Tax debt glossary

Every term you will meet in an IRS notice, collection letter, or resolution conversation, defined in plain English.

Offer in compromise (OIC)

An agreement with the IRS to settle a tax debt for less than the full amount owed. The IRS generally accepts an offer only when the amount offered equals or exceeds what it believes it could collect from your assets and future income. Applications go in on Form 656 with a financial disclosure and, for most applicants, a $205 fee.

Installment agreement

A monthly payment plan with the IRS that lets you pay a tax debt over time instead of all at once. While an agreement is in place, the IRS generally will not levy your wages or bank accounts, though penalties and interest continue to accrue on the unpaid balance.

Streamlined installment agreement

A simplified IRS payment plan available when your combined balance of tax, penalties, and interest is $50,000 or less and you can pay it within 72 months. It requires no financial statement, so the IRS never reviews your income, expenses, or assets. Most individual payment plans are set up this way.

Partial pay installment agreement

A monthly payment plan sized to what you can actually afford, even though the payments will not cover the full debt before the collection statute expires. Whatever remains unpaid when the collection clock runs out is written off. The IRS requires full financial disclosure and reviews your finances periodically, typically every two years.

Currently not collectible (CNC)

An IRS hardship status that pauses collection because paying anything would leave you unable to cover basic living expenses. Levies and garnishments stop while the status lasts, but penalties and interest keep accruing and the IRS keeps any tax refunds. If the collection statute expires while the account sits in CNC, the remaining debt is wiped out.

Reasonable collection potential (RCP)

The IRS's calculation of how much it could realistically collect from you: the net equity in your assets plus a multiple of your monthly disposable income. RCP is the yardstick for an offer in compromise, since the IRS generally accepts an offer only when it equals or beats this number.

Collection statute expiration date (CSED)

The deadline after which the IRS can no longer collect a tax debt, generally 10 years from the date the tax was assessed. Once the CSED passes, the remaining balance is legally uncollectible and is written off. Certain events pause the clock, including a pending offer in compromise, bankruptcy, and some appeals.

Penalty abatement

The removal or refund of IRS penalties, either because you qualify for first-time relief or because you had a legitimate reason for the noncompliance. Abatement applies to penalties and the interest charged on them, not to the underlying tax or the interest on the tax itself.

First-time abatement (FTA)

An administrative waiver that removes failure-to-file, failure-to-pay, or failure-to-deposit penalties for a single tax period when you have a clean compliance history. To qualify you generally need no penalties in the prior three years, all required returns filed, and any current-year tax paid or under a payment arrangement. No explanation or excuse is required.

Reasonable cause

The legal standard for removing IRS penalties when circumstances beyond your control prevented you from filing or paying on time, despite ordinary business care and prudence. Common grounds include serious illness, death in the family, natural disasters, and inability to obtain records. Simply not having the money usually does not qualify on its own.

Failure-to-file penalty

The penalty for filing a tax return late: 5 percent of the unpaid tax for each month or partial month the return is overdue, capped at 25 percent. It is ten times steeper than the late payment penalty, which is why filing on time matters even when you cannot pay. When both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay amount.

Failure-to-pay penalty

The penalty for paying tax after the due date: 0.5 percent of the unpaid balance for each month or partial month it goes unpaid, capped at 25 percent. The monthly rate drops to 0.25 percent while an approved installment agreement is in effect and rises to 1 percent after the IRS issues a final levy notice.

Underpayment interest

Interest the IRS charges on unpaid tax and penalties, set quarterly at the federal short-term rate plus 3 percentage points and compounded daily. For the quarter beginning July 1, 2026, the rate for individuals is 7 percent. Unlike penalties, interest generally cannot be removed unless the underlying tax or penalty is reduced.

Substitute for return (SFR)

A tax return the IRS files on your behalf when you fail to file, built from W-2s, 1099s, and other third-party reports. An SFR allows no deductions beyond the standard deduction, no dependents in most cases, and the least favorable filing status, so it almost always overstates what you owe. Filing your own accurate return can replace an SFR and usually lowers the balance.

