In the USA, an abusive tax shelter reduces liability to tax using complex transactions often judged to have no legitimate business purpose beyond tax avoidance. The IRS publishes a list of such transactions, making taxpayers liable for back taxes and interest. Similarly, the UK's GAAR aims to outlaw 'artificial and abusive' tax shelters.
The Accelerated Cost Recovery System (ACRS) is a method of tax depreciation introduced in 1981 and modified in 1984. It was used for tangible personal property placed in service between January 1, 1981, and December 31, 1986, and later replaced by the Modified Accelerated Cost Recovery System (MACRS) for assets placed in service after 1986.
A 15% penalty surcharge on earnings retained in a corporation to avoid the higher personal income taxes to which they would be subject if paid out as dividends to the owners.
In the USA, the difference between the gross income of a taxpayer and the adjustments to income, which is an essential figure for multiple tax computations.
An amended tax return is a form filed as a correction, supplement, or replacement for an original tax return. For instance, individuals use Form 1040X, and corporations use Form 1120X, to claim refunds or rectify errors in prior year tax returns.
A comprehensive U.S. legislation that repeals the Foreign Sales Corporation/Extraterritorial Income regime and enacts a variety of tax-related changes to boost domestic job creation.
A modification of the former Hope Scholarship Tax Credit, AOTC provides up to $2,500 a year for eligible postsecondary education expenses including course materials, with gross income limitations and up to 40% of the credit being refundable.
The annual amount that an individual can give to another person without having to pay federal gift tax, which was up to $13,000 in 2010 and 2011, and periodically adjusted for inflation.
An assessment of deficiency refers to the determination of additional tax owed by a taxpayer following an appellate review within the Internal Revenue Service (IRS) and a tax court adjudication, if necessary.
The 'Assignment of Income' doctrine is a tax principle that prevents taxpayers from avoiding tax by directing income they have earned to another person.
AUTOGEN is an automated system managed by the IRS that generates and mails a Federal Tax Deposit (FTD) coupon to taxpayers. This form accompanies employment tax deposits made at any Federal Reserve Bank.
Capital Gains Tax (CGT) is a tax levied on the profit from the sale of assets or investments. The tax applies to the difference between the sale price and the original purchase price or basis of the asset.
An itemized deduction allowed for donations made to qualifying charities. Several limitations apply to this deduction, especially for noncash property donations.
The Child and Dependent Care Credit is a non-refundable tax credit in the United States designed to help families offset the cost of care for children and dependents while they work or look for work.
An IRS publication that provides instructions for employers concerning employment tax withholding amounts and procedures.
A corporation that dissolves before realizing a substantial portion of the taxable income to be derived from its properties. The Internal Revenue Service (IRS) treats the gain on the sale or liquidation of a collapsible corporation as ordinary income to the stockholder.
This is a filed statement that a taxpayer must submit to the IRS that includes an estimate of the amount of income tax owed for a particular year. It is typically used by individuals who do not have their taxes automatically withheld from their paycheck.
A deduction is an amount allowed to taxpayers under the Internal Revenue Code as an offset against gross income or adjusted gross income.
A delinquent return is a tax return that is not filed within the time prescribed by the Internal Revenue Code (due date). It may be subject to penalties based on the unpaid tax liability.
A Departure Permit, also known as a Sailing Permit, is a certificate of compliance from the IRS certifying that a departing alien has satisfied U.S. income tax laws.
A Dependency Exemption allows taxpayers to deduct a specified amount for each dependent claimed on their tax return, reducing their overall taxable income. It is designed to assist families by acknowledging the financial responsibility involved in supporting dependents.
Depreciation is an accounting method that allocates the cost of a tangible asset over its useful life.
The General Depreciation System (GDS) is a tax depreciation system used to determine the depreciation deduction for depreciable property using the Modified Accelerated Cost Recovery System (MACRS) in the United States.
The direct charge-off method is an accounting technique used to write off specific bad debts when they are deemed uncollectible.
The Discriminant Function System (DIF) is an IRS technique using mathematical formulas programmed into computers to identify and select tax returns for examination. This secret system permits the IRS to rank the selected returns according to the greatest potential for tax error by weighing significant return characteristics.
The District Director serves as the chief operating officer of one of the Internal Revenue Service (IRS) districts and reports to the appropriate regional commissioner.
A taxpayer who was divorced under a final decree of divorce or separate maintenance by the last day of the tax year; considered unmarried for the entire year for tax purposes.
