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  • Michael Gunckel

Tax and accounting terms A-M

ABLE Account: Created as a result of the passage of the Achieving a Better Life Experience

(ABLE) Act of 2014. A tax-advantaged savings account available to individuals diagnosed with

significant disabilities before age 26. They are designed to help people with disabilities and their

families save and pay for disability-related expenses. The funds within the account grow tax-free.

Abstract Fees: Fees that do not conform to the standard fees charged in an industry. For

example, charges for doing title research is an abstract fee and are referred to as an “abstract of

title”.

Academic Period: A semester, trimester, quarter, or other period of study (such as a summer

school session) as reasonably determined by an educational institution. If an educational

institution uses credit hours or clock hours and does not have academic terms, each payment

period can be treated as an academic period.

ACAT: Accreditation Council for Accountancy and Taxation—Non-profit independent testing

organization, accrediting and monitoring organization established in 1973. ACAT is affiliated with

the National Association of Accountants. The organization awards accreditation based upon

examinations to individual tax practitioners specializing in accounting and tax services to small

businesses and individuals. In order to maintain the credential, individuals must commit to

continuing professional education requirements and adherence to the Council’s Code of Ethics

and Rules of Professional Conduct.

Acceptance Letter: Correspondence issued by the IRS to applicants confirming they may

participate in IRS e-file and annually to Authorized IRS e-file Providers confirming they may

continue to participate in IRS e-file. See also “Credentials.”

Acceptance or Assurance Testing (ATS): Required testing for Software Developers that

participate in IRS e-file to assess their software and transmission capability with the IRS, prior to

live processing. PATS, BATS and CATS are acceptance or assurance testing specific to certain

form types.

Accountable Plan: Employer reimbursement plans can be either accountable or

nonaccountable. For more information, see Chapter 6 of Publication 463, Travel, Gift, and Car

Expenses.

Accrual Method: Accounting method that reports income when earned (not necessarily

received) and expenses when incurred (not necessarily paid), as opposed to the cash method.

Acknowledgment (ACK): A report generated by the IRS to a Transmitter that indicates receipt

of all transmissions. An ACK Report identifies the returns in each transmission that are accepted

or rejected for specific reasons.

ACRS (Accelerated Cost Recovery System): A method of depreciation that depreciates an

asset using recovery periods instead of useful life.

Active Conduct of a Trade or Business: Performing active and substantial management and

operational functions.

Active Participation / Material Participation: The taxpayer must have owned at least 10% of

the rental property and must have made management decisions in a significant and bona fide

sense.

Actual Auto Expense: Expense incurred by the taxpayer during the course of conducting his

trade or business. Instead of using the standard mileage rate, the taxpayer deducts the actual

cost of operating his vehicle for business.

Actuarial Value: The percentage of total average costs for covered benefits that a plan will

cover.

Additional Medicare Tax: An additional Medicare tax (0.9%) applicable to higher income

taxpayers whose wages/income exceed a specified threshold which is based on filing status. The

standard employee portion of Medicare tax is 1.45%. The additional Medicare tax is required to

be paid by employees and self-employed individuals, bringing the total Medicare tax rate to

2.35%. Employers are not required to match the additional percentage of the Medicare taxes on

the employee’s wages which exceed the threshold.

Adequate Disclosure: Sufficient revelation of facts or reasons for a position involving the

preparation of a tax return.

Adjusted Basis: The original cost of property, plus certain additions and improvements, minus

certain deductions such as depreciation allowed or allowable and casualty losses.

Adjusted Basis of Property: Basis plus amounts that increase or decrease the basis.

• Decreases: The postponed gain on the sale of the previous asset is the main decrease.

• Increases: Improvements and additions are the main increases to the basis.

Adjusted Gross Income (AGI): The income arrived at after adjustments are subtracted. AGI is

determined prior to subtracting the standard deduction or itemized deductions. Adjustments may

be claimed by taxpayers even if they cannot itemize deductions using Schedule A.

Adjusted Qualified Education Expenses (AQEE): Qualified education expenses reduced by

any tax-free educational assistance, such as a tax-free scholarship or employer-provided

educational assistance. They must also be reduced by any qualified education expenses

deducted elsewhere on your return used to determine an education credit or other benefit or used

to determine a tax-free distribution.

Adjusted Sales Price: Selling price minus expenses of sale, minus fix-up expenses of property

or assets.

Adjustments to Income: Certain “allowances” or deductions taken from the total income from

line 22, Schedule 1 (Form 1040). This subtraction from total income results in the adjusted gross

income (AGI). Examples include:

• Contributions to an IRA

• 1/2 self-employment tax

• Deductible portion of self-employed health insurance

Administrative Review Process: The process by which a denied applicant or sanctioned

Authorized IRS e-file Provider may appeal the IRS’ denial or sanction.

Adopted Child: Any child placed by an authorized placement agency for legal adoption. An

authorized placement agency includes any person authorized by state law to place children for

legal adoption. The adoption does not have to be final.

Adoption Taxpayer Identification Number (ATIN): A tax processing number issued by the IRS

as a temporary taxpayer identification number for a child in the domestic adoption process who is

not yet eligible for a Social Security Number (SSN). An ATIN is not a permanent identification

number and is only intended for temporary use. To obtain an ATIN, complete IRS Form W-7A,

Application for Taxpayer Identification Number for Pending U.S. Adoptions.

Advance Rent: Any amount of rent the taxpayer receives before the period that the payment

covers.

Advance Premium Tax Credit (APTC): A tax credit that helps taxpayers afford coverage

bought through the Marketplace. This tax credit can be used to lower monthly premium costs for

health care coverage through the Marketplace. If the taxpayer qualifies, you may choose how

much advance credit payments to apply to your premiums each month, up to a maximum

amount. If the amount of advance credit payments you get for the year is less than the tax credit

you're due, you'll get the difference as a refundable credit when you file your federal income tax

return. If your advance payments for the year are more than the amount of your credit, you must

repay the excess advance payments with your tax return.

Affordable Care Act: Refers to the Patient Protection and Affordable Care Act and the Health

Care and Education Reconciliation Act of 2010. Together, the Acts expand Medicaid coverage to

millions of Americans with low income, improving upon programs such as Children’s Health

Insurance Program (CHIP) and Medicaid.

Affordable Coverage: Employer coverage is considered affordable - as it relates to the premium

tax credit - if the employee’s share of the annual premium for the lowest priced self-only plan is

no greater than 9.56% (9.86% for 2019) of annual household income. People offered employer sponsored coverage that’s affordable and provides minimum value aren't eligible for a premium

tax credit.

Affordable Insurance Exchange/Marketplace: A resource where individuals, families, and

small businesses can: learn about their health coverage options; compare health insurance plans

based on costs, benefits, and other important features; choose a plan; and enroll in coverage.

