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INTERNAL REVENUE SERVICE ADVISORY COUNCIL WAGE AND INVESTMENT SUBGROUP REPORT

INTRODUCTION/EXECUTIVE SUMMARY


       The IRSAC Wage & Investment Subgroup (hereafter “Subgroup”) is comprised of a diverse group of tax professionals including certified public accountants, educators, enrolled agents, and a national tax director of a large retired person organization. This group brings a broad range of experience and perspective from both tax preparers’ and taxpayers’ views, and includes unique experience in the issues faced by many W&I taxpayers. We have been honored to serve on the IRS Advisory Council and appreciate the opportunity to submit this report.
       The Subgroup would like to thank W&I Commissioner Richard Byrd for his recognition of the value of the Subgroup as an integral part of his leadership team. The Subgroup has had the privilege of working with the professionals within the W&I Division of the IRS and found them to be extremely helpful in providing the information, resources, and IRS personnel necessary to develop our report.
       The Subgroup has researched and is reporting on the following four issues:

  1. Electronic Business Returns EIN/Name Control Mismatches
    The IRS, tax professionals, and taxpayers have been experiencing unnecessary delays and time spent electronically filing of business and fiduciary returns. Name control (NC) mismatches are increasing because of multiple ways of developing the NC, including differences in the four letters chosen depending on how the Employer Identification Number (EIN) was initially requested, online or by paper. Our recommendations are intended to save time and frustration for tax professionals when filing electronic returns as they are now mandated beginning in 2011.
  2. Savings Bonds
           On September 5, 2009, the IRS announced the savings bond initiative that allows purchase of savings bonds with income tax refunds. W&I is currently reaching some of the low-income and elderly populations, but would like to promote the initiative more broadly to other W&I populations, directly and through intermediaries. Most of the current marketing is geared toward taxpayers, but the Subgroup feels the marketing effort should go beyond the effort directed at taxpayers and directly target the intermediaries.
  3. Automated Underreporting Soft Notices (CP 2057)
           The primary goal of the Automated Underreporting (AUR) Soft Notice program is to correct taxpayer behavior on future tax returns. The secondary goal is the collection of any additional tax due on the current tax return. Our recommendations provide suggestions for redesigning the soft notice by improving its readability and usefulness to both the taxpayer and tax practitioner. The Subgroup also suggests that the notice include an educational component for the taxpayer, and that the IRS develops a procedure to inform the tax practitioner community of the soft notice program.
  4. First-Time Homebuyer Credit


       The Subgroup was asked to assist the IRS in reviewing the three Computer Paragraph (CP) 03 notices that will be mailed to taxpayers who claimed the First-Time Homebuyer Credit (FTHBC) beginning in late 2010. Additionally, the Subgroup worked with the IRS by reviewing Form 5405 as well as addressing the various repayment requirements of the credit.

ISSUE ONE: ELECTRONIC BUSINESS RETURNS EIN/NAME CONTROL MISMATCHES
Executive Summary


       The IRS requested that the Subgroup review the current Business Master File (BMF) customer needs regarding the Employer Identification Number (EIN) and Name control mismatches that occur when filing returns electronically. The IRS, tax professionals, and taxpayers have been experiencing unnecessary delays and time spent electronically filing business and fiduciary returns. Name control (NC) mismatches are increasing because of multiple ways of developing the NC, including differences in the four letters chosen depending on how the EIN was initially requested, online or on a paper application. Our recommendations are intended to save time and frustration for tax professionals when filing electronic returns as they are now mandated beginning in 2011.


