Tax Debt Glossary of Common Terms

Adjusted Gross Income An individual’s income that is taxable. Total income minus certain allowable adjustments such as contributions to a retirement plan or employee business expenses.

Appeal As related to tax, requesting that the IRS review a decision or make an adjustment.

Casualty Property damage that results from a natural disaster or other common hazard. It may be tax deductible in the year of the damage. Also known as Loss.

Collections Actions taken to obtain payment from a taxpayer from whom taxes are past due.

Compulsory Payroll Tax Tax that is collected automatically from employers and their workers to pay for federal programs.

Deficit A financial situation in which expenses are greater than earnings. It can be incurred by individuals, businesses, or the government.

Direct Deposit Funds are transferred automatically as payment into an individual’s account. Taxpayers may utilize this option to obtain their tax refunds.

Direct Tax A tax that is paid from an individual directly to the government and cannot be transferred to another party, such as an income tax.

Domestic Partnership A couple who lives together as partners, but is not legally married or joined in a civil union. Status as such can have large implications for taxes and other financial obligations.

Earned Income All money earned from employment including wages, salary, commissions, and tips, but not including investment income.

Earned Income Credit A refundable tax credit for certain individuals who meet the requirements of a low-income worker.

Electronic Funds Transfer A payment method whereby funds are transferred automatically from taxpayers to the IRS.

Excise Tax A tax that applies only to the manufacturing, selling or consuming of certain non-essential goods such as alcohol, gasoline and tobacco.

Exemptions Claims that a taxpayer can make to keep certain assets from their creditors.

Federal Insurance Contributions Act (FICA) Federal law that requires a certain amount of employees’ salaries or wages to be withheld by employers and transferred to the government for the Social Security program. Also known as the Social Security tax.

Financial Hardship Circumstances out of a taxpayer’s control, such as unemployment or disease, that make it difficult to pay one’s taxes.

Flat Tax A type of tax that requires the same percentage be paid from every member of a given group, such as income taxes. Also known as a Proportional Tax.

Gross Income Total earnings before taxes, allowances, or other expenses are deducted.

Income Tax Taxes imposed on both earned and unearned income that serve as the main revenue for the government. It is a flat tax, so the same percentage of income is taken from all taxpayers.

Indirect Tax A tax that may be collected or handled by a third party to whom the tax is not owed. Tax payment is given from the taxpayer to an intermediate source before it is transferred to the government. Sales taxes are a common example.

Injured Spouse A spouse who is held jointly liable for taxes that are the responsibility of the other spouse.

Innocent Spouse A spouse who meets the requirements to not be held liable for taxes, penalties, and interest incurred by the other spouse. Generally, spouses who file taxes jointly are equally responsible for financial obligations.

Installment Agreement A tax payment option by which a taxpayer makes monthly payments on due taxes rather than paying the lump sum. Sometimes periodic smaller payments are more manageable for taxpayers, however late fees and interest (compounded daily) will be added to the balance throughout the agreement, so such taxpayers end up paying more in the long run. Also known as a Payment Plan.

Interest A percentage of a due amount that is charged periodically to the debtor until full payment is received. The IRS compounds interest daily on past due taxes.

Internal Revenue Service The federal government agency that is responsible for determining, assessing, and enforcing the collection of taxes. Commonly referred to as the IRS.

Joint Filing Status A married couple files their taxes on one tax return, reporting combined income and combined deductions and allowances.

Levy A legal procedure by which personal assets, including bank accounts, can be seized as payment for debts. The IRS utilizes asset seizure in rare, serious cases of tax debt.

Lien A legal claim that attaches to one’s property as security for repayment of a debt. It can make property transfer very difficult.

Loss Property damage that results from a natural disaster or other common hazard. It may be tax deductible in the year of the damage. Also known as Casualty.

Luxury Tax A tax attached to certain products and services that are not considered to be essential for daily life, such as sports cars.

Mass Tax A widespread tax that must be paid by the majority of taxpayers.

Offer in Compromise (OIC) A payment agreement between a taxpayer and the IRS to compromise on tax liability. In very rare cases, the IRS may agreement to accept payment that is less than the full amount of the tax debt if (1) there is doubt as to the liability, (2) there is doubt as to the collectibility, or (3) there are exceptional circumstances.

Payment Plan A tax payment option by which a taxpayer makes monthly payments on due taxes rather than paying the lump sum. Sometimes periodic smaller payments are more manageable for taxpayers, however late fees and interest (compounded daily) will be added to the balance throughout the agreement, so such taxpayers end up paying more in the long run. Also known as an Installment Agreement.

Payroll Taxes Taxes that are required to be withheld from employees’ paychecks by their employers for submission to the federal government. Such taxes include Social Security tax, income tax, and Medicare tax. Some employers may be required to withhold state or city taxes as well.

Penalty Abatement Taking measures to remove IRS penalties from a taxpayer’s balance. The taxpayer (or his or her representative) must explain either in writing, at a verbal interview, or on Form 843 that is was impossible to pay the taxes at the time they were due.

Personal Identification Number (PIN) As related to taxes, a confidential five-digit number that taxpayers select to be able to submit their tax returns online. It is for authentication purposes.

Power of Attorney Written documentation that authorizes a person to act on behalf of another person in certain specified situations, or in general.

Property Taxes Taxes owed on privately owned property, often paid annually or semi-annually.

Refund Reimbursement given to taxpayers who have paid more in taxes than is necessary. If one qualifies, it is provided after the filing of a tax return.

Separate Filing Status Each spouse of a married couple files his or her own tax return, reporting individual income and individual deductions and allowances. This option makes a spouse responsible for payment only of his or her own taxes.

Single Filing Status Filing a tax return as an individual who is unmarried or legally separated.

Tax Avoidance Attempts to minimize tax liability through legal means. Not to be confused with Tax Evasion.

Tax A fee assessed on a product, service or population that must be paid for city, state, or federal government support.

Tax Code Official tax laws and regulations.

Tax Gap The difference between the amount of taxes owed and the amount voluntarily paid by the taxpayer.

Tax Evasion Attempts to minimize tax liability through illegal means. Not to be confused with Tax Avoidance.

Tax Liability The amount of tax for which you are held responsible by the IRS, after any credits or advance payments are taken into consideration.

Tax Return An official form that taxpayers must file with the IRS. It contains income and expense information in order to determine one’s tax liability.

Voluntary Compliance As related to tax, the situation in which taxpayers file tax returns voluntarily and accurately to the best of their knowledge.

W-4 A form filled out by employees so that their employers can withhold the correct amount of federal income tax from their wages.

Wage Garnishment A legal process by which an employer is required to withhold part of an employee’s wages as payment for debt. The withheld money is transferred to the creditor (or the IRS).

Wage Garnishment Release Retracting of a wage garnishment notice due to an alternate payment agreement made before the seizure of any wages.

Wages Earnings made by a worker before any payroll tax deductions.

Withholding Portion of an employee’s earnings held by the employer as payroll taxes, to be transferred to the federal, state, or city governments.