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Part 21. Customer Account Services

Chapter 6. Individual Tax Returns

Section 4. Tax Computation/Tax Period Changes (Cont. 1)

21.6.4  Tax Computation/Tax Period Changes (Cont. 1)

21.6.4.4 
Working Tax Computation/Tax Period Changes Procedures

21.6.4.4.8 
Schedule H, Household Employment Taxes

21.6.4.4.8.10  (10-01-2002)
Schedule H, Household Employment Taxes, Received Without Form 1040, U.S. Individual Income Tax Return

  1. Schedules H, Household Employment Taxes, received in Receipt and Control must be routed to the Code and Edit function.

  2. Schedules H received in other functions (e.g., Customer Service, Collection) require research to determine the appropriate action.

    If the account contains And Then
    A posted TC 150   Adjust the account using the appropriate EIN and reference numbers.
    No TC 150 Line 28 is answered "Yes " Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is answered "No " and Part IV is blank Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is answered "No " and Part IV has entries Prepare a "dummy" Form 1040 and route the Schedule H for processing.
    No TC 150 Line 28 is not answered, Part II has entries Return the Schedule H to the taxpayer. Refer to (3) below.
    No TC 150 Line 28 is not answered, Part II is blank and Part IV has entries Prepare a "dummy" Form 1040 and route the Schedule H for processing.
    No TC 150 Line 28 is not answered, Parts II and IV are blank Return the Schedule H to the taxpayer. Refer to (3) below.

    Caution:

    Edit Computer Condition Code "3" on the "dummy" Form 1040, if the credits exceed the amount of the Schedule H tax and/or there is any indication the taxpayer is liable for filing a Form 1040.

  3. When returning the Schedule H, advise the taxpayer:

    1. The Schedule H entries indicate he or she will file an income tax return.

    2. The Schedule H is being returned for inclusion with the Form 1040.

    3. To file a Form 1040X if a Form 1040 was filed without reporting the Schedule H tax.

    4. To resubmit a Schedule H, after verifying all Schedule H entries, IF a Form 1040 is not required to be filed.

21.6.4.4.8.11  (10-01-2002)
Duplicate Filing Conditions (Dummy Form 1040, U.S. Individual Income Tax Return, with Schedule H, Household Employment Taxes)

  1. Schedules H, Household Employment Taxes, received without Form 1040, U.S. Individual Income Tax Return, are processed with a "dummy" Form 1040. A duplicate filing condition results if the taxpayer files an original return.

    If And Then
    The "dummy" Form 1040 posted as an original (TC 150) The taxpayer's original return posted as a duplicate and by-passed Discriminant Function (DIF) scoring 1. Math verify the taxpayer's original return.
    2. Adjust the account to reflect the income and tax shown on the taxpayer's original return.
    3. Route to Examination for manual screening. Use local routing procedures.
    The taxpayer's original return posted as the TC 150 Schedule H, processed with a "dummy" Form 1040, posted as a duplicate Adjust the account, using the appropriate EIN and reference numbers.

21.6.4.4.8.12  (11-26-2008)
BMF Form 941, Employer's QUARTERLY Federal Tax Return, Filed Instead of IMF Schedule H, Household Employment Taxes

  1. If the taxpayer filed Form 941, Employer's QUARTERLY Federal Tax Return, for household employees, or Form 944 , Employer's ANNUAL Federal Tax Return, instead of Schedule H, Household Employment Taxes, (with or without Form 1040, U.S. Individual Income Tax Return), the tax must be eliminated from the BMF Form 941 (or Form 944 ) account and assessed on the IMF Form 1040 account.

    Reminder:

    These procedures should ONLY be followed when ALL of the employees reported on Form 941 are household employees. If the taxpayer has both household and other employees, the employer has the option to report both types of employees on Form 941, (or Form 944, or Form 943, if applicable).

    Note:

    The individual campus may determine who will perform the following procedures; IMF, BMF, or both.

  2. Take the following action on the Form 941 (MFT 01) account, the Form 944 (MFT 14) account, or Form 943 (MFT 11).

    1. Delete the tax; use HC 4 if payments must be transferred.

    2. Transfer payments to the IMF account.

    3. Delete the Form 941 or Form 944 filing requirements. (Also, delete the Form 940 filing requirement, if present.)

    4. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941 or Form 944, if available, but DO NOT request the return from Files.

  3. Take the following action on the Form 1040 (MFT 30) account:

    1. Assess the tax originally reported on Form 941 or Form 944.

    2. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941 or Form 944, if available, but DO NOT request the return from Files.

