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As a taxpayer, you should be familiar with different tax terms. It will allow you to deal with any tax related issues efficiently. Here are some of the relevant tax terms–

Tax Debt Related Terms and Definitions

A

Adjusted Gross Income – It is an income by above the line deductions. It does not include any standard itemized deductions. This type of income includes capital gains, wages, interest and income from other accounts.

Amortization – a regular reduction of debt by installment payments of the principal interest.

Appraisal –the valuation of an asset that is conducted by an authorized person. Typically, an appraisal is utilized for several purposes such as a tax lien against any property.

Asset –anything that is owned by an individual or entity. Assets have the potential to provide future benefits to the owners. An asset can be cash or property, goods, accounts receivables, investments or savings. In short, an asset holds an economic value that offers the expectation of providing a future benefit.

B

Back Taxes –a tax that is due and have not been paid on time.

Back Taxes Relief – Back taxes help, Back Taxes

Bank Account Levy – It is a form of IRS enforcement for recovering the back taxes. Typically, the IRS will notify your bank through a Bank Account Levy, and they might take whatever you have in your bank account. The money will be frozen for 21 days until you can justify or release the levy and prevent the bank from sending money to the IRS.

Bank Account Garnishment – (see bank account levy)

C

Capital Gains –the increase in the value of a capital asset that is higher than the buying price. This gain will not be realized until the asset is sold. Capital gains should be claimed on income taxes.

Casualty –the property damages that occur from any natural disaster or common hazard. Casualty might be tax deductible in the year of damage.

Collateral –any asset that is used to secure or get a loan or credit. The primary asset used as collateral is property, but there can be other types of assets as well. Collateral is subject to seizure on default.

Collections Appeal – a request made by a taxpayer to IRS. The taxpayer uses it when he or she does not agree with a decision of IRS.

Compound Interest – It is a form of interest that is paid on both previously earned interest and the principal amount. A compound interest has different terms such as continuously, monthly, quarterly, and annually.

Correspondence Audit – The IRS uses Correspondence Audit to mail a request for additional information on a tax return.

Credit Bureau –is an organization that collects, records, updates and stores financial and public information about the payment records of individuals. Credit Bureau uses the information for People who are considered for credit. If any taxpayer fails to repay the tax debt, there might be adverse consequences including poor credit score and bad reputation.

Credit inquiry – It is an inquiry to seek information about interest rates and the availability of funds. Here, the identity of the individual is not disclosed, and the particular need or purpose of the proposed borrowing is not shared publicly.

Credit Report –a detailed report where an individual’s credit history is recorded by a credit bureau. By using the credit report, a lender measures the creditworthiness of a particular loan applicant.

Credit Score – This score reflects an individual’s credit risk at a given point of time. All lenders use it to judge whether a borrower qualifies for a loan.

D

Debt Consolidation –is the combination of several loans into one single loan. Often, debt consolidation offers a lower interest rate with lower monthly payments.

Debt Ratio – Also known as debt to income ratio. This ratio is used by the lenders to determine whether a borrower is qualified enough to take a loan. It calculated by considering the borrower’s monthly debts and dividing them by the monthly income.

Default – Default is the failure of any legal obligation on a contract like failing to meet the monthly repayment schedule.

 

Deferment – It happens when a borrower is permitted to postpone the repayment schedule of a tax debt.

Deferred Interest – A deferred interest rate is an unpaid interest that is added to the tax debt with the IRS.

Delinquent Tax Payer – A delinquent taxpayer is anybody who fails to pay IRS or state taxes.

Delinquent Tax Returns – It indicates to the failure of any taxpayer to file the required tax returns. The inability to file the tax returns is considered as a criminal act by the IRS. It is punishable by a one-year sentence to jail for each year not filed.

Direct Tax –a tax at sources of income on which the taxpayer has no discretion. Direct tax includes income taxes, corporate taxes, and transfer taxes.

Disposable Income – Disposable income refers to the earnings that are the net amount or dollar amount after taxes, social security, etc.

E

Earned Income –is any income that comes from gross salary, fees, wages, commissions, etc. The primary source of earned income is a job or profession. It does not include any income from investment income, annuity, rent, etc.

Equity –the difference between the market value of an asset and the claims held against it. The formula for calculating Equity = Assets – Liabilities

F

Field Audit – an audit on a corporate tax return. It is conducted at the taxpayer’s location of business to review the records of taxpayers.