A unique number stamped on tax returns, checks, or other documents that enables the IRS to quickly identify and access specific documents.
The Earned Income Tax Credit (EITC) is a refundable tax credit aimed at helping low- to moderate-income working individuals and families, particularly those with children. It serves to reduce the amount of tax owed and may result in a refund.
Electronic Filing, commonly referred to as E-Filing, is a system allowing taxpayers to transmit their tax returns directly to the Internal Revenue Service (IRS) electronically. This streamlines the tax submission process, reduces the chance of errors, and accelerates the refund process.
An Electronic Return Originator (ERO) is an individual or company authorized by the IRS to submit tax returns electronically.
A unique number assigned by the IRS to providers of electronically filed tax returns, identifying them as authorized e-file originators, transmitters, software developers, or reporting agents.
The Electronic Transmitter Identification Number (ETIN) is a unique identifier assigned by the IRS to authorized electronic return originators (EROs) transmitting e-filed tax returns.
An Employer Identification Number (EIN) is a unique Taxpayer Identification Number (TIN) assigned to entities other than individuals, such as partnerships, corporations, estates, and trusts. The EIN is used for the purpose of identifying businesses and certain other entities for tax reporting.
An enrolled agent (EA) is a tax advisor who is authorized to represent taxpayers before the IRS. EAs have demonstrated their competence in tax matters by passing a rigorous examination or through significant professional experience with the IRS.
Exempt status refers to a special designation that frees certain organizations, such as churches, government organizations, and community chests, from paying taxes. However, these organizations must submit an application for exempt status and file information returns even when no tax is due.
An additional period during which a tax return may be filed without penalty. An automatic six-month extension of time to file an individual tax return (Form 1040) is obtained by filing Form 4868 by April 15.
A Federal Tax Lien is a legal claim by the government on all properties and rights to properties of a taxpayer who fails to pay a tax for which they are liable.
A financial lease is a leasing arrangement where the lessor's role is mainly limited to financing the property, while the lessee takes on the responsibilities of maintenance, insurance, and taxes, resembling a loan in its structure.
An allowable method for computing a business automobile mileage allowance that is not reported as wages on Form W-2.
Foreign income refers to any income that is generated from sources outside the United States. It is important for individuals and businesses, particularly those with international investments and operations, to understand the various regulations and tax implications associated with foreign income.
The Foreign Tax Credit (FTC) is a credit allowed against U.S. income taxes for foreign taxes paid on income earned overseas. It helps to mitigate the double taxation of income that is taxable both in the U.S. and by a foreign country.
The Foreign Tax Deduction allows individuals to deduct foreign income taxes paid or accrued from their U.S. income tax, or alternatively, apply the taxes as a credit against U.S. income tax liabilities.
U.S. tax form used by payers to report various types of income other than wages, salaries, and tips. Examples include interest, dividends, royalties, capital gains, and miscellaneous income.
Gift Tax Exclusion allows taxpayers to give away a certain amount of money or property without having to pay federal gift tax on the transfer. The annual exclusion amount was $13,000 per donee in 2011, indexed for inflation.
Illegal income refers to earnings derived from activities that are against the law, such as theft or embezzlement. These earnings are considered taxable income and must be reported to tax authorities.
An information return is a document that businesses, organizations, and entities must submit to the IRS to report certain types of payments made during the year. While it does not compute the actual tax liability of a taxpayer or accompany the payment of taxes, it provides key details that are relevant for tax calculations. Common examples include Forms 1099, W-2, and others.
The Internal Revenue Bulletin (IRB) is a weekly publication issued by the Internal Revenue Service (IRS) that summarizes various administrative rulings, procedures, and other IRS-related announcements and developments.
The Internal Revenue Code (IRC) is the comprehensive set of laws enacted by the United States Congress and enforced by the Internal Revenue Service (IRS) that defines the rules and regulations governing federal taxation.
The Internal Revenue Service (IRS) is an agency of the federal government responsible for the administration and collection of federal income taxes. As part of the Department of the Treasury, the IRS prints and distributes tax forms and audits tax returns.
The IRS is the United States federal government agency responsible for collecting taxes and administering the Internal Revenue Code. It ensures compliance with tax laws, investigates tax abuses, and prosecutes tax fraud.
The Internal Revenue Service (IRS) is the revenue service of the United States federal government responsible for collecting taxes and the administration of the Internal Revenue Code, the main body of federal statutory tax law.