The Marketplace also provides information on programs that help people with low to moderate

income and resources pay for coverage. This includes ways to save on the monthly premiums

and out-of-pocket costs of coverage available through the Marketplace, and information about

other programs, including Medicaid and the Children’s Health Insurance Program (CHIP). The

Marketplace encourages competition among private health plans, and is accessible through

websites, call centers, and in-person assistance. In some states, the Marketplace is run by the

state. In others, it is run by the federal government.

AICPA (American Institute of Certified Public Accountants): An organization headquartered

in New York whose members are certified public accountants. This organization provides

educational and industry updates to the members. AICPA also preparers the CPA examination

taken by individuals who wish to acquire the CPA credential.

Aiding and Abetting: The act of helping or assisting another individual in an attempt to evade

that individual’s tax liability.

Allocated Tips: Tips an employer assigns to an employee. They are in addition to the tips the

employee reported to the employer.

Alternative Minimum Tax (AMT): A tax assessed on special treatment items such as certain

types of income and certain deductions.

Alternative Motor Vehicle: An alternative motor vehicle is a new vehicle that qualifies as one of

the following four types of vehicles:

• Qualified hybrid vehicle

• Advanced lean burn technology vehicle

• Qualified alternative fuel vehicle

• Qualified fuel cell vehicle

Amended Return: A form filed as a correction or supplement to, or replacement for, an original

tax return (Form 1040X).

American Opportunity Credit: A new education tax credit for tax years 2009 and 2010 that is a

modification of the Hope credit. The credit was extended to apply for tax years 2011 and 2012 by

the Tax Relief and Job Creation Act of 2010. The new credit makes the Hope Credit available to

a broader range of taxpayers, including many with higher incomes and those who owe no tax. It

also adds required course materials to the list of qualifying expenses and allows the credit to be

claimed for four post-secondary education years instead of two. Many of those eligible will qualify

for the maximum annual credit of $2,500 per student.

Amortization: A ratable deduction for the cost of intangible property over its useful life.

Amount Realized: The selling price minus the selling expenses.

Annual Federal Tax Refresher (AFTR) Course: An IRS approved course based on general

filing season concepts, tax law updates, and typical trouble areas identified by the IRS.

Unenrolled preparers who take the AFTR course, pass the accompanying exam, and complete

the required continuing education (CE), can have their names listed on the Directory of Federal

Tax Return Preparers. This is all part of the IRS’s Annual Filing Season Program (AFSP), which

began in the summer of 2014.

Annual Filing Season Program (AFSP): An annual voluntary IRS tax training program for

return preparers. It aims to recognize the efforts of non-credentialed return preparers who aspire

to a higher level of professionalism. Upon completion of the requirements, the return preparer

receives an Annual Filing Season Program – Record of Completion.

Annuity: A contract sold by an insurance company that pays a monthly, quarterly, semiannual,

or annual income benefit for the life of the annuitant or other specified period of time.

At-Risk: The taxpayer’s liability for an activity to the extent of cash and adjusted basis of other

property contributed to the activity and certain amounts borrowed for use in the activity.

Attorney: Any person who is a member in good standing of the bar of the highest court of any

State, territory, or possession of the United States, including a Commonwealth or the District of

Columbia.

Attorney-in-Fact: An agent authorized by a person under a power of attorney to perform certain

act(s) or kind(s) of acts for that person.

Audits: An examination of a taxpayer’s books and records performed by the Internal Revenue

Service.

Authorized IRS e-file Provider (Provider): A firm accepted to participant in IRS e-file.

Automated Clearing House (ACH): A system that administers electronic funds transfers (EFTs)

among participating financial institutions. An example of such a transfer is Direct Deposit of a tax

refund from IRS into a taxpayer’s account at a financial institution.

Backup Withholding: The method used by the IRS to make sure it collects taxes on income

that an investor may have already spent before his/her taxes become due. Backup withholding

may also be applied when an investor has not met the taxpayer identification number (TIN) rules.

Base Amount: A figure used as a control for certain calculations. (Such as the base amount for

individuals who qualify for the credit for the elderly and totally disabled.)

Basis: A way of measuring an individual’s investment in property for tax purposes.

Basis of Property: Cost when purchased or built. If acquired by inheritance, it is the fair market

value at date of death. If received as a gift, the recipient’s basis is that of the donor.

Batch: A single transmission consisting of the electronic data from single or multiple tax returns.

Beginning Inventory: The cost of items available for sale. This should be the same as last

year’s closing inventory.

Below-Market Loans: A below-market loan is a loan on which either no interest is charged or

interest is charged at a rate below the applicable federal rate. If a below-market loan is made, the

recipient may have to report income from the loan in addition to any stated interest received from

the borrower.

Bonus Depreciation: An additional amount of deductible depreciation that is awarded above

and beyond what would normally be available. Bonus depreciation is always taken right away, in

the first year that the depreciable item is placed in service. Bonus depreciation is also known as

the additional first year depreciation deduction.

Boot: The portion of a like-kind exchange that is unlike property included to balance the values

of like properties exchanged.

Business Expenses: Business expenses are amounts that are ordinary and necessary to carry

on a business.

Business/investment Use: Usually, a percentage showing how much an item of property, such

as an automobile, is used for business and investment purposes.

Business Mileage: Mileage traveled by a taxpayer during the course of conducting his trade or

business. The taxpayer must use a vehicle that he owns or leases.

Business Rules (BR): Error codes included on an Acknowledgement (ACK) for returns that the

IRS rejected. The IRS publishes explanations prior to the filing season on IRS.gov.

CAF Number: The Centralized Authorization File number issued by the IRS to each

representative whose power of attorney, and each designee whose tax information authorization,

has been recorded on the CAF system.

Cancelled Debts: Debt from a loan or from buying something on credit and a portion of the

amount owed is discharged or forgiven ("cancelled"), the amount of the forgiven debt is generally

counted as income to the taxpayer.

Candidate for a Degree: A student who meets either of the following requirements. (1) Attends

a primary or secondary school or pursues a degree at a college or university, or (2) Attends an

accredited educational institution that is authorized to provide (a) a program that is acceptable for

full credit toward a bachelor’s or higher degree, or (b) a program of training to prepare students

for gainful employment in a recognized occupation.

Capital Gain Distributions: Paid by mutual funds and real estate investment trusts. May be

taxed at different rates.

Capital Improvements: Costs that add to the value of the asset. These do not include repairs

or maintenance.

Capitalize: To classify the cost of an asset as a long-term investment and expense the cost over

the life of that asset rather than deducting it fully in the year it was incurred.

Carryover: An amount that is unable to be used in the current year due to restrictions.

Cash Method of Accounting: The cash method of accounting reports all income when received

and deducts all expenses when paid (as opposed to the accrual method, which reports income

when earned and expenses when incurred).