Background


       The IRS frequently rejects electronically filed (e-file) business and fiduciary tax returns when the business’ or fiduciary’s NC fails to match the associated EIN. During the 2010 filing season, IRS turned off this matching process and perfected the tax returns manually because of the volume of mismatches.
       When a tax professional contacts the e-Help Desk for assistance in resolving NC/EIN mismatches, they are advised to have the taxpayer contact the Business and Specialty Tax Line in Accounts Management to obtain the NC. The e-Help Desk is only able to assist with non-account related issues. This creates a second telephone call and increases IRS resources needed to resolve the taxpayer’s issue.
       The e-Help Desk, following Internal Revenue Manual (IRM) 3.42.4 and IRM 3.42.7, provides the tax professional with guidance on how a NC is created and refers them to the Business and Specialty Tax Line if additional assistance is needed. This leaves the tax professional with three options:

  1. Guess the NC and file the return again electronically (if they guess wrong the return rejects again),
  2. Make a second contact to IRS by calling the Business and Specialty Tax Line to obtain the correct NC, or
  3. Mail the return to the IRS (if they are required to file electronically, then they must choose option 1 or 2).

       Feedback from the IRS, Office of the Chief Counsel (Procedure & Administration) indicated the four-letter NC is taxpayer return information, which is protected from disclosure under IRC Section 6103. The NC information is return information because it is a piece of information identifying a taxpayer. Consequently, appropriate consent, such as a power of attorney or authorization to disclose return information, is needed to support proof that the return preparer has authority to access that information. Given the statutory restrictions on disclosure of return information under IRC Section 6103, Counsel indicated that the IRS could not change this position.
       IRS representatives discussed the background and history of the NC and the different (manual and online) naming conventions with the Subgroup. The Subgroup emphasized the need for a single naming structure. Since the online naming convention is not flexible, the option of modifying the manual naming rules to be the same as the online rules were discussed. There are also challenges with determining the number of unique EIN/NC rejects. The system currently tracks the number of EIN/NC rejects and acceptances without regard to the number of times the return was submitted. The IRS will continue to gather data on the number of rejects by return type and provide that information to the IRSAC Subgroup.


Recommendations

  1. De-classify the four-letter NC as protected information.
  2. Expand the e-Help Desk authority to include resolving EIN and NC mismatch issues.
  3. Modify the language on all Forms 8879 (e-file Signature Authorization forms) and possibly other tax authorization forms to specifically include language indicating that the taxpayer is specifically authorizing the tax return preparer to have access to the NC assigned to the taxpayer.
  4. Change the rules for assigning a NC so they are the same regardless of the application process for the EIN.
  5. Send a letter to all Form 1041 and 1065 filers who do not currently e-file or for whom the IRS manually perfected the prior year tax return informing them of the NC that was assigned to the entity. The letter should indicate that the NC should be shared with their tax professional.
  6. Provide the assigned NC on the IRS information letter prominently with an explanation of the need for the NC and its uses. Do not hide the NC on page two of the letter.
  7. Allow the check box on a paper tax return to be sufficient authority for the third-party designee to obtain the NC directly from an IRS e-Help Desk assister.
  8. Examine the need for the NC and the NC assignment rules for all taxpayers to determine if their use continues to make sense.
  9. Develop a web-based application or telephone application with a direct telephone number that provides the NC for the entity if the taxpayer enters the EIN and a shared secret.
  10. Eliminate the words “A”, “An”, “The”, Estate”, “Trust” and other “noise phrases” as part of the NC and make certain that all NCs be exactly four characters.
  11. Revise the NC assignment rules so that a name is never truncated from the name of the entity, such as PTA for Parent Teachers Association, as indicated in the current rules.
  12. Publish the streamlined NC rules on IRS.gov and provide to software developers to be included in their software instructions and design.
  13. Recommend that software preparation companies modify the reject message on NC mismatches to include an instruction to the preparer to have the third-party designee contact the IRS during the authority period to obtain the NC.

ISSUE TWO: SAVINGS BONDS
Executive Summary


       The IRSAC was asked to provide input and feedback to assist the IRS in advertising the Savings Bond initiative that was announced September 5, 2009. W&I is currently reaching some of the low-income and elderly populations, but would like to promote the initiative more broadly to other W&I populations, directly and through intermediaries. Most of the current marketing is geared towards taxpayers, but W&I feels the marketing effort will have to go beyond the effort directed at taxpayers and directly target the intermediaries.