Itemized deductions are specific, individualized tax deductions allowed under provisions of the Internal Revenue Code and state and municipal tax codes for particular expenses incurred by the taxpayer during the taxable year. These deductions are permitted in computing taxable income, but there is an overall limitation on certain itemized deductions. An alternative to itemizing deductions is to claim the standard deduction.
Expenses incurred while looking for a new job in the same line of work, whether or not a new job is found. These miscellaneous itemized deductions for tax purposes are subject to the 2% Adjusted Gross Income (AGI) floor. Expenses of search for one's first job after completing school are not deductible.
A tax return filed jointly by a married couple, computing a combined tax liability with progressive tax rates based on the assumed equal income by both spouses.
The lifetime exemption pertains to the total amount of gifts and estate transfers one can make without incurring federal gift or estate taxes.
Like-kind property refers to properties that are of the same nature or character but may differ in grade or quality. In terms of taxation, like-kind properties can be exchanged without triggering immediate tax liabilities, typically under IRS Section 1031.
Luxury automobiles are four-wheeled vehicles used on public streets and highways with an unloaded gross weight of 6,000 pounds or less. Depreciation deductions for such vehicles are severely limited for income tax purposes.
The marginal tax rate is the tax rate applied to an additional dollar of income, influenced by the progressive nature of income tax systems.
Various provisions of the tax law that require married people to pay more taxes in some situations than if they were single. The penalty is most pronounced for high-tax bracket couples earning equal amounts of income.
A filing status option for taxpayers who are married to each other and agree to report their combined income and deductions. For a given level of income, filing jointly typically results in a lower tax than filing separately. *However, see Marriage Penalty*.
Material Participation refers to the level of involvement by a taxpayer in the operations of a business activity on a regular, continuous, and substantial basis. This term is crucial in distinguishing between passive and active income for tax purposes.
Meals and Incidental Expenses (M&IE) refer to the daily allowance for meals and other related costs incurred by employees during business travel, as defined by the federal government.
Job expenses and other miscellaneous expenses that are deductible by individual taxpayers but do not fall under medical expenses, taxes, interest, charitable contributions, casualty and theft losses, or moving expenses.
MACRS is a method of depreciation used in the United States to recover the cost of tangible property over a specified life span. Introduced by the Tax Reform Act of 1986, MACRS replaces the Accelerated Cost Recovery System (ACRS) and offers a faster depreciation schedule for tax purposes.
MACRS is a depreciation method introduced in 1986 to calculate tax depreciation for property placed in service after its inception. It allows businesses to recover the cost basis of certain property more quickly, by assigning longer lives for personal property and offering conventions for calculation.
MACRS is a depreciation system in the USA designed to encourage capital investment by businesses. It enables a quicker recovery of an asset's cost by allowing greater depreciation deductions in the earlier years of an asset's life.
Modified Adjusted Gross Income (MAGI) is a measure used by the IRS to determine eligibility for certain tax credits, deductions, and additional taxes. It starts with Adjusted Gross Income (AGI) from federal Form 1040 and adds back certain tax-exempt interest income and other deductions.
Moving Expense Deduction refers to the tax deduction available for certain expenses incurred by an individual when relocating to a new residence for employment purposes. The deduction is permitted if the taxpayer's new job is located at least 50 miles farther from the former residence than the previous job.
A nonresident alien is an individual who is not a lawful permanent resident of the United States during the calendar year and does not meet the requirements of the substantial presence test, nor elects to be treated as a resident alien.
A not-for-profit organization (NFP) is an entity formed for purposes other than generating a profit and where no part of the organization's income is distributed to its members, directors, or officers.
A Notice of Deficiency is a formal notice issued by the Internal Revenue Service (IRS) to a taxpayer, outlining the amount of additional tax owed and a summary of how the deficiency was calculated. This notice must be sent to the taxpayer's last known address to be legally valid.
A tax term that allows a current deduction for business expenses; contrasted with capital expenditures. An ordinary and necessary business expense of a sole proprietor would appear on Schedule C of Form 1040.
Penalties for repeated errors are imposed to discourage consistent inaccuracies in tax filings or financial reports. These penalties serve as a deterrent for habitual mistakes and ensure compliance with legal standards.
A petitioner is the party requesting action in a court. In tax disputes, this role is frequently assumed by the taxpayer appealing an IRS position. However, if the government loses and appeals to a higher court, the IRS then assumes the role of the petitioner.