Casualty and Theft: The loss of property through a disaster, fire, storm, or theft.

Centralized Authorization File (CAF) System: The computer file system containing information

regarding the authority of individuals appointed under power of attorney or persons designated

under the tax information authorization system. This system gives IRS personnel quicker access

to authorization information.

Certified Public Accountant (CPA): Any person who is duly qualified to practice as a certified

public accountant in any State, territory, or possession of the United States, including a

Commonwealth or the District of Columbia. Any CPA who is not currently under suspension or

disbarment from practice before the IRS and who is duly qualified to practice as a CPA in any

State, territory, or possession of the United States may practice before the IRS.

Child and Dependent Care Credit: A nonrefundable credit that allows taxpayers to claim a

credit for paying someone to care for their qualifying Dependents under the age of 13 or spouses

or dependents who are unable to care for themselves.

Civil Penalty: Violations of the Internal Revenue Code whenever a taxpayer fails to abide by

IRS regulations, resulting in fines or penalties the IRS assesses to the taxpayer’s tax bill. Civil

fraud can include a penalty of up to 75% of the underpayment of tax attributable to fraud, in

addition to the taxes owed.

Circular 230: A publication of certain U.S. Treasury regulations which include the rules

governing practice before the U.S. Internal Revenue Service (IRS). These rules require

attorneys, those qualified to practice as Certified Public Accountants (CPAs), Enrolled Agents

(EAs), and other persons who prepare tax returns and provide tax advice to do certain things.

The rules in Circular 230 also prohibit certain conduct. Penalties may be imposed for

noncompliance. The rules in Circular 230 are codified as Title 31 of the Code of Federal

Regulations, Subtitle A, Part 10 (31 CFR 10).

Claim for Refund: A claim by a taxpayer to the Internal Revenue Service for a refund of all or

part of the taxes paid in earlier years.

Class Life: A number of years that establishes the property class and recovery period for most

types of property under the General Depreciation System (GDS) and Alternative Depreciation

System (ADS).

Client Representation: A service offered to a taxpayer who may need assistance resolving an

issue with the Internal Revenue Service. An individual who offers client representation may

appear at audit for their client or possibly appear before the Internal Revenue Service on behalf of

their client.

COBRA: Federal law that may allow a taxpayer to temporarily keep health coverage after his

employment ends. If the taxpayer elects COBRA coverage, he will pay 100% of the premiums,

including the share the employer used to pay, plus a small administrative fee.

Codes of Conduct: An established set of rules which are designed to determine the boundaries

in which behavior is deemed acceptable.

Coercion: To intimidate or to force.

Combat Pay (nontaxable): If the taxpayer was a member of the U.S. Armed Forces who served

in a combat zone, certain pay is excluded from his income. See Combat Zone Exclusion in

Publication 3, Armed Forces’ Tax Guide. The taxpayer can elect to include this pay in his earned

income when figuring the EIC. The amount of his nontaxable combat pay should be shown in

Form(s) W-2, Box 12, with code Q. If he is filing a joint return and both the taxpayer and his

spouse received nontaxable combat pay, each will make their own election.

Commissioner: The Commissioner of the Internal Revenue Service

Communications Testing: Required test for all Transmitters using accepted IRS e-file software

to assess their transmission capability with the IRS, prior to live processing.

Commuting Mileage: Mileage traveled from home to work or from work to home.

Compensation: A direct or indirect monetary and non-monetary reward given to employees.

Usually taxed as ordinary income.

Constructive Receipt: Income that has been credited or made available to the taxpayer even

though the taxpayer may not have yet actually received it in hand.

Convention: A method established under the Modified Accelerated Cost Recovery System

(MACRS) to determine the portion of the year to depreciate property both in the year the property

is placed in service and in the year of disposition.

Cost (of a retirement plan): All of an employee’s contributions paid into a qualified plan and any

contributions paid into a plan by an employer that were taxable at the time they were paid.

Cost and Lower of Cost or Market Methods: If livestock inventory is valued at cost or the

lower of cost or market, then IRS approval is needed to change to the unit-livestock-price method.

Cost of Goods Sold: A total that represents the cost of buying raw material and the cost of

producing finished goods such as overhead, labor, and utilities.

Cost of Labor: The cost of labor used in the actual production of the goods.

Coverdell ESA: A Coverdell ESA is a trust or custodial account created or organized in the

United States only for the purpose of paying the qualified education expenses of the designated

beneficiary of the account.

Covered Security: For tax purposes, a covered security refers to any investment security for

which a broker is required to report the asset's cost basis to the Internal Revenue Service and to

the owner. A “covered security” is a security the taxpayer acquired after 2010. Most stocks

traded in the U.S. are covered securities.

Credit: A direct reduction of the taxpayer's liability. Credits are allowed for such purposes as

childcare expenses, higher education costs, qualifying children, and earned income of low income taxpayers.

Credentials: Documentation issued by the IRS which indicates qualification of an Authorized

IRS e-file Provider to participate in the IRS e-file Program. The documentation consists of

identification numbers and acceptance letters.

Credit Figured by the IRS: To have the IRS figure the credit for you —

1. Put “EIC” on the dotted line next to line 17 of Form 1040.

2. If you have a qualifying child, complete and attach Schedule EIC. If your EIC for a year

after 1997 was reduced or disallowed, see Instructions for Form 8862, Information To

Claim Certain Credits After Disallowance.

Credit for Other Dependents (ODC): Beginning with the 2018 tax year, if the taxpayer has a

dependent, he may be able to claim this credit. The ODC is a nonrefundable credit of up to $500

for each eligible dependent who cannot be claimed for the child tax credit. This credit is figured

using the same worksheet used to figure the Child Tax Credit (CTC); the Child Tax Credit and

Credit for Other Dependents Worksheet and is reported directly on Form 1040.

Criminal Penalty: The Internal Revenue Service (IRS) is primarily responsible for charging

these penalties at the Federal level. Criminal penalties may include jail time but are imposed only

by a federal judge after a defendant is convicted. Fraud and tax evasion could result in criminal

charges, fines, and jail time.

Crop Method: If the farmer does not harvest and dispose of his crop in the same tax year it is

planted, he can, with IRS approval, use the crop method of accounting. Under this method, the

entire cost of producing the crop is deducted; including the expense of seed or young plants, in

the year income is realized from the crop.

Custom Hire (machine work): Pay received for contract work or custom work that is performed

by the taxpayer’s hired help off the farm for others, or for the use of the taxpayer’s property or

machines, is income to him whether or not income tax was withheld. This rule applies whether

the pay is received in cash, services, or merchandise. Report this income on Schedule F, Part I,

line 9.