Trust fund recovery penalty (TFRP)

A personal penalty the IRS assesses against individuals when a business fails to pay over the payroll taxes it withheld from employees. The penalty equals 100 percent of the unpaid trust fund taxes, meaning the withheld income tax plus the employee share of Social Security and Medicare. It pierces the business entity, so owners, officers, and even bookkeepers can owe it personally.

Responsible person

Anyone with the duty and authority to collect, account for, and pay over a business's withheld payroll taxes. The IRS can assess the trust fund recovery penalty against any responsible person who willfully failed to pay, which can include owners, officers, partners, and employees who control the checkbook. Job titles matter less than actual control over which bills got paid.

Form 941

The quarterly federal tax return employers file to report wages paid, income tax withheld from employees, and both shares of Social Security and Medicare tax. Unpaid Form 941 balances are the core of most payroll tax debt cases and can lead to personal liability through the trust fund recovery penalty.

Form 433-A

The IRS Collection Information Statement for wage earners and self-employed individuals: a detailed disclosure of your income, expenses, assets, and debts. Revenue officers use it to decide what you can pay, and a variant called Form 433-A (OIC) accompanies most individual offers in compromise. What you report here drives nearly every resolution outcome.

Form 433-B

The IRS Collection Information Statement for businesses, covering the company's income, expenses, assets, bank accounts, and receivables. The IRS uses it to evaluate payment plans, hardship status, and offers for corporations, partnerships, and LLCs with tax debt.

Form 433-F

The short-form Collection Information Statement used by the IRS Automated Collection System, condensing your finances to two pages. It is typically requested when you call the IRS to set up a payment plan that exceeds streamlined limits or to claim hardship, and it demands less detail than the longer Form 433-A.

Form 656

The official application for an offer in compromise, where you state the amount you are offering and the payment terms. It is filed with a Form 433-A (OIC) or 433-B (OIC) financial disclosure, a $205 application fee, and an initial payment, though low-income applicants can have the fee and initial payment waived.

Form 9465

The IRS form used to request a monthly installment agreement on a tax debt. It can be attached to a return or filed on its own, though most taxpayers who qualify can now set up the same payment plan faster through the IRS Online Payment Agreement tool.

Notice of federal tax lien (NFTL)

A public document the IRS files with county or state records to announce its legal claim against everything you own. The lien itself arises automatically once tax is assessed, billed, and unpaid; the notice makes it public, which can complicate selling property, refinancing, and some lending. It is a claim on property, not a seizure.

Levy

The actual seizure of your property to pay a tax debt, as opposed to a lien, which is only a claim. The IRS can levy wages, bank accounts, accounts receivable, Social Security benefits, and other assets, but it must first send a final notice giving you 30 days to request a hearing.

Wage garnishment

A continuous IRS levy on your paycheck that requires your employer to send a large portion of each check to the IRS until the debt is paid or the levy is released. Only a modest amount, based on your filing status and dependents, is exempt. Unlike most creditor garnishments, the IRS needs no court order.

Bank levy

A one-time IRS seizure of the funds in your bank account, up to the amount of the tax debt. The bank must freeze what was in the account on the day the levy arrived and hold it for 21 days before sending it to the IRS. That 21-day window is your chance to get the levy released or negotiate a resolution.

Revenue officer

A local IRS field collection employee assigned to larger or more complex tax debt cases, typically bigger balances, payroll tax debt, or repeat nonfilers. Unlike the automated collection system, a revenue officer works your case personally: they can visit your home or business, demand financial disclosures by deadline, and initiate levies and seizures.

Automated Collection System (ACS)

The IRS's centralized, call-center based collection operation that handles most tax debt cases without assigning a specific person. ACS sends the escalating notice stream and can issue liens and levies by computer. Cases that are large or complicated enough get transferred out of ACS to a field revenue officer.