Finance Charge –is an amount that a borrower must receive a credit or loan. The amount consists of all fees and interest payments paid by the borrower.

Flat Tax –is a single rate tax system, which is also known as a proportional tax. This system measures all companies in a class at the same rate.

Final Notice of Intent To Levy and Notice of Your Right To A Hearing –

This is the final notice that IRS sends to the taxpayers before levying the wages, bank account, and house or any other property.

 

I

Income Tax – The tax paid on income for a specific financial year. Income tax is the primary source of revenue for the federal government. The tax is based on the earned and unearned income of any individual.

Indirect Tax –refers to any tax that is levied on goods or services than on any individual or company. For example – sales tax, value added tax, etc.

Innocent Spouse – According to the innocent spouse rule, a spouse can claim not to be liable for a joint tax return if he or she did not know about discrepancies and did not benefit from them. In an ideal situation, both signers are individually liable to pay the entire amount including any due or any other penalties and interest.

Interest – The charge that is made to a borrower for borrowing money. It is often referred to as the cost of borrowing money.

Internal Revenue Service – A government organization that is responsible for collecting taxes or revenue for Federal Government.

IRS Audit – an audit to evaluate the individual or corporate tax return for verifying its accuracy. The taxpayer is responsible for providing all supporting documents or records. Therefore, the taxpayer must maintain a good record. There are three different types of audits – correspondence audits, office audits, and field audits.

IRS Bank Levy – In case the taxpayer is delinquent in paying the taxes, the IRS can seek a levy on the bank account of the taxpayer. The IRS bank levy can effectively freeze the funds in the account for seizure.

IRS Payment Plan – Typically, the IRS compels taxpayers to pay tax debt quickly but in some cases, the IRS will allow specific individuals or businesses (without any alternatives) for a payment agreement for previous due taxes.

L

Liquid Asset –includes cash or any asset that can be converted to cash quickly.

Lien – It is a claim or security of interest that is granted over the personal property for securing the payment of debt.

M

Minimum Payment Amount –is the amount that must be paid to keep the bank account going from default with the IRS payment plan. The taxpayer must pay a percentage rate or a minimal fixed amount every month.

N

Notice and Demand for Payment – Primarily, the IRS sends these letters before sending a Final Notice of Intent to Levy and Notice of Your Right to a Hearing.

O

Offer in Compromise – It is an agreement between the IRS and the taxpayer to resolve the tax debt. The IRS has the right settle federal tax liabilities while accepting less than full payment in particular circumstances. The taxpayer can enjoy the advantage of the Offer in Compromise if he or she is unable to pay the tax debt in full or installment agreement.

Office Audit –includes an interview, conducted at a local IRS office on tax filings.

P

Payroll Taxes – The payroll taxes are based on salaries, wages, and tips. The company or employer deducts this tax. The payroll taxes can finance different programs such as social security, worker’s disability, and health care.

Penalty Abatement –when the taxpayer is penalized for not paying taxes. If the taxpayer has legitimate reasons for not filling the tax return, then he or she can receive a complete or partial reduction of the owed money. The IRS will require valid reasons for providing penalty abatement.

Property Taxes – These taxes are paid annually on the value of the property.

S

Secured Debt – This debt is collateralized by particular assets wherein the creditor has the authority to claim the collateralized property even in the case of default.

T

Tax Liability –refers to the amount that a taxpayer owes on his or her income.

Tax Lien – It is a claim against the personal property that arises from unpaid taxes.

Tax Sale – It indicates the sale of property, deriving from the non-payment of taxes.

Tax Levy –refers to the legal seizure of personal properties like cars or house by the local government. The State and the IRS can levy the property that is held by someone else, for instance – the Bank Account Levy or Bank Account Garnishment. The IRS can seize the bank funds through these levies.

U

Unsecured Debt – An uncollateralized debt.

 

W

W-4 Form – It is a form, used to find out the exact amount of withheld income tax from the taxpayer’s paycheck. It represents the total tax deductions divided by the personal exemption rate.

Wage Garnishment – Wage garnishment is the court order for which money is deducted from an employee’s monetary compensation. The deduction of money can be for any debt including child support taxes and unpaid court fines.

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