DCN (Declaration Control Number): A unique 14-digit number assigned to each tax return,

which must be clearly printed or typed on the upper left-hand corner of the Form 8453.

Debt Indicator (DI): The Debt Indicator is a field on an ACK Report. It only indicates whether a

debt offset of a taxpayer’s refund will occur. It does not indicate how much the offset will be.

Offsets taken by IRS may be for current and prior year tax obligations. Offsets taken by the

Financial Management IRS (FMS) are for past due student loans, child support, federal taxes,

state taxes, or other governmental agency debts.

Decedent: A person who is no longer living; a person who has died.

Declaration Control Number (DCN): A unique 14-digit number assigned by the ERO (or

Transmitter, in the case of Online Filing), to each electronically filed tax return.

Declining Balance Method: An accelerated method to depreciate property. The General

Depreciation System (GDS) of MACRS uses the 150% or 200% declining balance methods for

certain types of property. A depreciation rate (percentage) is determined by dividing the declining

balance percentage by the recovery period for the property.

Deductible: An amount that allows a reduction of the AGI.

Deductions in Respect of a Decedent: Deductions for which the decedent would have been

liable, such as business expenses, interest, taxes, or income-producing expenses, but which

were not deductible on the decedent’s final tax return.

Denied Applicant: An applicant that is not accepted to participate in IRS e-file. An applicant

that has been denied participation in IRS e-file has the right to an administrative review.

Dependency Tests: The tests that must be met in order to claim an individual as a dependent

include —

1. Joint return test

2. Citizen or resident test

3. Relationship test

4. Age test

5. Residency test

6. Support test

* Taxpayer identification numbers – although not considered to be a “test,” it is a

requirement to be entitled to claim an individual as a dependent.

Dependent: A person for whom the taxpayer can claim on his tax return. A dependent may be a

qualifying child or a qualifying relative. He must be supported by the taxpayer and meet all six of

the dependency requirements to be claimed as a dependent. The requirements are: support,

relationship (or household member), gross income, joint return, citizenship (or residency), and

legal relationship tests (explained in Chapter 2).

Dependent Care Benefits: These benefits include amounts employers pay to a taxpayer or

directly to the care provider.

Depositor Account Number (DAN): The financial institution account to which a Direct Deposit

refund is to be routed.

Depreciation: A method of recovering the cost of an asset over the asset’s useful life or

recovery period.

Depreciation Recapture: When personal property is sold at a gain, the gain is ordinary income

to the extent of depreciation previously deducted; when real property is sold at a gain and

accelerated depreciation has been claimed, the taxpayer may be required to pay a tax at the

ordinary rate to the extent of the excess accelerated depreciation. Excess depreciation on

residential real estate after 1980 is recaptured, when an accelerated method is used, under

Section 1250 of the Internal Revenue Code.

Designated Beneficiary: The individual named in the document creating the account plan who

is to receive the benefit of the funds in the account plan.

Direct Deposit: Process by which the IRS deposits the taxpayer's refund into a checking or

savings account. In the case of a RAL, the bank sets up an account specifically for this purpose

for each taxpayer.

Direct Expenses: Expenses incurred only as a result of conducting business in the home.

Direct Filer: see “Transmitter”

Director of Office of Professional Responsibility: An individual assigned to enforce the rules

and regulations for tax professionals.

Director of Practice: An individual assigned to enforce the rules and regulations for tax

professionals.

Disability Income: The amount paid to an employee under an insurance or pension plan while

the employee is absent from work because of a disability. If the employer paid the insurance

premiums, the amount received is taxable income. If the employee paid the premiums it is

nontaxable.

Disability Pension: Generally paid to a taxpayer who retires because of a disability before the

minimum retirement age (set by the employer). The disability pension is considered regular

pension income when the taxpayer reaches the minimum retirement age.

Disbarred: To be deprived on the right to practice before the Internal Revenue Service.

Disposition: Permanently withdrawn from use in a trade or business or from the production of

income.

Disreputable Conduct: Behavior that is considered dishonest or outside of the rules or

guidelines set forth by the Internal Revenue Service.

Distribution: A payment of cash or property made to a taxpayer.

Dividends: Distributions of money, stock, or other property or services paid to the taxpayer by a

corporation.

Divorced, Separated, or Never Married Parents: Special rules apply if the dependent is

supported by parents who are divorced or separated; these rules also apply to parents who were

never married. In general, the child will be considered a dependent of the custodial parent,

assuming the child meets all the rules for a qualifying child or qualifying relative. However, the

custodial parent can agree to allow the noncustodial parent to treat the child as a qualifying child

or qualifying relative if certain conditions are met. A signed Form 8332 or equivalent is required

and must be attached to the noncustodial parent’s return, or attached to Form 8453 if filing

electronically.

Domestic Business: For purposes of calculating qualified business income (QBI), a domestic

business is one that is connected to the conduct of trade or business within the U.S. or Puerto Rico.

Drain: The IRS scheduled time for processing electronically filed return data.

Drop or Dropped: An EFIN that is no longer valid due to inactivity or other administrative action.

Dual Status Alien: An alien who is both a nonresident and resident alien during the same tax

year. The most common dual-status tax years are the years of arrival and departure.

Due Diligence: The practice of assuring correctness in tax preparation through thorough tax

client interviews. Thoroughly completely the proper worksheets and forms will aid in assuring

correctness.

Durable Power of Attorney: A power of attorney that is not subject to a time limit and that will

continue in force after the incapacitation or incompetency of the principal (the taxpayer).

E-file: The IRS process permitting tax returns to be filed electronically.

Early Distribution: Amounts received by the taxpayer from a pension, annuity, or IRA, prior to

reaching age 59½. Early distributions are subject to a 10% penalty. (Some exceptions apply.)

Earned Income: Includes wages, salaries, tips, and other employee compensation when the

amounts are includible in gross income. Also, net earnings from self-employment and other

income received for personal services.

Earned Income Credit (EIC): A refundable individual income tax credit for certain persons who

work and have earned income.

Easements and Rights-of-Way: Income received for granting easements or rights-of-way on a

farm or ranch for flooding land, laying pipelines, constructing electric or telephone lines, etc., may

result in income, a reduction in the basis of all or part of the farmer’s farmland, or both.

Economic Recovery Payment: A $250 Economic Recovery Payment paid automatically in

2009 to recipients of certain benefits administered by the Social Security Administration,

Department of Veterans Affairs, and the Railroad Retirement Board.

Education Credits: Credits that reduce the amount of tax due and are based on qualified

education expenses that the taxpayer paid during the tax year.

Effectively Connected Income (ECI): When a foreign person engages in a trade or business in

the U.S., all income from sources within the United States other than certain investment income.

EFIN: Electronic Filer Identification Number issued to all participants in the electronic filing

program. The number is written at the bottom of Form 8453 along with the ERO's signature and

the firm's name and address.