Background


       While the idea of using a portion of a tax refund to purchase savings bonds is new to many, it was tried previously. Between 1962 and 1968 the IRS allowed refund recipients to purchase savings bonds with their refunds. This program required the entire amount of a tax refund to go into savings bonds. As a result, less than one percent of refund dollars were used to purchase savings bonds.
       The introduction of Form 8888 for the 2006 tax year allowed taxpayers to conveniently designate their refunds be deposited into up to three accounts with any U.S. financial institution. With the ability to split refunds came the opportunity to allocate a portion of a refund into savings bonds. Beginning with a pilot program during the 2007 tax season, the Doorways 2 Dream (D2D) worked with a large national tax preparation firm and Volunteer Income Tax Assistance (VITA) programs to offer savings bonds as an option.
       For 2009 tax returns, the option to have a portion of a tax refund used for Savings Bond purchases was reintroduced to the tax return. Taxpayers could use Form 8888 to purchase savings bonds in increments of $50 to a maximum of $5,000. Direct deposit of any remaining refund to a U.S. financial institution account was required. Savings bonds could only be purchased in the name of the taxpayer and certificates were mailed to them within three weeks. Over 22,000 taxpayers requested savings bonds with purchases totaling nearly $11 million.
       For 2010 tax returns, the program will be greatly enhanced. Savings bonds will be able to be purchased in co-ownership and with beneficiaries; for example, children and grandchildren. Direct deposit of any remaining refund will not be required. Paper checks can be requested for the balance. Many of the technical issues which caused a slow down in processing a refund payment and a default to a paper check for 2009 tax returns, such as a savings bond request not being in a multiple of $50, have also been resolved.
       The savings bonds chosen for the refund program are U.S. Series I Savings Bonds. Their composite interest rate consists of a fixed rate and an inflation based rate, adjusted every six months, May 1 and November 1.
       The Bureau of the Public Debt has a strategic initiative to eliminate issuing paper savings bonds. Therefore, coordination with the Bureau of the Public Debt to take advantage of electronic issuance might be needed in the future for the continuation of this program.
       Another issue is getting an undefined but potentially large group of tax return preparers to consider recommending the purchase of savings bonds by taxpayers with expected refunds. The value proposition to engage tax return preparers is harder to make and market than the value for consumers. For example, tax return preparers cannot earn commissions from the sale of savings bonds and might be unwilling to spend any time or effort addressing savings bonds with taxpayers. Some preparers believe there may be an Internal Revenue Code (IRC) 7216 issue with encouraging the purchase of savings bonds, and there are other preparers who have agreements with financial institutions restricting their promotion of any financial products to those of the financial institution only. Self-prepared tax returns generated the highest portion of Savings Bond purchases in 2010 and demonstrate that consumers will buy savings bonds without a direct request from a preparer.


Recommendations

  1. Promote, to both taxpayers and preparers, the ability to purchase savings bonds in the names of the taxpayer and another person including children and grandchildren, and utilize promotional materials featuring families such as those available for the Earned Income Tax Credit.
  2. Emphasize in IRS promotions the positive components of the interest rate including the inflation protection built into the savings bonds. The promotion should compare the savings bond rate to that of Treasury Bills and/or average saving accounts rates at banks to highlight the relatively high interest rate.
  3. Rotate information about savings bonds for all parties, individuals and preparers, on the home page of IRS.gov and include information on savings bonds as a topic on the home page of the Tax Professionals page of IRS.gov to reach this key target audience with more detail.
  4. Request that the Ad Council work on promoting savings bonds throughout tax season.
  5. For the taxpayers:

    a. Market to low- and moderate-income taxpayers without bank accounts (the unbanked) as well as the agencies serving them with tax preparation and other services. Highlight that direct deposit is no longer required, allowing this to be a unique saving opportunity for the unbanked. IRS Stakeholder Partnerships, Education and Communications had already initiated some of these contacts.