  4. If the taxpayer also erroneously reports FUTA on Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, (MFT 10) for household employees:

    1. Use the procedures in (2) above to delete the FUTA tax and make any necessary credit transfers on MFT 10.

    2. Follow the procedures in (3) above to assess the FUTA portion on MFT 30. (If both FICA and FUTA tax must be assessed, assess on the same adjustment document, whenever possible.)

      Reminder:

      If the taxpayer has both household and other employees, the employer has the option to report taxes for both types of employees on Form 940.

  5. Provide the taxpayer a complete explanation of the adjustments to the IMF and BMF accounts.

    1. Include information concerning credit transfers or potential refund, if applicable.

    2. Instruct the taxpayer to report the taxes for household employees on Schedule H.

    3. Advise the taxpayer Form 941 or Form 940 can be filed to include household employees only when taxes for other employees must be reported.

      Note:

      Employers whose total liability was $1,000 or less were mandated to file Form 944, Employers ANNUAL Federal Tax Return, if they were notified to do so and did not opt out of the Form 944 filing requirement as permitted under certain conditions. See IRM 21.7.2.4.14, Form 944, Employers ANNUAL Federal Tax Return, for additional filing information.

21.6.4.4.8.13  (11-26-2008)
Schedule H, Household Employment Taxes, Claims Citing IRC Section 3509

  1. IRC Section 3509 provides for reduced employer liability for employment tax if a worker is reclassified from an independent contractor to an employee status.

  2. The taxpayer may submit an amended return, Form 1040X, U.S. Amended Individual Income Tax Return, with a Schedule H, if he/she discovers the worker was mis-classified. If the taxpayer does not have a Form 1040 filing requirement, they may file the Schedule H by itself.

  3. IMF will handle an IRC 3509 claim in the same way BMF handles the Form 941, Employer's QUARTERLY Federal Tax Return Claim, citing IRC 3509.

  4. To process the claim, refer to and use BMF instructions in IRM 21.7.2.4.18.6.8, IRC Section 3509.

  5. Use IMF Reference Numbers.

  6. If the ascertained date is not given, contact the taxpayer. If no answer is received, input a TC 290 for the amount of the increase. See IRM 21.6.4.4.8.6 , Schedule H, Household Employment Taxes - Interest - Free Provisions - Underpayments.

21.6.4.4.9  (10-01-2008)
Schedule J, Income Averaging for Farmers and Fishermen

  1. For tax years 1998 and later, farmers may use Schedule J, Income Averaging for Farmers and Fishermen, (Schedule J was titled "Farm Income Averaging" prior to 2004) to elect to average all or part of taxable farm income over the previous 3 years. Farmers may benefit from this election in a year when farm income is high and income in one or more of the previous three years was low.

  2. The American Jobs Creation Act of 2004 (H.R. 4520, PL 108-357), allowed fishermen to use income averaging on Schedule J to reduce their tax for tax years beginning after 2003. For additional information, see Schedule J instructions.

  3. Taxpayers enter income amounts on Schedule J from the appropriate line of the prior year(s) income tax returns.

    • If the taxpayer filed a Schedule J for the previous year, then the taxpayer enters amounts from the previous year's Schedule J on his or her current year Schedule J.

    • If the taxpayer did not file a Schedule J for the previous year, then the taxpayer enters income amounts on its current year Schedule J from the appropriate line of the prior year(s) income tax returns.

    • If deductions exceed gross income for any year that is a base year, you may have negative taxable income for that base year. However, any amount that may provide a benefit in another taxable year is added back in to determine the base year taxable income. See the worksheet in the instructions for Schedule J.

    The base years are determined as follows:

    If Tax Year is... Then Base Years are...
    2008 2007, 2006, 2005
    2007 2006, 2005, 2004
    2006 2005, 2004, 2003
    2005 2004, 2003, 2002

  4. If a farmer or fisherman did not file a return for any of the three previous years, the amount entered on Schedule J for that year(s) is the amount that would have been reported if the taxpayer had filed a return.

  5. The Taxpayer Notice Code explanation for Schedule J is: "Your Schedule J tax was figured incorrectly. We adjusted your account accordingly."

  6. For tax years beginning after 2003, a farmer's or fisherman's regular tax liability for purposes of computing alternative minimum tax (AMT) is determined without reduction for income averaging. Those taxpayers receive the full benefit of income averaging because it reduces the regular tax while the AMT (if any) remains unchanged.

    Note:

    For tax years beginning prior to 2004, a farm income averaging election applied in determining regular tax liability for purposes of computing AMT. If a taxpayer owed AMT (figured without regard to farm income averaging), filing Schedule J did not reduce the total tax. However, filing schedule J could increase the credit for prior year minimum tax for a later year.

  7. With respect to base years, minor children who had unearned income and were taxed based on their parents' rates in those earlier years do not recompute their tax liability when a parent makes an election to average income in a later year. With respect to an election year, if minor children have unearned income and are taxed based on their parents' rates, the applicable tax rate is the rate determined after the parent makes an income averaging election.