EIC (Earned Income Credit): A refundable credit based on the taxpayer's income and number

of qualifying children.

EIC Recertification: A requirement for a taxpayer previously denied EIC to provide additional

information on Form 8862, Information To Claim Certain Credits After Disallowance, when they

file a similar EIC claim on a subsequent return.

Electronic Federal Tax Payment System (EFTPS): A free service from the U.S. Treasury

through which federal taxes may be paid. Taxes can be paid via the Internet, by phone or

through a service provider. After authorization, payments are electronically transferred from the

authorized bank account to the Treasury’s general account.

Electronic Filing: A system whereby tax returns are transmitted electronically to the Internal

Revenue Service and tapes are created in the receiving station and loaded into the electronic

filing computer system.

Electronic Filing Identification Number (EFIN): An identification number assigned by the IRS

to accepted applicants for participation in IRS e-file.

Electronic Funds Transfer (EFT): The process through which Direct Deposit refunds are

transmitted from the government to the taxpayer’s account at a financial institution.

Electronic Funds Withdrawal (EFW): A payment method which allows the taxpayer to authorize

the U.S. Treasury to electronically withdrawal funds from their checking or savings account.

ELF or EF: Electronic Filing.

Electronic Management System (EMS): Front-end processing system for electronic information

exchange between the Internal Revenue Service (IRS) and Authorized IRS e-file Providers

(Providers), to a designated Submission Processing Campus. EMS receives returns from

Transmitters, acknowledges the receipt of the information and prepares the information for

mainframe processing.

Electronic Postmark: The Electronic Postmark is the date and time the electronic return is first

received on the Transmitter’s host computer in the Transmitter’s time zone. The ERO, or

taxpayer in the case of Online Filing, adjusts the time to their time zone to determine timeliness.

Electronic Return Originator (ERO): An Authorized IRS e-file Provider that originates the

electronic submission of returns to the IRS.

Electronic Signature: Method of signing a return electronically through use of a Personal

Identification Number (PIN).

Electronic Tax Administration Advisory Committee (ETAAC): An advisory group established

by the IRS Restructuring and Reform Act of 1998 to provide an organized public forum for

discussion of ETA issues in support of the overriding goal that paperless filing should be the

preferred and most convenient method of filing tax and information returns.

Electronic Tax Administration and Refundable Credits (ETARC): ETARC is the office within

IRS with management oversight of the IRS’ electronic commerce initiatives. The mission of

ETARC is to revolutionize how taxpayers transact and communicate with the IRS.

Electronic Transmitter Identification Number (ETIN): An identification number assigned by

the IRS to a participant in IRS e-file that performs activity of transmission and/or software

development.

Electronically Transmitted Documents (ETD): A system created to process electronic

documents that are not attached to a tax return and are filed separately from the tax return.

Eligible Educational Institution: The definition of an eligible educational institution will vary

depending upon the context in which it is used – education credits, Coverdell accounts, qualified

tuition programs, scholarships and fellowships, student loans, etc. Please see IRS Publication

970, Tax Benefits for Education.

Eligible Student: The definition of an eligible student will vary depending upon the context in

which it is used – education credits, Coverdell accounts, qualified tuition programs, scholarships

and fellowships, student loans, etc. Please see IRS Publication 970 Tax Benefits for Education.

Employee Contribution: Amounts paid by the employee into an employee benefit program or

plan.

Employer Dependent Care Assistance: Dependent care benefits provided by the taxpayer’s

employer which are excluded from income (such as those received under a cafeteria plan). This

amount should be reported on the taxpayer’s Form W-2 in box 10.

Employer Identification Number (EIN): A taxpayer identification number issued to an entity

other than an individual.

Ending Inventory: The cost of merchandise remaining in stock at the close of the tax year. This

is inventory figured at the end of the tax year and is used as the beginning inventory for the next

year’s return.

Enrolled Actuary: A persons who is enrolled by the Joint Board for the Enrollment of Actuaries.

They are enrolled to practice in areas regarding pension plans. This classification was

established in the Employment Retirement Income Security Act (ERISA) of 1974.

Enrolled Agent (EA): An individual who is qualified to practice before the Internal Revenue

Service. Enrolled agents have passed a two-day IRS examination or have worked in a technical

area of the IRS for at least five years.

Enrolled Retirement Plan Agent: Any enrolled retirement plan agent in active status who is not

currently under suspension or disbarment from practice before the IRS may practice before the

IRS. The practice of enrolled retirement plan agents is limited to certain Internal Revenue Code

sections that relate to their area of expertise, principally those sections governing employee

retirement plans.

ERC/RAC (Electronic refund check): A bank product alternative to a RAL (see below) for

taxpayers who don’t qualify for a loan or desire a less costly alternative for a fast refund. They

either lack the money to pay tax preparation fees or do not have a personal bank account.

ERO (Electronic Return Originator): Either the preparer who files electronically or an

"electronic return collector" who accepts prepared returns and files them.

Error Reject Code (ERC): Codes included on an Acknowledgment (ACK) Report for returns that

are rejected by the IRS. The IRS publishes explanations prior to the fling season on IRS.gov.

Providers can locate these on the e-file for Tax Professionals page titled “2009 (or current year)

Tax Year IRS e-file for Individual Income Tax Returns.” In addition, the IRS also provides these

in Publication 1346, Electronic Return File Specifications and Record Layouts for Individual

Income Tax Returns.

Essential Health Benefits: A set of health care service categories that must be covered by

certain plans, starting in 2014. Essential health benefits must include items and services within at

least the following 10 categories: ambulatory patient services; emergency services;

hospitalization; maternity and newborn care; mental health and substance use disorder services,

including behavioral health treatment; prescription drugs; rehabilitative and habilitative services

and devices; laboratory services; preventive and wellness services and chronic disease

management; and pediatric services, including oral and vision care.

Insurance policies must cover these benefits to be certified and offered in the Health Insurance

Marketplace. States expanding their Medicaid programs must provide these benefits to people

newly eligible for Medicaid.

Estate Tax Exclusion: Estate tax is levied on an heir’s inherited portion of an estate if the value

of the estate exceeds an exclusion limit set by federal law. The estate tax is mostly imposed on

assets left to heirs, but it does not apply to the transfer of assets to a surviving spouse. The

estate tax exclusion amount is subtracted (excluded) from an estate’s gross value for purposes of

calculating the tax owed at the federal level.

Estimated Taxes: A quarterly payment on income not subject to withholding taxes. The

payment represents a projection of the taxpayer’s ultimate tax liability for the taxable period.

Ethics: Standards of conduct and moral judgment. The system of morals of an individual.

Evade: To avoid by deceit or dishonesty.