    b. Send a post card to those who already purchased a Savings Bond with tax refunds and encourage them to buy Savings Bond when filing their 2010 tax return and ask them to tell a family member or friend to buy one too.

    c. Evaluate messaging to taxpayers to determine motivation to purchase savings bonds. Incorporate the most effective messaging in future promotions.

    d. Keep a strong focus on marketing savings bonds directly to taxpayers. The taxpayer is the ultimate decision maker determining whether he or she will benefit from savings bonds. Preparer concerns and conflicts of interest, real and perceived, may make their willingness to engage in savings bond promotion difficult to attain. Regardless, few, if any preparers, would actually tell a taxpayer they won’t process the taxpayer’s request for a savings bond.

    e. Create a bookmark or tri-fold about the savings bond initiative that can be provided to taxpayers.

  6. For the Bureau of the Public Debt:

    a. Develop joint publicity with the Bureau of the Public Debt in promoting savings bonds, and do so in January so taxpayers have already received information about savings bonds at the time their taxes are prepared and know what funds are available for purchasing savings bonds.
    b. Work with the Bureau of the Public Debt on electronic options for issuing savings bonds in future filing seasons to reduce costs to the government and help ensure long-term viability of the opportunity.
  7. For tax preparers and payroll companies:
    a. Educate tax preparers. Prepare Frequently Asked Questions (FAQs) about U.S. Series I Savings Bonds. General questions include: how to purchase savings bonds through the tax filing process and, specifically, address any applicability of IRC 7216. Reference FAQs in the e-News for Tax Professionals and post them on the Tax Professionals page of IRS.gov.
    b. Utilize the new PTIN database of preparers to promote the opportunity and key points that might be helpful in encouraging preparers to build awareness/promote savings bonds.
    c. Encourage tax preparers to include a question asking the taxpayer if they are interested in purchasing a savings bond in any preparer version of a taxpayer questionnaire as well as directly when they tell the taxpayer he or she has a refund and how much it is.
    d. Research other promotional materials such as AICPA’s “Feed the Pig” program in terms of risk/burden to the tax preparer.
  8. For volunteers:
    a. Continue the campaign with VITA and Tax Counseling for the Elderly volunteer preparers to boost purchase rates with the low- and moderate-income taxpayers by focusing on the benefits to taxpayers and the ease of purchasing savings bonds through the tax filing process. Add a section to volunteer training materials including instructions on the savings bond purchasing process. Also advise volunteers that the IRS supports and encourages volunteers to build savings bond awareness by asking taxpayers if they want a savings bond. Add a question, “Are you interested in learning more about buying a savings bond with any refund?” in the section related to direct deposit in the Interview and Intake Form and savings bond information, including term, penalties, safety, ease in cashing, rate as of November 2010, etc., on the mostly-blank page four of the Intake and Interview Form 13614.
    b. Ask the software vendor for the product used by volunteers to include a one-page information sheet with “Bond Basics” (type of savings bond, rate, term, how to cash, replace, etc.) in the software system for volunteers to print for taxpayers as a take-away. This ensures that needed and accurate information is available for taxpayers and reduces volunteer effort by not requiring them to memorize savings bond basics or order and carry collateral materials to and from tax sites. Ask this software vendor to consider a pop-up or imbedded question in the software asking preparers if the taxpayer wants to purchase a savings bond.


ISSUE THREE: AUTOMATED UNDERREPORTING SOFT NOTICE (CP 2057)
Executive Summary


       The IRSAC was asked to provide input and feedback to assist the IRS with the Automated Underreporting (AUR) Soft Notice program. The primary goal of the program is to correct taxpayer behavior on future tax returns. The secondary goal is the collection of any additional tax due on the current tax return. Our recommendations provide suggestions for redesigning the soft notice by improving its readability and usefulness to both the taxpayer and tax practitioner. The Subgroup also suggests that the notice include an educational component for the taxpayer, and that the IRS develop a procedure to inform the tax practitioner community of the soft notice program.


