Allocate items of income, deductions, and exemptions, as determined by the taxpayer on Form 8379, Injured Spouse Allocation, or as reported on their original return to arrive at the taxable income for each spouse. This is in accordance with Revenue Ruling 80-7.

Determine the married filing separate (MFS) tax for each spouse.

Determine the injured spouse percentage of joint tax by dividing injured spouse MFS tax by the sum of the MFS tax for both spouses.

Compute the injured spouse's share of tax liability by multiplying the injured spouse percentage of tax by the joint tax on the return before deducting credits and adding other taxes.

Revenue Ruling 87-52 allows for allocation of the EITC shown on the joint return. If EITC is not shown on the joint return, do not figure EITC on the allocation.

Use the appropriate EITC table and worksheet, or CC EITCMP with definer R, for the tax year for which the form is being worked.

Determine a new, separate EITC that would be available for each spouse if that spouse had filed a separate return and if EITC were available on a MFS return. This is a theoretical situation used for computation only.

Compute each spouse's separate EITC, with (Y) indicator, based on each individual’s earned income, using the same number of qualifying dependents used to compute the EITC on the joint return.

Figure the injured spouse percentage of EITC by dividing the injured spouse’s new separate EITC by the sum of the EITC for both spouses and multiply the percentage by the amount allowed on the joint return.

Provisions of the Heartland Disaster Tax Relief Act of 2008 allow impacted taxpayers to use their 2007 earned income for purposes of figuring any EITC for 2008 if The 2008 earned income is less than the 2007 earned income and:

If the taxpayer qualifies to use their 2007 earned income, you will determine the EITC allocation based on the 2007 income not the 2008 income.

Compute the injured spouse share of the joint overpayment by subtracting the injured spouses share of the joint tax liability as well as any previous refunds or offsets to other IRS obligations, from the injured spouse's contribution toward the joint liability.

Research for Outstanding Balance Liabilities (OBLs) for both spouses before completing the allocation. Any amount of the overpayment credit that will offset to another tax obligation, attributable either individually or jointly to the injured spouse, must be subtracted from the injured spouse's share of the joint overpayment.

Subtract any previous offset or refund, such as TC 820/826, TC 840/846, BMF or IRAF TC 896, from the injured spouse's share of the joint overpayment.

Continue to determine the refund amount below depending upon the type of offset that was made.

After deducting prior tax offsets and refunds, subtract from the remaining amount:

If interest was included in the refund that was offset, further computation is needed when the injured spouse is not entitled to all the overpayment.

After deducting prior tax offsets and refunds, subtract from the remaining amount any agency refund, TC 131, where the YR offset matches the processing year (PY). See IRM 21.4.6.5.25.2, UPC 142.

A manual refund with a BPI must be issued on all DMF injured spouse offset reversals. This is to identify eligibility for TOP offset for the injured spouse. See IRM 21.4.6.4.2.1, TOP Offset Bypass Indicator.

If an offset has occurred to a separate tax liability for which the injured spouse is not responsible, compare the injured spouse's allocation to the amount of offset. The injured spouse's refund could be equal to or less than the amount that offset to the debt.

A manual refund is required on all injured spouse refunds of tax offsets to keep the credit from offsetting back to the same tax debt. The manual refund must also have a BPI applicable to the injured spouse to show ownership of the refund for TOP offset eligibility. See IRM 21.4.6.4.2.1, TOP Offset Bypass Indicator (BPI).

When working an injured spouse form for a tax offset (I) debt, the control base must be changed to something other than DMFC/DMFE (97140 Paper or 97144 Electronic). Change the control base for paper and ELF to the appropriate category (program code) such as TPRQ 40000, DUPF 40050, or XRET 40051, etc. Refer to IRM 21.5.1.5.2 Cases Currently Assigned in CIS.

