Glossary of Tax Terms

Appeal

A request by a taxpayer for the review of a decision by the IRS or FTB when the taxpayer disagrees with the agency's proposed action or judgment.

Amended Return

A correction to a previously filed return submitted. By law, a return can be amended within three years from the date of the filing of the original return or within two years from the date a tax was paid, whichever is later.

Audit

A process used by the IRS to verify the accuracy of a tax return by confirming specific items on the return.

Automated Collection System

A computerized collection system used by the IRS to contact delinquent taxpayers by mail and/or telephone.

Burden of Proof

A phrase referring to the responsibility and duty of each taxpayer to prove that their tax return is accurate.

Charitable Contribution

A cash or non-cash donation made to an organization that exists for the benefit of the public. A tax deduction is allowed for such contributions when the recipient organization has received tax exempt status under section 501(c)(3) of the Internal Revenue Code.

Cancelled Debt

Debt that has been forgiven or written-off. Since debt forgiveness financially benefits the taxpayer who receives it, the amount of the cancelled debt is considered to be taxable income.

Capital Gain

A net gain realized from the sale of property or assets including real estate, stocks, and bonds. A gain is classified as a short-term capital gain if the property or assets that produced it have been held for less than one year and as a long-term capital gain if they have been held for more than twelve months.

Capital Loss

A net loss realized from the sale of property or assets including real estate, stocks, and bonds. A loss is classified as a short-term capital loss if the property or assets that produced it have been held for less than one year and as a long-term capital loss if they have been held for more than twelve months.

Collateral Agreement

An agreement often secured by the IRS prior to the acceptance of an Offer in Compromise or some other tax resolution agreement that settles a tax debt for less than the full amount owed. A Collateral Agreement allows the IRS to collection money in excess of the original dollar settlement amount if a taxpayer's financial situation improves significantly.

Correspondence Audit

An audit conducted entirely by mail. It is initiated with an official IRS Notice announcing to a taxpayer that their tax return has been selected for further examination. The notice will typically request that more information or documentation be submitted regarding certain specific items on the return. Many IRS audits are Correspondence Audits.

Deduction

An amount that is subtracted from taxable income to reduce that amount of income that is subject to tax.

Delinquent Tax Return

A tax return that is not submitted by the initial filing deadline or by a deadline established by filing an extension.

Dependent

A qualifying child or relative that can be claimed by a taxpayer as a dependency exemption on a tax return.

Depreciation

A deduction reflecting the gradual loss in value of business property beginning with the original cost of the property and continuing over its assigned tax life.

Earned Income

Taxable income received from working. Earned income includes wages, tips, long-term disability income, strike benefits, and income from self-employment.

Estimated Tax

Tax payments that are made to cover a taxpayer's projected tax liability for the current tax year when they have income, such as self-employment income, that is not subject to withholding.

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