Exception to “Time Lived With You” Condition: A child is considered to have lived with the

taxpayer for all of the tax year if the child was born or died in the tax year and the taxpayer’s

home was this child’s home for the entire time he or she was alive during the year. Temporary

absences, such as school, vacation, medical care, or detention in a juvenile facility, count as time

lived at home. If the child is presumed to have been kidnapped by someone who is not a family

member, see Publication 596 to find out if that child is a qualifying child for the EIC.

Excess Contributions: Contributions of cash or deferred arrangements for highly compensated

employees that exceeds the amount allowed under nondiscrimination rules.

Exchange: To barter, swap, part with, give, or transfer property for other property or services.

Excludable Income: Income that is not included in the taxpayer's gross income and, therefore,

exempt from federal income tax.

Exclusively: Must be used for business purposes only.

Exemptions: In tax years prior to 2018, taxpayers were permitted to claim an exemption for

themselves, their spouse, and each of their dependents, if eligible. The total exemption amount

was deducted from their adjusted gross income to arrive at their taxable income. For example, in

2017, the taxpayer could deduct $4,050 for himself, spouse, and each of his dependents. This

amount was adjusted yearly. The TCJA suspended exemptions when it increased the standard

deduction; therefore, they are not deducted on tax returns beginning in 2018. However, the

amount has been adjusted to $4,150 to keep up with inflation, as there are areas of the tax code

where the exemption amount is used to determine eligibility for other items.

Exemption Certificate Number (ECN): A number the Marketplace provides when a taxpayer

qualifies for a health insurance exemption. The Marketplace will review applications for

exemptions, completed by taxpayers, to determine if they qualify. The Marketplace will mail a

notice of the exemption eligibility results. If the taxpayer qualifies for an exemption, the notice will

include a unique identifier, called the exemption certificate number (ECN). The ECN for the

taxpayer’s tax return. Each member of the household who qualifies for an exemption will get their

own ECN. The ECNs are needed to complete Form 8695, Health Coverage Exemptions.

Extension of Time to File: A taxpayer must request the extension of time to file by the regular

due date of the return to avoid the penalty for filing late. An automatic six-month extension to file

will be granted if the taxpayer submits Form 4868, Application for Automatic Extension of Time to

File U.S. Individual Income Tax Return. An extension will give the taxpayer extra time to get his

paperwork to the IRS, but it does not extend the time he has to pay any tax due.

Fair Market Value (FMV): The price which property brings when it is offered for sale by one who

is willing but not obligated to sell, and is bought by one who is willing or desires to buy but is not

compelled to do so.

Fair Rental Value: An amount that a person who is not related to the taxpayer would be willing

to pay for rental use.

Farm-Price Method: Under this method, each item, whether raised or purchased, is valued at its

market price less the direct cost of disposition.

Federal/State e-file: The Federal/State e-file option allows Federal and state income tax returns

to be filed electronically in a single transmission to the IRS.

Federal Unemployment Tax Act (FUTA): An act that provides for federal unemployment

insurance and is paid by employers. FUTA rates are determined annually.

Fiduciary: Any trustee, executor, administrator, receiver or guardian that stand in the position of

a taxpayer and acts as the taxpayer not as a representative

FIFO (First In, First Out): A method of inventory valuation in which the first items entered into

inventory are considered the first items sold.

Filing Requirements: The determination of whether an individual is required to file a federal

individual income tax return is based on several factors, such as Federal tax filing status, gross

income, whether the individual is claimed as a dependent on another person’s tax return, and

whether a specific credit was received, or a tax liability is owed. There are several additional

filing requirements which depend on the person’s unique circumstances.

Filing Status: Five taxpayer categories that determine the amount of tax and/or tax credits that

apply to different taxpayers. The five filing statuses are (from lowest to highest tax): Married

Filing Jointly; Qualifying Widow(er) with Dependent Child; Head of Household; Single; Married

Filing Separately.

Financial Institution: For the purpose of Direct Deposit of tax refunds, a financial institution is

defined as a state or national bank, savings and loan association, mutual savings bank, or credit

union. Only certain financial institutions and certain kinds of accounts are eligible to receive

Direct Deposits of tax refunds.

Financial Management Service (FMS): The agency of the Department of the Treasury through

which payments to and from the government, such as Direct Deposits of refunds, are processed.

Financially Disabled: An individual who is unable to manage his financial affairs because of a

medically determinable physical or mental impairment which can be expected to result in death or

which has lasted or can be expected to last for a continuous period of not less than 12 months.

However, he is not treated as financially disabled during any period his spouse or any other

person is authorized to act on his behalf in financial matters.

First-time Homebuyer: A first-time homebuyer is a taxpayer who has never owned a house as

his principal residence before or one who has not owned a house in the past three years.

Fixing-Up Expense: Decorating and repair costs (applies to personal residence only) paid to

prepare the old home for sale. These repairs are restricted in that they must be done within 90

days of signing the contract of sale with the buyer and must be paid for within 30 days after the

date of sale.

Foreign Earned Income Exclusion: The foreign earned income exclusion allows eligible

taxpayers to avoid paying federal income tax on their foreign earned income.

Foreign Tax Credit: A nonrefundable credit taken on the U.S. tax return for taxes paid to a

foreign country or U.S. possession.

Form 1040: Tax return used to report all items of income, deductions, and credits for individual

taxpayers. The 1040 has always offered the most options, allowing taxpayers to take advantage

of itemizing their deductions and possibly increasing their refund. Beginning with tax year 2018, it

is the only version of Form 1040 available to taxpayers.

Form 1040A: Tax return (used prior to tax year 2018) to report taxable income less than

$100,000 from the following sources; wages, salaries, tips, interest and ordinary dividends,

capital gain distributions, taxable scholarship and fellowship grants, pensions, annuities, and

IRAs, unemployment compensation, taxable social security and railroad retirement benefits, and

Alaska Permanent Fund dividends. A few adjustments to income are allowed; IRA deduction,

student loan interest deduction, educator expenses, and tuition and fees deduction.

Form 1040EZ: Tax return (used prior to tax year 2018) for Single and Joint Filers with NO

Dependents, used to report taxable income less than $100,000 from only from wages, salaries,

tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska

Permanent Fund dividends Taxable interest must be $1,500 or less.

Form 1040NR: U.S. Nonresident Alien Income Tax Return.

Form 8453: Individual Income Tax Declaration for Electronic Filing. Form must be signed by the

taxpayer and must have the same address and return amount as the electronically filed return.

This is the paper document the IRS receives in lieu of an entire paper return.

Form 8879: IRS e-file Signature Authorization. This form is used as a paperless means of filing

a tax return with the Internal Revenue Service.

Form 9325: General Information for Taxpayers Who File Returns Electronically. Form must be

given to taxpayers that explains direct deposits and tells the taxpayer the procedure to follow if he

does not receive his return when expected.