When the injured spouse is entitled to all or part of the joint refund and the overpayment is reduced in whole or part by an IRS tax offset, credit elect, or any prior refund, then send letter 1290C (or another appropriate letter) giving the injured spouse:

All injured spouse refunds must be issued in the joint name line unless requested in one name only on Form 8379, Injured Spouse Allocation. When issuing a manual refund to the injured spouse, in one name only, do not input both names on the 2nd name line of Form 5792.

Injured spouse refunds of TOP offsets generate systemically with the input of TC 766 with the appropriate OTN. Injured spouse refunds of DMF and tax offsets must not be allowed to generate systemically. See IRM 21.4.6.5.11.5, Injured Spouse Refund - DMF Offset and IRM 21.4.6.5.11.6, Injured Spouse Refund Tax Offset. A manual refund must be issued for the injured spouse's portion of the overpayment in the following instances:

Follow instructions in IRM 21.6.3.4.2.1, Outstanding Balance Considerations Prior to Refund or Credit Elect, when reversing offsets and issuing a manual refund from an account where the taxpayer previously made a credit election.

Research under both SSNs for OBLs for which the injured spouse is liable. Use CC INOLE for cross- reference TIN OBL checks. Also, check for any OBL that may have occurred with a prior year-spouse.

For manual refunds of DMF offset reversals, research under both SSNs for an agency refund, TC 131.

For manual refunds of TOP offset reversals, research the tax module where the offset was reversed for an agency refund, TC 899, type 2, and an agency refund reversal, TC 899, type 4, with the same OTN as the offset being reversed. If an agency refund has occurred, see IRM 21.4.6.5.13.1.Input of TOP Offset Reversals, TC 766 with OTN.

Compute normal interest on manual refunds resulting from offset reversals.

When determining the "TO" date, do not take into account the 45-day interest-free period that applies to claims for credit or refund.

If the research shows no IRS OBLs or an agency refund, continue processing the Manual Refund according to normal procedures as outline in IRM 21.4.4, Manual Refunds.

Under certain hardship circumstances, the IRS may issue manual refunds of excess credits without first satisfying an IRS outstanding balance (OBL). This type of refund is called an Offset Bypass Refund (OBR). Handle each OBR on a case by-case basis.

OBR paper requests are no longer referred to the Taxpayer Advocate Service. A request for an OBR must be worked immediately upon receipt. Phone request, received on the Customer Service line for an OBR, are referred to TAS, if there is no open control base.

The processing date for OBR's depends on whether there is a freeze code on the taxpayer's account. For qualifying taxpayers with no freeze codes, OBR request must be received and processed before the actual posting date on which the offset of the overpayment is shown (the 23C Date). When the overpayment is held in a module by an IDRS freeze condition, the OBR request for qualifying taxpayers must be submitted in coordination with the release of the IDRS freeze condition and before the account is offset. This is done to prevent an erroneous refund and to assure the overpayment is available for the OBR and has not been offset.

Generally, for original returns, an OBR must be issued before the posting date (Assessment Document Date or the 23C Date) of the original return (TC 150) on which the overpayment was reported. The manual refund document must be received by Accounting no later than the Friday cut-off-time before the Assessment Document Date (23C Date, always a Monday) of the original return.

Certain IDRS freeze conditions will hold the overpayment beyond the return posting date (Assessment Document Date or the 23C Date) of the original return (TC 150). Any actions on the overpayment, either refund or offset, are prevented by the IDRS hold until the resolution of the IDRS Freeze condition. Determine whether the IDRS freeze condition can be released based on the applicable IRM provisions. This may include coordination with another IRS function. When the resolution of the IDRS freeze condition results in an overpayment, that overpayment can be issued in a manual refund, for those taxpayer eligible for an OBR as long as the OBR request is made before the freeze is released.

OBRs may also be made if subsequent adjustments are made to a tax module. These may include: a payment or credit transfer, an audit tax adjustment, a math error correction, and an amended return or claim that is filed and processed. Each will have its own 23C Date. Therefore, the subsequent overpayment can be issued in a manual refund for those taxpayers eligible for an OBR.

