filed voluntarily, the Internal Revenue Service will prepare the substitute return. Usually the Internal Revenue Service will not file a substitute return until the return has been delinquent by two or more years.

When preparing the substitute return, the Internal Revenue Service will gather the income information reported to the taxpayer in the form of W-2’ and 1099’s. If the taxpayer is self employed or unusual circumstances are present, the Internal Revenue Service may also base the return or bank statements, ledger sheets, the standard of living of the taxpayer, or any other information which suggests the taxpayer’s income.

After determining the taxpayer’s income, the Internal Revenue Service will often prepare the return in a light least favorable to the taxpayer. For example, a 1040 filer would be filed as single or married filing separate, with no dependents or itemized deductions. If the taxpayer had also had self-employment income, the Schedule C would reflect business income, but no expenses. Often the substitute return reflects a much higher tax than what the taxpayer would have been assessed, had the taxpayer filed their own return.

Trust

Any arrangement whereby property is transferred with intention that the trustee (person holding title to the property) administers the property for another’s benefit (beneficiary). A trust can be created for any purpose that is not illegal or against public policy. The trustee is under a duty to deal with the property for the economic benefit of the beneficiary.

Wage Garnishment

A wage garnishment is a levy that the IRS has a right to issue to an employer of a taxpayer who owes the IRS money. The IRS must give proper notice to a taxpayer before it can actually issue the levy. Proper notice constitutes several form letters ending with a letter with a Final Notice of Levy attached. Once the notice has been sent to the taxpayer, the IRS can issue a garnishment after 30 days from the date of the letter.

An employer is legally obligated to comply with the terms of the wage garnishment. However, 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. If the taxpayer goes back to work for the employer, then the employer is re-obligated to honor the garnishment.

Through the wage garnishment, the IRS is allowed to take all of a taxpayer’s wages up to a certain amount. The IRS gives the employer a chart that informs the employer of how much they need to send to the IRS. Frequently, the amount the IRS can garnish is up to 80% of a taxpayer’s wages.

The wage garnishment is ongoing until the taxpayer 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 liability in full, agrees to a payment plan, or can show that the garnishment is causing an economic hardship.