21.6.4.4.9.1  (10-01-2009)
Taxable Income from Farming or Fishing and Elected Farm Income

  1. Taxable income from farming or fishing includes all of the items listed below that are attributable to any farming or fishing business:

    • Income

    • Gains

    • Losses

    • Deductions

    • Compensation received by a shareholder from an S Corporation engaged in a farming or fishing business.

    • A landlord's crop share income reported on Form 4835, Farm Rental Income and Expenses, is eligible for income averaging under certain circumstances. See Treas. Reg. §1.1301-1(b)(2).

    • Qualified settlement income from Exxon-Valdez. The taxpayer must either be a plaintiff in the action or any individual who is a beneficiary of the estate of a plaintiff, was the spouse or immediate relative of the plaintiff and acquired the right to receive the settlement income from the plaintiff. Qualified settlement income means any interest or punitive damages received in connection with the civil action.

  2. Taxable income from farming does not include gains or losses from the sale or other disposition of land.

  3. Elected farm income is the amount of taxable income attributable to a farming or fishing business that the taxpayer elects to include on line 2 of the Schedule J.

21.6.4.4.9.2  (10-01-2009)
Adjusting Schedule J

  1. Math Verify Schedule J, Income Averaging for Farmers and Fishermenhttp://publish.no.irs.gov/FORMS/PUBLIC/PDF/25513Y06.PDF .

  2. Input the adjustment to tax with a TC 290/291.

  3. Use Reason Code 046 and appropriate Source Code and Blocking Series.

21.6.4.4.9.3  (10-01-2009)
USDA Discrimination Settlement Payments

  1. The United States Department of Agriculture (USDA) paid a cash settlement and granted loan cancellation to about 15,000 farmers pursuant to a settlement approved in 1999. The settlement resulted from a discrimination suit brought against the USDA by the farmers.

  2. Taxpayers may use terms other than "USDA" when communicating about these claims. Some of the other terms frequently used are:

    • Pigford vs. Glickman

    • Pigford vs. Veneman

    • Black Farmers Suit/Settlement cases

    Note:

    These are NOT African- American Reparation Claims. See IRM 21.6.6.4.1, African-American Reparation Claims, for more information.

  3. For 99% of the claimants, the settlement amounts fell into three categories:

    • $50,000 cash payment

    • Forgiveness of the principal and interest on certain debts (amounts varied by claimant)

    • A payment toward tax equal to 25% of the total of the $50,000 payment and the forgiveness of the debt principal (but not the interest).

  4. Most taxpayers received these payments over a period of two years (the cash payment and the debt forgiveness occurred in one year) and the tax payment was remitted to IRS in the following year. The cash payment and the tax payment (the 25% amount) are taxable income. The forgiveness of debt principal is generally taxable income, but may be excludable under certain circumstances. For example, the forgiveness of debt interest is generally not taxable income if a taxpayer uses the cash method of accounting and would have been able to deduct the payment of such interest. If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable income in the year the payment was applied to the taxpayer's account.

  5. The payment of tax (25% payment):

    1. Must be claimed as an estimated tax payment for the tax year the settlement/debt forgiveness was received.

    2. The estimated tax payment is made directly to IRS by the USDA on behalf of the taxpayer.

    3. Since the taxpayers did not make this payment, they may forget to claim the credit on their return.

    4. Identify the payment by the unique DLN of 52217 or 43217 (013/014) 9XX.

    5. If the farmer does not claim the estimated tax payment the tax module will show a J - Freeze. See IRM 21.5.6.4.15, J -- Freeze.


    PROCEDURES TO FOLLOW ON THESE ACCOUNTS ONLY:

    If And Then
    You receive a contact from a taxpayer Contact is in reference to USDA Farmer's Settlement
     
     
     
    AND



      

    The taxpayer did not receive credit for a settlement payment     		1. Complete Form 4442, Inquiry Referral, and refer the case to Kansas City. Include a day and evening telephone for the taxpayer. Fax to Kansas City P&A, Teresa Olsen, at 816–292–6276.
    2. Input a STAUP.
    3. Kansas City will open a control base, research for the payment, and contact the taxpayer on the status of the account (within 10 business days).

  6. Farmers are issued Form 1099-MISC, Miscellaneous Income, along with an instructional notice advising the farmer how to correctly report the settlement.

  7. Farmers must file a return to receive a refund.

  8. Refer to the table below to work these cases:

    If ... Then ...
    (1) This is a USDA Cash Settlement payment of $50,000.
     