An OBR may not be issued if a TOP offset will occur.

When the taxpayer provides the dollar amount of his/her hardship liability, the OBR is issued for that amount. Do not exceed the amount of the hardship request.

The taxpayer must submit with an OBR request, evidence such as a newly signed copy of the return with W-2s, completed Schedule EITC, and other appropriate forms or schedules to support the overpayment. Math verify all lines on the return and attachments.

Complete Form 3753 or 5792 as required and process as follows:

If the TAC or designee agrees with the OBR, he/she must initial in the remarks section of the manual refund form and forward the OBR to the Accounting Function.

If the TAC or designee disagrees with the OBR, the case must be turned over to the Taxpayer Advocate Service for resolution.

If the OBR is rejected, the OBR initiator must input on CC REQ77, TC 972, AC 036, to reverse TC 971, Input a history item on IDRS, "REJECT/OBR."

Compare the injured spouse's refund allocation with the TC 898 on the module and:

Use TC 766 with an OTN to reverse a TOP offset, TC 898, with the same OTN. Input the reversal using CC REQ54, block 00 with original return or 05 without original, source code 7, and the appropriate reason code. See IRM 21.4.6.5.15, TOP/DMF Source and Reason Codes .

The TC 766 amount may not exceed the net TOP offset amount. A TC 766 input for more than the net amount results in an UPC 189. See IRM 21.4.6.4.2.10, Netting TOP Offsets and Reversals.

The OTN input with TC 766 must match an OTN of a prior posted TC 898.

Do not input the Amended Claims Date (Amd-Clms-Dt) field on CC ADJ54 when working injured spouse allocation forms. The 45-day interest-free period does not apply to injured spouse allocation refunds. See IRM 21.4.6.5.11.7, Issuing the Injured Spouse Refund.

Do not use HC 1, 2, or 4 when inputting a TOP offset reversal unless:

A TC 766 reversing a TC 898 without a DEBTOR-TIN present results in the generation of a TC 846 with BPI 1. This prevents a TOP offset to any debts owed by the primary filer and allows for offset to any debts owed by the secondary filer.

A TC 766 reversing a TC 898 with a DEBTOR-TIN present (secondary debtor) results in the generation of a TC 846 with BPI 2. This prevents a TOP offset to any debts owed by the secondary filer and will allow offset to any debts owed by the primary filer.

Multiple TC 898 offsets from the same refund must be reversed separately. The order in which they are input does not matter.

A manual reversal is required when you have an IMF/BMF offset which was sent to FMS in error and cannot be reversed with a TC 766 (IRS reversal) or TC 899 (FMS reversal).

Examples of offsets which can never be reversed using a TC 766 are:

On occasion, you will have a UPC condition or Agency Refund Record TC 899 Type Code 2 which was submitted in error and cannot be reversed or corrected.

Research the account to determine that a manual reversal is needed and the offset cannot be reversed via a TC 766. This is done on a case by case basis and each case may vary.

After you have determined a manual reversal is needed, contact the TOP/DMF Liaison (559) 456-5464. This phone number is for internal use and should not be given to taxpayers. This phone line is not staffed for taxpayer inquiries. Any taxpayer calls to this number will be referred to the appropriate toll free lines. When notating your case file do not input the name of the DMF/TOP Liaison. Notate "Contacted DMF/TOP Liaison." The TOP analyst will request a manual reversal of the offset from FMS.

Accounts Management will prepare Form 3809, Miscellaneous Adjustment Voucher and forward the completed document to Accounting. Refer to IRM 3.17.63.26.15.4, TOP/DMF Exceptions Processing for Manual Offset Reversal Transactions.

Monitor for the credit to post back, if the credit has not posted back after 60 days, contact the TOP analyst.

A TC 766 reject occurs when IRS requests a specific TOP offset reversal and the Federal agency has already refunded the offset or FMS has initiated a reversal of the offset because it was undeliverable or a debt was canceled.