A private ruling is a written response from the Internal Revenue Service (IRS) regarding the tax implications of a specific proposed transaction. Initially kept private, these rulings are now publicly accessible.
The Problem Resolution Program (PRP) is an avenue provided by the IRS for aggrieved taxpayers who have difficulty getting their voices heard, providing them with assistance and advocacy.
Profit motive refers to the desire to earn a favorable financial return on a business venture. Without a profit motive, tax losses from an activity may be considered a hobby loss, which are only deductible to the extent of income.
A 'qualified charity' or 'qualified charitable organization' is a nonprofit organization recognized by the IRS as eligible to receive tax-deductible contributions.
A Qualified Charity is an organization that has applied for and received tax-exempt status under the Internal Revenue Code, allowing it to receive tax-deductible contributions from donors.
A Qualified Organization is a term primarily used in tax law to denote entities that meet specific regulatory criteria and are eligible for certain tax exemptions and privileges.
The recapture of depreciation is a tax provision that allows the IRS to tax the portion of gains on the sale of property that represents 'excess' depreciation.
In the context of tax-free exchanges, a recognized gain is the portion of a gain that becomes taxable. While a realized gain represents the total profit from the sale or exchange of an asset, the recognized gain is the part that the IRS considers taxable income.
The process of returning cash or a check, typically by the IRS or state tax agency, when the taxpayer's withholding and estimated tax payments exceed their tax liability for the year.
A Regulated Investment Company (RIC), such as a mutual fund or Real Estate Investment Trust (REIT), is eligible under Regulation M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level, thereby avoiding double taxation on corporations and stockholders.
Official interpretations of the Internal Revenue Code (IRC) issued by the Treasury Department (IRS) that have the force and effect of law to guide taxpayers and tax professionals.
Return can have varied meanings in different contexts, including finance, investment, retailing, taxes, and trade. Generally, it refers to profits, exchanges, and refunds or credits, often associated with securities, merchandise, or taxpayer information.
Revenue Procedures are published statements from the Internal Revenue Service (IRS) detailing instructions for the taxpayer and IRS officials in performing their duties.
A Revenue Procedure is an official published statement by the Internal Revenue Service (IRS) detailing procedural and administrative matters pertaining to the tax laws. Initial publications appear in the Internal Revenue Bulletin and are later transferred to the Cumulative Bulletin.
An official interpretation by the IRS of the internal revenue laws, related statutes, tax treaties, and regulations, published in the Cumulative Bulletin. Revenue rulings are issued only by the National Office of the IRS and are published for the information and guidance of taxpayers, IRS officials, and others concerned.
Schedule C is a tax form used by individuals to report income and expenses from a business or self-employed activity.
Section 167 of the Internal Revenue Code details the rules and methodology regarding depreciation deductions for assets used in a trade or business or held for the production of income.
Provision for Social Security (old-age, survivor's, and disability insurance) and Medicare (hospital insurance) for self-employed individuals. The rate is equal to the combined rates paid for Social Security by both employer and employee.
A 'Separate (Tax) Return' refers to the option for married couples to file their tax returns individually rather than jointly, which may offer different tax benefits and considerations.
A single taxpayer is an individual who files taxes separately from others, and who does not qualify as a head of household or a qualifying widower; they fall into the 'single' filing status category, one of several classifications used by the IRS to determine tax liability.
The term 'single taxpayer' refers to an individual who is not married on the last day of the tax year. This designation affects the rate schedules and tax tables used to calculate their tax liabilities.
An identifying number for individuals that is furnished by the Social Security Administration. Social Security numbers are required for all individual taxpayers and dependents. It is the counterpart of the Employer Identification Number (EIN) that is used for non-individual entities such as businesses, trusts, and partnerships.
The Social Security tax, specifically the Old-Age, Survivors, and Disability Insurance (OASDI) portion, is a crucial federal tax under the Federal Insurance Contributions Act (FICA) that applies to compensation and self-employment earnings.
A special agent can refer to either a professional engaged to act on behalf of another with limited authority, such as a real estate broker, or an Internal Revenue Service employee tasked with investigating potential fraud.
The specific charge-off method allows for the deduction of bad debt at the time a specific receivable is determined to be uncollectible, following the exhaustion of all possible collection methods. Accrual basis taxpayers are required to use this method for tax purposes, as they can no longer accrue reserves for bad debts.
