Tax Terms Glossary

IRS 1040 Form

(W2 wage earner works for a company where FICA, Social Security, Medicare is withheld).

IRS 1099 Form

(Self-employed sub-contractor no taxes are withheld or small business owners).

IRS 941 Form

(Employers who withhold income taxes, social security tax, or Medicare tax from employee’s paychecks or who must pay the employer’s portion of social security or Medicare tax, use Form 941 to report those taxes).

Installment Agreement

Installment Agreement allows taxpayers who owe the IRS to make a small amount of payments (taxpayers) can manage they will continue to incur penalties and interest at a daily rate (For example if they owe $20,000 and are paying $400.00 a month, they will pay back about $40,000 with all the penalties and interest.

Wage Garnishment

The IRS has enforced a garnishment of their paycheck.

Bank Levy

The IRS has levied the money that is in the bank account (the IRS takes the money).

Non-compliance person

A person has not filed taxes (three years of un-filed taxes consecutively can be considered tax evasion).

IRS Audit

The IRS is reviewing an individual/business tax return and errors, inconsistencies are found it’s an examination

Tax Lien

A notice of federal tax lien means that the IRS has filed a notice to seize assets necessary to satisfy an outstanding tax payment. When a taxpayer receives a notice of federal tax lien, they are given 10 days in which to make acceptable arrangements to address the outstanding tax payment. Although the IRS may accept an arrangement other than full payment, only full payment within the 10 days will lift the federal tax lien.

Taxes can be very confusing. Following are a list of tax terms and definitions to bring a little clarity to the situation. Terms are listed in alphabetical order.

Ability to Pay

A concept of tax fairness that states that people with different amounts of wealth or different amounts of income should pay tax at different rates. Wealth includes assets such as houses, cars, stocks, bonds, and savings accounts. Income includes wages, interest and dividends, and other payments.

Adjusted Gross Income (AGI)

Gross income reduced by certain amounts, such as a deductible IRA contribution or student loan interest

Amount Due

Money that taxpayers must pay to the government when the total tax is greater than their total tax payments.

Appeal

To call for a review of an IRS decision or proposed adjustment.

Authorized IRS e-file Provider

A business authorized by the IRS to participate in the IRS e-file Program. The business may be a sole proprietorship, a partnership, a corporation, or an organization. Authorized IRS e-file Providers include Electronic Return Originators (EROs), Transmitters, Intermediate Service Providers, and Software Developers. These categories are not mutually exclusive. For example, an ERO can at the same time, be a Transmitter, a Software Developer, or an Intermediate Service Provider, depending on the function being performed.

Benefits Received

A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services.

Bonus

Compensation received by an employee for services performed. A bonus is given in addition to an employee’s usual compensation.

Business

A continuous and regular activity that has income or profit as its primary purpose.

Citizen or Resident Test

Assuming all other dependency tests are met, the citizen or resident test allows taxpayers to claim a dependency exemption for persons who are U.S. citizens for some part of the year or who live in the United States, Canada, or Mexico for some part of the year.

Commission

Compensation received by an employee for services performed. Commissions are paid based on a percentage of sales made or a fixed amount per sale.

Compulsory Payroll Tax

An automatic tax collected from employers and employees to finance specific programs.

Deficit

The result of the government taking in less money than it spends.

Dependency Exemption

Amount that taxpayers can claim for their eligible dependents. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.

Dependent

A person, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption.

Direct Deposit

This allows tax refunds to be deposited directly to the taxpayer’s bank account. Direct Deposit is a fast, simple, safe, secure way to get a tax refund. The taxpayer must have an established checking or savings account to qualify for Direct Deposit. A bank or financial institution will supply the required account and routing transit numbers to the taxpayer for Direct Deposit.

Direct Tax

A tax that cannot be shifted to others, such as the federal income tax.

Earned Income

Includes wages, salaries, tips, includible in gross income, and net earnings from self- employment earnings.

Earned Income Credit

A tax credit for certain people who work, meet certain requirements, and have earned income under a specified limit.

Electronic Filing (e-file)

The transmission of tax information directly to the IRS using telephones or computers. Electronic filing options include (1) TeleFile using a touch-tone telephone, (2) Online self-prepared using a personal computer and tax preparation software, or (3) using a tax professional. Electronic filing may take place at the taxpayer’s home, a volunteer site, the library, a financial institution, the workplace, malls and stores, or a tax professional’s place of business.

Electronic Preparation

Electronic preparation means that tax preparation software and computers are used to complete tax returns. Electronic tax preparation helps to reduce errors.

Electronic Return Originator (ERO)

The Authorized IRS e-file Provider that originates the electronic submission of an income tax return to the IRS. EROs may originate the electronic submission of income tax returns they either prepared or collected from taxpayers. Some EROs charge a fee for submitting returns electronically.

Employee

Works for an employer. Employers can control when, where, and how the employee performs the work.

Excise Tax

A tax on the sale or use of specific products or transactions.

Exempt (from withholding)

Free from withholding of federal income tax. A person must meet certain income, tax liability, and dependency criteria. This does not exempt a person from other kinds of tax withholding, such as the Social Security tax.

Exemption

Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.

Exemption Amount

Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.

Exemptions

Amount that taxpayers can claim for themselves, their spouses, and eligible dependents. There are two types of exemptions-personal and dependency. Each exemption reduces the income subject to tax. The exemption amount is a set amount that changes from year to year.

Federal/State e-file

A program sponsored by the IRS in partnership with participating states that allows taxpayers to file federal and state income tax returns electronically at the same time.

Federal Income Tax

The federal government levies a tax on personal income. The federal income tax provides for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt.

Federal Insurance Contributions Act (FICA) Tax

Provides benefits for retired workers and their dependents as well as for disabled workers and their dependents. Also known as the Social Security tax.

File a Return

To mail or otherwise transmit to an IRS service center the taxpayer’s information, in specified format, about income and tax liability. This information-the return-can be filed on paper, electronically (e-file), or by telephone (TeleFile).

Filing Status

Determines the rate at which income is taxed. The five filing statuses are: single, married filing a joint return, married filing a separate return, head of household, and qualifying widow(er) with dependent child.

Financial Records

Spending and income records and items to keep for tax purposes, including paycheck stubs, statements of interest or dividends earned, and records of gifts, tips, and bonuses. Spending records include canceled checks, cash register receipts, credit card statements, and rent receipts.