A TC 766 Reject Listing is created for IRS Headquarters and each IRS Campus, on a weekly basis. The report identifies the origin and the portion of a particular TOP offset reversal that was denied in full or in part by FMS.

The IRS campus assigns a particular AM Tax Examiner, Customer Service Representative or another individual to coordinate the resolution of each of these rejects.

When possible, the employee who input the rejected TC 766 should control and correct the case. It is likely that each of these rejects could result in an erroneous refund.

The examiner receiving a TC 766 reject must review the account to identify the condition that caused the TC 766 to be rejected. You should find a TC 899, type 1, 2, or 3, pending or posted to the account. If you do not find any TC 899, inform your reject coordinator, who will contact the FSC Liaison Office @ (559) 456–5464 before any adjustment is made. The liaison phone number is for internal use and should not be given to taxpayers. This phone line is not staffed for taxpayer inquiries. Any taxpayer calls to this number will be referred to the appropriate toll free lines. When notating your case file do not input the name of the DMF/TOP Liaison. Notate "Contacted DMF/TOP Liaison."

The reject code on the listing will be represented as a "result code" and is provided by FMS. The most common result codes, with an explanation, are listed below. If there are any codes shown on the TC 766 Reject listing other than the ones shown below, please have your reject coordinator contact the Fresno Campus Liaison Office.

Once the condition creating the TC 766 reject is identified,

Compare the injured spouse's refund allocation with the TC 896 on the module and:

Reverse a DMF offset, TC 896, by inputting on CC ADJ54, TC 897 with HC 1, source code 7, AG/SA, and a reason code. See IRM 21.4.6.5.15, TOP/DMF Source and Reason Codes, Do not input the Amended Claims Date (Amd-Clms-Dt) field on CC ADJ54 when working injured spouse allocation forms. The 45-day interest free period does not apply to injured spouse allocation refunds. See IRM 21.4.6.5.11.7, Issuing the Injured Spouse Refund.

A TC 897 cannot be input for more than the net DMF offset amount: TC 896s/TC 897s with the same AG/SA codes less any agency refunds, TC 131s, for the same AG/SA and PY. A TC 897 input for more than the net DMF offset amount results in an UPC 189.

See below when reversing:

Consider the offset priorities set by Congress when reversing multiple DMF offsets. Reverse the offset with the lowest priority first.

Reverse offsets to two or more AG/SA on the same module in the opposite order from their posting: reverse last offset first.

Make a separate adjustment for each TC 896 reversal if they have different AG/SA codes.

You can input multiple TC 897s at the same time, only when the reversals will satisfy a debit balance in the module. For example, if you are issuing a manual refund due to an injured spouse allocation, input the TC 840 first, creating a debit balance that will be satisfied by the posting of the TC 897s.

Research for agency refund, TC 131:

The first adjustment should be blocked 05 and input No Source Document (NSD). Change the case control base to "M" Status code and update the received date to the current date.

Inform the taxpayer that the refund will be issued in more than one check. Use the 1290C or other appropriate letter.

After the prior adjustment has posted, input the final adjustment as SD, BS 05 or 00, and close the case.

Use Hold Code (HC) 1 when a manual refund is issued for each reversal.

Forms 8379 filed on two or more tax periods with DMF offsets to one or more AG/SA in the same PY are worked together.

When related cases are controlled to more than one tax examiner, the tax examiner with the oldest received date retains control of the accounts.

When processing Form 8379, Injured Spouse Allocation, for same year offsets, annotate each form with the injured spouse refund amounts for all modules involved.

Reverse the module with the most recent offset first. Settle this module (module balance: zero) before inputting a subsequent TC 897 to another module.

Forms filed on two or more tax periods with DMF offsets to the same AG/SA, in the same PY as an agency refund, TC 131, indicated on ENMOD require special consideration.

