Tax Lingo – What does Offer in Compromise mean? And other tax terms you need to know.

What does Offer in compromise meanTax Lingo 101 – What do these tax terms mean?

We hear it all the time, “It’s like accountants are speaking a different language”.  Or, you received a notice from the IRS that’s only provided more questions than answers. As always, we’re here to help you out.

Here is a handy little glossary list of tax terms for you to reference. We’ve selected some terms our clients often ask about. If there are other terms you’d like to learn more about please let us know in the comments below.

Amortization

Amortization is the paying off of debt with a fixed repayment schedule in regular installments over a period of time for example with a mortgage or a car loan. It also refers to the spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life) for accounting and tax purposes.

Bookkeeping

Bookkeeping is the recording of the financial transactions and information pertaining to a business. It ensures that records of the individual financial transactions are correct, up-to-date and comprehensive. Accuracy is therefore vital to the process.

Bookkeeping provides the information from which financial statements are prepared. It is a distinct process, that occurs within the broader scope of accounting.

A consultation is a meeting with a professional or expert for purposes of gaining information. Fix-It Accounting offers free initial consultations for bookkeeping services.

Depreciation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken.

IRS Payment Arrangement

Same as IRS Installment Agreement. Read more about IRS Payment Arrangements on our blog.

IRS Installment Agreement

If you’re financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. Learn more about IRS Solutions.

IRS Levy

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a legal claim against property to secure payment of the tax debt, while a levy actually takes the property to satisfy the tax debt.

IRS Lien

A federal tax lien is the government’s legal claim against your property when you neglect or fail to pay a tax debt. The lien protects the government’s interest in all your property, including real estate, personal property and financial assets. If you have an IRS Lien consult with a professional to have it resolved and oftentimes the amount owed may be reduced.

Offer in Compromise

An offer in compromise is one of the programs offered by the Internal Revenue Service to allow someone to satisfy the tax liability owed by paying less than the full balance.

An offer in compromise is not made available to every taxpayer, as the Internal Revenue Service has strict guidelines it follows to determine who may make use of this benefit. These guidelines include the taxpayer’s ability to pay, income, expenses, and assets in determining if payment of the full tax liability owed would create an undue financial hardship for the taxpayer. Read more about the Offer in Compromise process in our blog post.

Trust Fund Penalties

If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including withholding and employment taxes, and willfully fail to do so, you 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, a volunteer in a non-profit 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.

Penalty Abatement

Abatement is a reduction in the penalties. Learn more about penalty abatement in our blog post.

Lien Release

A recordable document showing that a lender, judgment creditor, the IRS, or other secured creditor no longer claims a lien upon real property.

Lien Withdrawal

An IRS tax lien is the government’s legal right to your property when you owe taxes. A Tax Lien Withdrawal removes the public tax lien record, and helps assure other creditors that the IRS will not compete for your property and other assets.

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