Form Field Number or Form Sequence (SEQ) Number: The identifier of specific data on an

electronic tax return record layout as defined in Publication 1346, Electronic Return File

Specifications and Record Layouts for Individual Income Tax Returns.

Foster Child: A foster child is any child placed with the taxpayer by an authorized placement

agency or by judgment, decree, or other order of any court of competent jurisdiction. For more

details on authorized placement agencies, see Publication 596, Earned Income Credit (EIC).

Fraud: Act of deceiving or misrepresenting. Persons who file or assist in filing a materially false

or fraudulent return may be subject to a criminal penalty of up to $100,000 and/or up to three

years imprisonment plus costs of prosecution ($500,000 in the case of a corporation).

Fraudulent Return: A “fraudulent return” is a return in which the individual is attempting to file

using someone’s name or SSN on the return or where the taxpayer is presenting documents or

information that have no basis in fact.

Fringe Benefit: An indirect compensation provided to an employee. Generally includes life and

health insurance. May also include pension plans.

Frivolous: Lacking in substantial correctness or containing information that is knowingly

incorrect. An attempt at evading taxes.

FTF (First Time Filer): Anyone who has not filed under the same name and Social Security

number within the last 10 years is considered a first-time filer.

Full-time Employee: An employee who works an average of at least 30 hours per week.

Gain: Amount realized from a sale minus the adjusted basis of the property sold.

General Power of Attorney: A power of attorney that authorizes the attorney-in-fact to perform

any and all acts the taxpayer can perform.

Gift Tax Exclusion: The gift tax is a tax on the transfer of property by one individual to another

while receiving nothing, or less than face value, in return. An annual exclusion gift is one that

qualifies for the $15,000 per person per year exclusion from federal gift taxes for 2018 and 2019.

In other words, this is the amount that can be gifted in cash or property value without incurring a

gift tax.

Goodwill: An intangible property such as the advantage or benefit received in property beyond

its mere value. It is not confined to a name but can be attached to a particular area where

business is transacted, to a list of customers, or to other elements of value in business as a going

concern.

Government Officer or Employee: An individual who is an officer or employee of the executive,

legislative or judicial branch of a state or of the United States Government; an officer or employee

of the District of Columbia; a Member of Congress.

Government Retiree Credit: The government retiree credit was available for the 2009 tax year

for certain federal, state, and local government retirees who received a government pension or

annuity from work not covered by Social Security. This credit was a one-time $250 credit ($500 if

filing a joint return and both spouses were government retirees).

Gramm-Leach-Bliley Act: An act that imposed requirements on financial institutions to protect

the privacy of nonpublic personal information of their clients.

Grandchild: Any descendant of your son, daughter, adopted child, or stepchild. For example, a

grandchild includes the taxpayer’s great-grandchild, great-great-grandchild, etc.

Grantor: The owner of property who transfers ownership of that property to another (grantee).

Green Card Test: The determination that an individual has been issued a “green card” by the

United States Citizenship and Immigration Services (USCIS), generally making that person a

lawful, permanent resident of the United States.

Gross Earnings: Earnings prior to deductions.

Gross Income: The total amount of income received by a taxpayer from all sources before any

adjustments or deductions — except items specifically excluded by the Internal Revenue Code

and other items not subject to tax.

Examples:

• Wages

• Taxable interest income

• Alimony received

• Net rent income

• Net income from a business (if the taxpayer is the only owner)

• Capital gains

Half-time Student: A student who is enrolled for at least half the full-time academic workload for

the course of study the student is pursuing, as determined under the standards of the school

where the student is enrolled.

Hardship Exemption: Under the Affordable Care Act, most people must pay a fee if they don't

have health coverage that qualifies as "minimum essential coverage." One exception is based on

showing that a "hardship" prevented them from becoming insured. Note: Due to changes made

by the Trump administration, this penalty has been eliminated for tax years beginning with 2019.

Health Coverage Tax Credit: A program that pays 80% of qualified health insurance premiums

for eligible individuals, as part of the American Recovery and Reinvestment Act of 2009.

Hobby: An activity not pursued for profit.

Home Mortgage Interest: Interest paid on a personal residence.

Hope Credit: One of two tax credits that was available to offset the costs of higher education by

reducing the amount of income tax. The Hope credit was a nonrefundable credit that was limited

by the amount of income and amount of tax owed. The Hope credit was expanded for the 2011

and 2012 tax years, to allow 40% of the Hope credit to be refundable. The modified version of

the Hope credit is now referred to as the American Opportunity Credit.

Household: The Marketplace generally considers a household to be the taxpayer, the taxpayer’s

spouse if married, and his tax dependents. Your eligibility for savings is generally based on the

income of all household members, even those who don’t need insurance.

Identity Theft: Tax-related identity theft occurs when someone uses another person’s Social

Security number to file a tax return claiming a fraudulent refund.

IMA (Institute of Management Accountants): “Practitioners of management accounting and

financial management have a responsibility to refrain from disclosing confidential information

acquired in the course of their work except when authorized, unless legally obligated to do so.”

Improvement: Adds to the value of the property and prolongs its useful life. Example: Paving a

driveway is considered an improvement.

Income in Respect of a Decedent: An amount that a decedent was entitled to receive as gross

income. However, because of his or her method of accounting, was not included in gross income

for any period before death.

Income Taxes: Taxes on income, both earned (for example, salaries, wages, tips, commissions)

and unearned (for example, interest and dividends). Income taxes can be levied both on

individuals (personal income tax) and businesses (business and corporate income taxes).

Independent Contractor: A person who is self-employed and contracts his services to other

businesses.

Indirect Expenses: Expenses for running the entire home.

Indirect Filer: An Authorized IRS e-file Provider who submits returns to IRS via the services of a

Transmitter.

Individual: In regard to the §199A deduction, an individual refers to an individual, estate, trust,

or other taxpayer eligible to claim the deduction.

Individual Retirement Arrangement (IRA): A personal savings plan that offers the taxpayer tax

advantages to set aside money for his retirement or, in some plans, for certain education

expenses. Contributions may be deductible or nondeductible depending upon the taxpayer’s

modified AGI.

Individual Taxpayer Identification Number (ITIN): A tax processing number that became

available on July 1, 1996, for certain nonresident and resident aliens, their spouses and

dependents. The ITIN is only available from IRS for those individuals who cannot obtain a Social

Security Number (SSN). To obtain an ITIN, complete IRS Form W-7, Application for IRS

Individual Identification Number.

Initial Amount: A figure used as a control for certain calculations (such as the initial amount for

individuals who qualify for the credit for the elderly and totally disabled).

Injured Spouse: A taxpayer who files a joint return and is due a refund that is likely to be

assessed because the spouse owes past due taxes, child support, or student loans.