Determine if any forms for that particular PY and AG/SA were processed on other tax modules after the cycle of the TC 131. If so, request the documents to determine if the TC 131, agency refund was already considered.

If the TC 131 was considered, note the amount taken into consideration when the other form was processed on the form you are working.

If the TC 131 was not considered, note the reason on the form you are working, re-file the prior form.

If any forms remain, deduct any TC 131 amount not previously considered from the form on the next earliest tax module and continue processing.

When a taxpayer responds to Letters 105C/106C stating he/she wants to appeal the disallowance, his/her written statement should include the following:

Request the original return and the disallowed form along with a print of IMFOL or TXMOD.

Responses to letters 105C/106C that relate to prior disallowances for injured spouse's who are or were residents of Arizona, California, Idaho, Louisiana, and Texas are processed as follows:

Cases referred to AM by Insolvency usually require:

Insolvency will detail the action necessary on Form 4442/e4442 or other referral.

The request must be approved by the TOP/DMF Liaison in Fresno, if the action requires the reversal of a DMF offset.

Cases involving TOP offsets require that the agency receiving the offset make the refund unless:

A TC 520, cc 83 or 89 on the account, generates a BPI 3 on refunds that are issued systemically. Manual refunds issued from accounts with a —W or —V Freeze require input of BPI 3.

Research the account for agency refunds or prior reversals.

If research shows that the TOP offset is available for reversal and you determine that IRS should have placed a BPI 3 on the refund, and there is no indication of an agency refund, (TC 899 Type Code 2). Contact the Liaison Office @ (559) 456–5464 for a copy of the Insolvency Special Procedures Referral Form, complete the bankruptcy case referral and fax to the TOP/DMF Liaison @ (559) 456–5665. Only Leads or Coordinators should contact the Liaison Office.

The Liaison acknowledges receipt of the fax within 2 days.

Call the liaison @ (559) 456–5464, if you are unable to fax the information or you have not received confirmation. The liaison phone number is for internal use and should not be given to taxpayers. This phone line is not staffed for taxpayer inquiries. Any taxpayer calls to this number will be referred to the appropriate toll free lines. When notating your case file do not input the name of the DMF/TOP Liaison. Notate " Contacted DMF/TOP Liaison."

Once the liaison responds to your referral, the requested action will be approved or disapproved.

If research shows that the TOP offset is not available for reversal or that IRS did not make an error in refunding the overpayment without a BPI 3, return the referral to Insolvency with an explanation.

When an injured spouse files a Form 8379, Injured Spouse Allocation, that results in a reversal and refund of the DMF or TOP offset, and the agency also refunds the offset for some reason, the injured spouse often returns the IRS refund.

If the TC 841 creates a credit balance and it is determined that the DMF offset reversal posted or the TOP offset reversal was honored by FMS, inform the taxpayer that he/she must return the refund to the agency. Explain that IRS has already obtained the offset funds from the agency and that the agency is now owed the money. IRS can no longer manually repay the refund to the agency. Allow the credit to refund if there are no other open issues. Refer to IRM 21.5.6.4.23, P— Freeze.

If the injured spouse explains that the agency issued a refund and the TC 841 satisfies a debit balance in the module, no further action is necessary. This occurs when a DMF offset reversal, TC 897, does not post or a TOP offset reversal, TC 766 with OTN, was denied by FMS (subsequent TC 767 in the module with the same OTN).

UPC 137 and 437 are IMF and BMF UPCs unique to the posting of a TC 898 or TC 899.

The Unpostables unit attempts to correct each of the above conditions. The case is referred to the appropriate AM Function if Unpostables is unable to correct the transaction.

Since UPC 137 results from a process dependent upon an outside agency, IRS Headquarters Customer Accounts Section monitors the number, causes, and resolution of UPC 137 and provides additional instructions based on any observations or problems encountered.