Collection due process (CDP) hearing

Your legal right to an independent appeals hearing after the IRS files a tax lien notice or sends a final levy notice. You have 30 days to request it on Form 12153; a timely request stops levy action while the case is heard and lets you propose alternatives like a payment plan or offer in compromise. If you disagree with the outcome, you can take the case to Tax Court.

Collection Appeals Program (CAP)

A fast-track IRS appeal, requested on Form 9423, that covers a wider range of collection actions than a CDP hearing, including liens, levies, seizures, and the rejection or termination of an installment agreement. Decisions usually come quickly, but a CAP decision is final and cannot be taken to Tax Court.

Seriously delinquent tax debt

A tax debt large enough to put your passport at risk: legally enforceable federal tax debt over a threshold adjusted yearly for inflation, set at more than $66,000 for 2026, where a lien notice has been filed or a levy issued. Once the IRS certifies the debt to the State Department, your passport application can be denied and your current passport can be revoked. Getting into a payment plan or other resolution reverses the certification.

Fresh Start initiative

A set of IRS policy changes from 2011 and 2012 that made collection less aggressive: the lien filing threshold rose to $10,000 in most cases, streamlined installment agreements expanded to $50,000 balances over 72 months, and offer in compromise terms became more flexible. It is not a single program you apply to, despite how advertisements often present it. The relief comes through the individual programs it improved.

Estimated taxes

Quarterly tax payments that self-employed people and others without withholding must make during the year as income is earned. You generally avoid an underpayment penalty by paying at least 90 percent of the current year's tax or 100 percent of the prior year's tax, which rises to 110 percent if your prior-year adjusted gross income was over $150,000. Skipped quarters are one of the most common ways founders and 1099 earners fall into tax debt.

Self-employment tax

The 15.3 percent tax self-employed people pay to fund Social Security and Medicare, covering both the employee and employer shares: 12.4 percent for Social Security up to an annual wage base plus 2.9 percent for Medicare on all net earnings. It applies on top of regular income tax, which is why 1099 income is taxed more heavily than many first-time freelancers expect. Half of it is deductible when figuring income tax.

CP2000 notice

An IRS underreporter notice proposing extra tax because income reported to the IRS by employers, banks, or brokers does not match what appears on your return. It is a proposal, not a bill or an audit, and you generally have 30 days to agree, dispute it, or supply corrected information. Ignoring it turns the proposed amount into an assessed debt.

Innocent spouse relief

IRS relief that removes your responsibility for tax, penalties, and interest on a joint return caused by your spouse's or former spouse's errors, such as unreported income, when it would be unfair to hold you liable. It is requested on Form 8857, and related forms of relief exist for divorced or separated spouses and for broader equitable situations.

Tax transcript

The IRS's official record of your tax account, available free through an IRS online account or by request. Account transcripts show assessments, penalties, payments, and collection activity, while wage and income transcripts show every W-2 and 1099 filed under your Social Security number. Transcripts are the starting point for confirming exactly what you owe and reconstructing unfiled returns.

Lien withdrawal

The removal of a filed notice of federal tax lien from the public record as if it had never been filed, requested on Form 12277. Beyond paying in full, a common route is entering a direct debit installment agreement on a balance of $25,000 or less. Withdrawal removes the public notice; the underlying debt must still be resolved.

Lien subordination

An IRS agreement to let another creditor's claim move ahead of the federal tax lien on a specific piece of property, most often so you can refinance a mortgage. The lien stays in place, but subordination can unlock a loan whose proceeds help pay the tax debt, which is why the IRS grants it when doing so serves collection.

Federal tax deposit

The payroll taxes an employer must deposit with the Treasury on a set monthly or semiweekly schedule, covering withheld income tax and Social Security and Medicare taxes, paid electronically through EFTPS. Deposits are due long before the quarterly Form 941 is filed, and late or missed deposits trigger a separate failure-to-deposit penalty that can reach 15 percent.