Innocent Spouse: A taxpayer who has filed a joint return with a spouse who has incorrectly

reported information on the joint tax return.

Installment Agreement: An Internal Revenue Service (IRS) program which allows individuals to

pay tax debt in monthly payments. The total amount paid can be the full amount of what is owed,

or it can be a partial amount.

Instrument: A legal document that records an act or agreement. Instruments may also be

considered as contracts, notes and leases.

Intangible Property: Property that has value but cannot be seen or touched, such as goodwill,

patents, copyrights, and computer software.

Interest: Income received from investments on which payments received by the taxpayer reflect

the time value of money.

Interest Income: Income a person receives from certain financial accounts or from lending

money to someone else.

Intermediate Service Provider: An Authorized IRS e-file Provider that receives electronic tax

return information from an ERO or a taxpayer who files electronically using a personal computer,

commercial tax preparation software and a modem, processes the electronic tax return

information, and either forwards the information to a Transmitter or sends the information back to

the ERO or taxpayer.

Internal Revenue Code: Legislation passed by Congress that specifies what income is to be

taxed, how it is to be taxed, and what deductions may be taken from taxable income.

Internal Revenue Service: The agency (which is a division of the Department of the Treasury)

that is responsible for the administration and collection of federal taxes.

Internet Protocol (IP) Information: The IP address, date, time, and time zone of the origination

of a tax return filed through Online Filing via the Internet. IRS requires Transmitters that provide

Online Services via the Internet to capture the Internet Protocol Information of Online returns. By

capturing this information, the location of the return’s originator is transmitted with the individual’s

electronic return. See Publication 1346 for additional information.

Investment Income: Investment Income includes taxable interest and dividends, tax-exempt

interest, capital gain net income, net income from rents and royalties not derived from a trade or

business, and net income from passive activities.

Involuntary Conversion: The sudden destruction by fire, storm, natural disasters, or other

damage or taking of property.

IRA: A personal savings plan that offers tax advantages to set aside money for retirement or

education expenses.

IRS e-file: The brand name of the electronic filing method established by the IRS.

IRS e-file Marketing Tool Kit: A specially designed kit containing professionally developed

material that EROs may customize for use in advertising campaigns and promotional efforts.

IRS Master File: A centralized IRS database containing taxpayers’ personal return information.

Itemized Deductions: Eligible expenses that individual taxpayers can report on their federal

income tax returns for the purpose of decreasing their taxable income. Most taxpayers are

allowed a choice between the itemized deductions and the standard deduction. Special rules

apply to married taxpayers who file separately.

Itemized Deduction Limitation: Prior to tax year 2018, there was a restriction placed on

taxpayers with an AGI that exceeded a predetermined threshold that required taxpayers to limit

their deductions. Starting in 2018, this limit has been eliminated.

Items to Include in Inventory: An inventory should include all items held for sale, or for use as

feed, seed, etc., whether raised or purchased, that are unsold at the end of the year.

Joint Ownership: Owned equally by all parties on the deed.

Keogh Plan: A tax deferred pension plan designed for self-employed individuals or employees

of unincorporated businesses.

Kiddie Tax: Tax on a child's investment and other unearned income. The kiddie tax was

created in 1986 to keep parents from sheltering income by putting accounts in the names of their

lower-taxed kids. In its original form, a portion of investment earnings held by a child were tax free. Another portion of earnings were taxed at the youngster’s tax rate. For 2018-2025, the Tax

Cuts and Jobs Act (TCJA) revamps the kiddie tax rules to tax a portion of an affected child's or

young adult's unearned income at the rates paid by trusts and estates. Those rates can be as

high as 37% or as high as 20% for long-term capital gains and dividends.

Levels of Infractions (LOI): Categories of infractions of IRS e-file rules based on the

seriousness of the infraction with specified sanctions associated with each level. Level One is the

least serious, Level Two is moderately serious, and Level Three is the most serious.

Lifetime Learning Credit: One of two tax credits available to offset costs of higher education by

reducing the amount of income tax. The Lifetime Learning credit is a nonrefundable credit of up

to $2,000 for qualified education expenses for students enrolled in eligible educational

institutions. It is available to students for all years of postsecondary education and for courses to

acquire or improve job skills.

LIFO (Last In, First Out): A method of inventory valuation in which the last items entered into

inventory are considered the first items sold.

Like-Kind Exchange: The exchange of one piece of property for another, often both real estate,

under Section 1031 of the Internal Revenue Code.

Limited Power of Attorney: A power of attorney that limits the attorney-in-fact to perform only

certain specified act(s).

Liquidating Dividends: Dividends that are issued as a result of the corporation becoming

partially or completely liquidated.

Listed Property: Passenger automobiles, any other property used for transportation, property of

a type generally used for entertainment, recreation or amusements, computers and their

peripheral equipment (unless used only at a regular business establishment and owned or leased

by the person operating the establishment), and cellular telephones or similar

telecommunications equipment.

Livestock: Animals such as cattle, pigs, horses, foxes, minks, etc.

Loss on Redemption: The farmer can deduct on Schedule F, Part II, any loss incurred on the

redemption of a qualified written notice of allocation received in the ordinary course of his farming

business. The loss is the difference between the stated dollar amount of the qualified written

notice included in income and the amount received when it was redeemed.

Lump-Sum Distribution: The payment of a taxpayer’s entire retirement or pension plan in one

payment, instead of steady payments made over time.

MACRS (Modified Accelerated Cost Recovery System): A method of depreciation that

replaced the Accelerated Cost Recovery System (ACRS) the asset is depreciated over a longer

life than with ACRS.

Married Child: A child who was married at the end of the tax year is a qualifying child only if (a)

the taxpayer can claim him or her as a dependent on Form 1040 or (b) this child’s other parent

claims him or her as a dependent under the rules in Publication 501 for children of divorced or

separated parents or parents who live apart.

Materials and Supplies: The materials used in the actual production or processing of the goods.

Medical Loss Ratio (MLR): A basic financial measurement used in the Affordable Care Act to

encourage health plans to provide value to enrollees. If an insurer uses 80 cents out of every

premium dollar to pay its customers' medical claims and activities that improve the quality of care,

the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the

insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such

as marketing, profits, salaries, administrative costs, and agent commissions. The Affordable

Care Act sets minimum medical loss ratios for different markets, as do some state laws.

Medical Savings Account: A health care program where the participant may purchase low cost

health insurance with a high annual deductible.

Members of the Military: A taxpayer on extended active duty outside the United States, is

considered to be in the United States during that duty period. Extended active duty is military

duty ordered for an indefinite period or for a period of more than 90 days. Once the taxpayer

begins serving extended active duty, the taxpayer is considered to be on extended active duty

even if they serve fewer than 90 days.


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