A UPC 142 occurs the first time a TC 897 is input on an account showing a TC 131 YR OFFSET, that is the same as the PY of the TC 896 being reversed.

The originator must research to determine the amount of the agency refund. Check IMFOLE or ENMOD for the TC 131 amount and YR OFFSET that is the same PY as the TC 896 being reversed. YR OFFSET always refers to the PY in which the offset took place, not the tax year.

Re-input a reversal for the same amount, or the corrected amount, if you failed to take into account the agency refund the first time you input the adjustment.

Deny the form if the agency refund was not originally taken into account and a partial disallowance was not already sent. Follow Form 8379,Injured Spouse Allocation, disallowance procedures. See IRM 21.4.6.5.16, citing the refund as the reason for the denial.

Initiate erroneous refund procedures for part or all of the injured spouse form refund that was previously issued. Refer to IRM 21.4.5 Erroneous Refunds.

A UPC 134, RC 03, is an IMF unpostable that occurs when an account containing a full or partially unreversed TC 898 (net offset amount greater than zero) attempts to merge with another account, and the 23C date of the TC 898 is within six years of the current date. Refer to IRM 21.6.2 Adjusting TIN-Related Problems

A UPC 134, RC 04, occurs when a TC 897 attempts to reverse a TC 896 with the same AG/SA, and the 23C date of the offset is more than six years from the date of reversal.

A UPC 134, RC 05, occurs when a TC 766 with OTN attempts to reverse a TC 898 with the same OTN, and the 23C date of the offset is more than six years from the date of reversal.

UPC 168, RC 0, is an IMF unpostable code that occurs when TC 766 with OTN fails to find a previously posted TC 898 with the same OTN.

Input the reversal with the correct OTN or on the correct tax period, MFT, etc.

For DMF offsets, UPC 189, RC 0, occurs when a TC 897 is input for an amount greater than the TC 896 available for reversal.

See IRM 21.4.6.5.13.6, Multiple Tax Period with Same-Year DMF Offsets, when a UPC 189, RC 0, occurs and all of the following conditions are met:

For TOP offsets, UPC 189, RC 06, occurs when a TC 766 with OTN is greater than the net TOP offset amount. See IRM 21.4.6.4.2.10, Netting TOP Offsets and Reversals.

UPC 342, RC 05, is a BMF unpostable code which occurs when TC 766 with OTN fails to find a previously posted TC 898 with the same OTN.

UPC 342, RC 06, occurs when a TC 766 with OTN is greater than the net TOP offset amount. See IRM 21.4.6.4.2.10,Netting TOP Offsets and Reversals.

UPC 342, RC 07, occurs when a TC 767 with OTN is greater than the net TC 76X with same OTN. See IRM 21.4.6.5.13.3, FMS TC 766 Reject Listing.

UPC 342, RC 08, occurs when a TC 766 with OTN attempts to reverse a TC 898 with the same OTN, and the 23C date of the offset is more than six years from the date of reversal.

The recovery rebate credit is a one-time benefit for people who didn't receive the full economic stimulus payment in 2008 and whose circumstances may have changed, making them eligible now for some or all of the unpaid portion.

Each spouse must take their own exemption and is entitled to his/her share of the joint RRC/ESP up to $600.00. Allocate any recovery rebate credit received for any children to the spouse who was allocated the qualifying child's exemption on Form 8379. Exemptions for the children must be entered in whole numbers only. For example, you cannot allocate an exemption by giving each spouse 1/2 of the exemption to each spouse.

When working an injured spouse allocation for 2008 and the taxpayer is claiming the RRC on their 2008 return. You will need to look at the 2007 account to determine if the injured spouses share of the 2007 ESP was reversed in Cycle 200852 or the 2007 ESP was not received (due to no return filed or not eligible for some or all) If either spouses share of the RRC was reversed in cycle 200852, the amount reversed should be allocated to that spouse. The remaining RRC is split 50/50 up to $600.00 for each spouse, plus any qualifying child exemption amount.