Background


       The IRS computer systems have the ability to match individual taxpayer data reported on the taxpayer’s tax return to data reported to the IRS by third-party payers. This matching process can inform the IRS about possible reporting errors. Correction of underreported income or over-reported deductions should result in the collection of additional taxes.
       The AUR program identifies discrepancies between the information provided by the taxpayer on an individual income tax return and information provided by employers, financial institutions, and others through third-party reporting systems. Once tax returns with discrepancies are identified, the IRS decides how many cases, out of the total number identified, can be investigated with available resources. Tax examiners then analyze the selected cases and are sometimes able to resolve the discrepancies without contacting the taxpayer. In other situations, tax examiners may request additional information from taxpayers by sending a Computer Paragraph (CP) 2000 notice. The CP 2000 notice requires a response from the taxpayer. If the taxpayer does not respond, or if the response is inadequate to resolve the discrepancy, the IRS will issue a Statutory Notice of Deficiency.
       Due to limited resources the IRS cannot investigate all areas of potential noncompliance, including AUR discrepancies. The IRS is increasingly using alternative approaches to resolve compliance issues outside of its traditional processes. The IRS launched its AUR Soft Notice program initiative to encourage taxpayers to voluntarily correct discrepancies on their tax returns. Information provided by the IRS stated that in the AUR Program, where millions of discrepancy cases were not investigated for Tax Year (TY) 2007, officials selected approximately 31,000 cases to test the soft notice program (CP 2057). The test was developed with six distinct objectives. These six objectives were to: (1) change taxpayer behavior on future tax filings, (2) correct current year taxpayer behavior, (3) limit the impact on IRS revenue, (4) limit the impact on IRS resources, (5) increase coverage to include more taxpayers with mismatches, and (6) minimize the burden on taxpayers.
       Measures were then developed and used in TY 2009 to assess the success of CP 2057 case inventory against each of these six objectives.

  1. The objective to change taxpayer behavior on future returns was measured by reviewing the taxpayer’s subsequent year’s tax return to determine if the taxpayer corrected the behavior.
  2. The objective to correct the current year behavior of the taxpayer was measured by surveying the filing of amended tax returns (Form 1040X) by
    those taxpayers, and determining how fully they agreed to or addressed the issues on the CP 2057.
  3. The measurement used to determine the impact on IRS revenue was to assess case revenue generated, comparing yield versus calculated tax change, and cost incurred per dollar of revenue.
  4. The measurement used to establish the impact on IRS resources was to determine increased IRS activity that directly resulted from the mailing of the CP 2057 to the taxpayers. The activities measured included responding to taxpayer telephone calls and written correspondence, including processing 1040X returns and handling of undeliverable mail.
  5. The measure developed to determine if there should be an increase in taxpayer coverage was to calculate the overall cost of generating and mailing the CP 2057.
  6. The impact on taxpayer burden was measured by the number of CP 2057 that resulted in no change in tax to the taxpayer or that resulted in the taxpayer seeking a tax practitioner for assistance with responding to the notice.
           Information provided by the IRS indicates that soft notice treatment generates substantially lower revenue per case than AUR historically achieves. The CP 2057 effectively collects only 13 percent of revenue as compared to the CP 2000 Notice. According to a TIGTA report, Plans for Evaluating the Use of Soft Notices in Addressing Underreporting Can Be Enhanced, dated August 27, 2010, the CP 2057 has negligible impact on changing repeat behavior overall, though some categories are more effective than others. Two categories that appear to be more effective are the earned income tax credit and dependency exemptions. The TIGTA report also states that researchers estimated approximately $218 million in tax revenue might have been saved from changed taxpayer behavior in these two categories for TY 2003.
           The CP 2057 provides information for the taxpayer to verify against the tax return submitted to determine if the return was correctly prepared. Although the notice tells the taxpayer what they should do if they find a problem, the taxpayer is not required to take any corrective action by paying additional tax due, providing additional documentation, or filing an amended tax return. Currently the CP 2057 contains a table that suggests response options for the taxpayer. If the taxpayer believes the filed return is correct, and the third-party payer data submitted to the IRS is incorrect, the taxpayer is instructed to contact the third-party payer that is referenced in the notice and request a corrected statement. The taxpayer is specifically told not to call or send correspondence to the IRS. If the taxpayer agrees with the notice, they are instructed to prepare Form 1040X and mail it to the IRS with a copy of the CP 2057 attached.

