Mar 13, 2023
If you have had any exposure to the U.S. tax world, you have probably heard some of these phrases: liability, levy, tax lien, garnishment, Offer in Compromise, EA… it can be confusing if you don’t know what they mean! The tax world has some commonplace phrases and monikers, just as every other industry uses its own terminology. The tax debt resolution corner of the tax world is no exception. We wanted to share some of the common phrases we utilize in the tax debt resolution world so you can be one step ahead of the standard knowledge curve, and also give you a “breakdown” of what it means in real-world terms:
Tax Liability: This one is the simplest phrase on this list. Tax liability is another word for tax debt. So, if a taxpayer files a tax return with an amount owed, the balance is referred to as a tax liability. The breakdown: the taxpayer owes money to the IRS or State.
Tax Lien: This document filed with the County Recorder’s Office gives the IRS or State a legal claim to your property over the tax liabilities owed. Remember that as new liabilities are recorded on a taxpayer’s account, multiple liens can be filed, and any lien can record multiple periods of tax debt. The breakdown: the IRS or State has issued a public notice that the debt is owed, and this notice will impact the taxpayer’s attempt to sell assets or secure lending.
Levy: This is a legal order the IRS or State can issue against a taxpayer to seize an asset such as funds in a bank or financial account, vehicles, real estate, or other personal property to satisfy or pay toward an outstanding tax debt. The breakdown: the IRS or State is taking your money or assets to start chipping away at the balance owed.
Wage Garnishment: This notice is issued to the taxpayer’s employer with instructions for a portion of the taxpayer’s income to be withheld from each paycheck and sent to the IRS or State for application to the outstanding balance. The breakdown: because the taxpayer hasn’t been proactive with addressing the debt, the IRS or State is now going to forcibly take funds each paycheck until the debt is paid in full, or the taxpayer makes other arrangements to address the debt.
EA: This is an abbreviation for Enrolled Agent. These are individuals whom the Treasury Department authorizes to represent taxpayers before the IRS. As it is a Federal designation, the same courtesy is extended by all 50 State tax agencies and departments. EAs must be proficient enough with the ever-changing tax codes to pass a grueling exam similar to those required by CPAs and Attorneys, and must commit to remaining compliant with annual Continuing Education requirements. The breakdown: These individuals are known as “tax experts” on the national tax platform.
CPA: This is an abbreviation for Certified Public Accountant. These individuals specialize in business taxes, auditing, financial accounting, and regulation. Though requirements vary based on the state the individual’s license is issued by, typically, they must have a bachelor’s degree, pass a comprehensive subject-based and ethics exam, and commit to remaining compliant with Continuing Education requirements. The breakdown: these are the experts on annual tax reporting and forward-thinking strategy implementation.
Installment Agreement: An Installment Agreement is an option to resolve a tax debt owed to the IRS or State. This resolution strategy allows a taxpayer to repay a tax debt over an extended period through monthly payments made. The IRS has various options depending on the taxpayer's tax type, tax amount, and financial condition. The States are not always as flexible, but they still have options to assist taxpayers who are financially struggling. The breakdown: a taxpayer can make monthly payments towards the debt.
Penalties & Interest: Once a tax liability is recorded, the IRS or State can legally charge penalties and interest on the balance due. Penalties can be charged for various reasons, allowing multiple penalties to be charged on a single balance due. Interest is typically charged on the total balance owed, with an annual rate usually compounded daily. The breakdown: the longer a debt sits on the books with the IRS or State, the total owed for penalties and interest increases!
Offer in Compromise: This is a resolution offered by the IRS and most States to settle a tax debt for a lesser amount. This type of resolution is one of the more challenging resolutions to get approved as a taxpayer must provide evidence that they cannot financially repay a tax debt now or in the foreseeable future. The breakdown: not everybody qualifies to settle their debt with the IRS or State, but if they can qualify, it can save the taxpayer a lot of money.
SFR/Substitute For Return: This is a tricky one as most individuals are unaware that the IRS and States have this authority, but a “substitute for return” is when the IRS or State files a return on the taxpayer’s behalf based on income information reported through third-party sources. When this happens, the SFR always claims no deductions for the taxpayer and charges an estimated tax using the highest tax bracket allowable. The breakdown: if a taxpayer has any earnings in a tax year, they should file a return for fear the IRS or State will file one that won’t be as favorable.
So, there it is… a crash course in the most common terms used in the tax debt resolution world. If you or your client finds themselves hearing these terms being used in relation to a tax debt, reach out to the Golden Lion Tax Solutions team. We will not only resolve the tax debt but will also educate you throughout the entire process. We pride ourselves on ensuring our clients understand everything happening with their files, including educating them on the terminology used in our industry. Knowledge is power, and we do everything we can to allow our clients to gain control over their tax debt issues with guidance provided to prevent it from happening again in the future.
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Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.