 If the amount of your return is...  Then...
 Correct
  •  Do not call or respond to the IRS in refernce to this letter.
  • Contact the payer if you believe the amount was incorrectly reported to the IRS and request that the payer verify and correct his records if necessary.

If the amount is not corrected before filing future returns, you may continue to havesimilar reporting problems.

 Not Correct
  •  Correct your return by completeingmthe enclosed form 1040X, Amended U.S. Individual Income Tax Return.
  • Securely attach the completed Form 1040X to a copy of this notice and send to IRS, PO Box XXX, City, ST, XXXXX-XXXX. An envelope is enclosed for your convenience.

Failure to file an amended return may result in further action by the IRS to verify the correct amount is reported on your return.


Recommendations

  1. Redesign the CP 2057 by expanding response options to direct the taxpayer towards corrective actions. Corrective actions may include contacting the third-party payer for a corrected document, changing the reporting line of an income or deduction item, amending the tax return, or agreeing to the CP 2057 changes as received from the IRS. The taxpayer should have the opportunity to agree with the changes to the tax return by submitting a signed statement agreeing to the adjustments on the CP 2057, and requesting that the IRS calculate the balance due along with penalties and interest. The calculation by the IRS of additional taxes due from an agreed to CP 2057 may not result in any additional processing cost to the IRS as the IRS currently manually reviews 1040X submissions. Allowing the
    taxpayer to agree with the CP 2057 reduces taxpayer burden as a tax practitioner may not have to be engaged to resolve the discrepancy.
    a. A suggestion for the redesigned table follows:

 If the item(s) you reported on your Tax Return Are Except That   Then
 Correct  ...the third-party entity data is incorrect  ...contact the third party and request that they correct their records, and issue corrected copies to both you and the IRS.
 Correct ...you reported on different line than the IRS expected (seepage 4 for expected reporting line),   ...for this year, no action is required. However, please use the expected line in future reporting to avoid additional correspondence from the IRS.
 Partially Correct    Correct your return by completeing the enclosed 1040X, Amended U.S. Individual Income Tax Return. Securely attach the completed form 1040X to the voucher on page X of this notice and send to IRS, PO Box XXXX, City, St. XXXXX-XXXX. An envelope is enclosed for your convenience.
 Incorrect    Sign on page X, the IRS will calculate the balance due and send a letter requesting payment.

 

 

b. Expand the “What To Do If You Need Assistance” section of the letter informing the taxpayer of the procedure for obtaining a copy of their tax return. The taxpayer should also be reminded of the resources on IRS.gov and at Taxpayer Assistance Centers.
c. Include a voucher for the taxpayer to attach to their completed 1040X, instead of attaching the CP 2057 notice.
d. Include a voucher for the taxpayer to sign attesting to all the proposed changes and requesting that the IRS calculate the balance due, including penalty and interest.

  1. Inform the taxpayer of educational resources that are available by directing the taxpayer to the IRS website and publications that may be specific to items on the CP 2057.
  2. Expand the use of E-alerts and the Tax Professionals page on IRS.gov to notify practitioners at least one week prior to a bulk mailing of the CP 2057. This alert should remind tax practitioners about their obligation to inform taxpayers that an amended tax return should be filed if the original tax return was prepared incorrectly. The IRS should also inform tax practitioners of other options available in response to the CP 2057 notice.

ISSUE FOUR: FIRST-TIME HOMEBUYER CREDIT
Executive Summary


       The Subgroup was asked to assist the IRS in reviewing the three Computer Paragraph (CP) 03 notices that will be mailed to taxpayers who claimed the First-Time Homebuyer Credit (FTHBC) beginning in late 2010. Additionally, the Subgroup worked with IRS by reviewing Form 5405 as well as addressing the various repayment requirements of the credit.
       Refundable tax credits administered through the tax code are increasingly being used to deliver social and economic benefits to the American public. The Congressional Budget Office estimated that refundable credits would increase $500 billion over the next 10 years. FTHBC is currently among the largest refundable tax credits for individuals. Over 3.3 million taxpayers have claimed more than $23 billion in FTHBC.


Background


       There are different strategies for the repayment of the three FTHBCs, therefore IRS will mail notices to all taxpayers who received the credit. The estimated total number of purchases is 3.3 million consisting of 1 million under the Housing and Economic Recovery Act (HERA); 1.7 million from the American Recovery and Reinvestment Act (ARRA) and 600,000 from the Worker, Homeownership, and Business Assistance Act (WHBAA). Everyone who took the FTHBC in one of the 2008, 2009 or 2010 years will receive a notice.
       Taxpayers who purchased their homes in 2008 under HERA and claimed and received the FTHBC are required to repay the credit over 15 years. The CP03a notice will be sent October through December, to remind those taxpayers who will have to repay. This notice will reflect the amount of credit received; the amount of credit to be repaid as additional tax in 2011; and the balance on the account.
       Taxpayers who purchased their homes in 2009 and 2010 under ARRA or WHBAA are not required to repay the credit as long as the home remains their primary residence for at least three years after purchase. If within those three years their situation changes and the home is no longer their primary residence, they will have to repay the entire credit. The CP03b notice will be sent October through December to those taxpayers who will probably not have to repay. The IRSAC fully supports the mailing of these notices.
        The 2009 credit under ARRA or WHBAA must be repaid if the owner moves out of the home within the three years of purchase and if the owner sells the home at a gain.
       In the event of the death of one of the taxpayers who claimed the credit, the repayment is forgiven in the year of death for the portion of the deceased taxpayer.
       Notice CP03c will be mailed to taxpayers for whom third-party data indicates a potential disposition that requires their attention and reporting.


Recommendations

  1. Ask the software companies to include an inquiry in the questionnaire or tax organizer used by tax preparers asking the taxpayer if they sold or moved out of the home that they purchased during one of the FTHBC years.
  2. Include a statement in the CP03a and CP03b notices that would provide information to the taxpayer regarding the recapture of the credit if they were to sell the home in which they received the FTHBC.
  3. Include a statement in the CP03a and CP03b notices that would inform the taxpayer that they would need to keep adequate documentation on improvements to the home if they sell.
  4. Send a notice to each spouse if the credit was claimed on a joint return.
  5. Include a “special events” paragraph in the balance due section of the CP03a notice to reflect change in the amount due, for example, if the home was jointly owned and the spouse died. The notice would explain that only one half the balance of the credit remaining will have to be repaid.
  6. Update Publication 523 to include more specific information on the following:

    a. Define “how to calculate a gain” and provide examples of what can be included;
    b. Inform the taxpayer that repayment of the credit would not be required if they sell the home at a loss to an unrelated party;
    c. Remind the taxpayer to reduce their basis in the home by the amount of any un-repaid credit if they sell;
    d. Include a recapture worksheet for un-repaid credit in the instructions for Form 5405.

  7. Develop a web-based application to calculate the recapture of the credit.
  8. Introduce a separate special section on the website entitled “Repayment and Recapture of First-Time Homebuyer Credit.” This section should consolidate all the various aspects of the topic on IRS.gov
  9. Ensure that reference is made for FTHBC in Publication 523 for the military exception and related documentation.
Page Last Reviewed or Updated: 02-Apr-2014