     
     



     




    (2) The taxpayer reports only the settlement income (no expenses) on Schedule F, Line 10


    (3) The farmer is engaged in the business of farming.     		(1) Treat settlement payment as farm income. Report payment on Line 10 "Other Income" of the Schedule F, Profit or Loss From Farming (identify the payment as "USDA Settlement" ). Farmers receiving this payment may benefit from filing Schedule J (Form 1040), Income Averaging for Farmers and Fishermen.

    (2) This amount is not subject to Self- Employment Tax.
       
     
    (3) This amount is subject to Self- Employment Tax.
    (1) This is a loan cancellation of: 

    1. debt principal for cash or accrual taxpayers, or

    2. debt interest for accrual taxpayers.


      
     
    (2) The taxpayer reports only the loan cancellation on Schedule F, Line 10 (no expenses).

     
    3) The farmer was engaged in the business of farming.

     
    (4) The farmer filed for bankruptcy under title 11 or was insolvent at the time the loan was cancelled or if the loan was qualified farm debt.     		(1) This cancellation of debt is considered farm income. Report the amount on Line 10 of Schedule F and identify as "USDA Settlement." Farmers receiving this payment may benefit from filing Schedule J (Form 1040).




    (2) This amount is not subject to Self-Employment Tax.

      


    (3) This amount is subject to Self-Employment Tax.



    (4) Loan cancellation amounts may qualify for exclusion. Refer to Publication 908, Bankruptcy Tax Guide and Publication 225, Farmer's Tax Guide, for exclusion criteria. File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with the Form 1040, U.S. Individual Income Tax Return, to claim the exclusion.
    (1) This 25% tax payment received January 2008 for tax year 2007 is considered taxable farm income for tax year 2008. These payments are posted as TC 660s (estimated Tax Payment).















    (2). The farmer was engaged in the business of farming in the year of receipt.
    This is a 25% tax payment made by USDA directly to IRS on behalf of the farmer.     		(1) Report the payment amount on Form 1040 line 65.
    Note: Advise the taxpayer to report this payment as farm income on Schedule F, Line 10, Profit or Loss From Farming. Payment is reported in the year the payment was received by IRS. The taxpayer will receive a Form 1099 MISC showing the payment as miscellaneous income for tax year 2008.

    Caution:

    If taxpayer is no longer engaged in farming, the miscellaneous income can be reported on Line 21 of the Form 1040 with a notation USDA Settlement Payment, Black Farmer, Pigford Suit, etc.


    (2). This income is subject to Self- Employment Tax. Note: The farmer may benefit from filing Schedule J. If there is a refund due, the farmer may choose to apply all or part of the refund to the subsequent year tax return as an estimated payment by using Line 75 of Form 1040.

21.6.4.4.10  (10-01-2008)
Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800

  1. For Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800, investment income includes all income except earned income. Earned income includes:

    • Wages

    • Salaries

    • Tips

    • Professional fees

    • Amounts received as pay for personal services

    • Distributions for qualified disability trusts

  2. The child's tax is the greater of:

    • The tax at the child's tax rate on the child's taxable income, or

    • The total obtained by adding the tax computed in (a) on (an amount equal to the child's taxable income minus the child's net investment income), plus the child's share of (4) below.

  3. Net investment income is the (adjusted gross income minus earned income) minus the larger of: ($1,800 for 2008) or, if the child itemizes deductions, ($900 for 2008 plus the amount of itemized deductions directly connected with the production of the child's investment income).

  4. The allocable parental tax is the tax that would be imposed if the parents' taxable income included the net investment income of all the parents' children meeting the age requirements shown below at the end of the tax year, minus the tax that would other wise be imposed on the parent. A child is considered under age 18 if born on or after January 1, of the applicable year.

    • H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006.

    • PL 110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

    .

    If ... And ... Then ...
    The parents' tax rate is higher than the child's the parent does not elect to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends The child's investment income is taxed at the parents' rate,
    Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800, for 2008 ($1,700, for 2007 and 2006 and $1,600 for 2005 and 2004) must be used to figure the child's tax.
    The parent elects to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends.   See IRM 21.6.4.4.11, Form 8814, Parents' Election to Report Child's Interest and Dividends.

  5. Refigure the child's tax if, after filing the return, the parents' taxable income, filing status, or the net investment income of the parents' other child(ren) changes.

    • Form 1040X, Amended U. S. Individual Income Tax Return must be filed if the child's tax changes.

    • The child is not subject to penalties or under payments resulting from the additional tax.

  6. For more details, see Publication 929, Tax Rules for Children and Dependents.

21.6.4.4.10.1  (10-01-2008)
Form 8615 Tax for Certain Children Who Have Investment Income of More Than $1,800, Tax Adjustments

  1. Follow the procedures in IRM 21.5.3, General Claims Procedures, if Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800, is missing or incomplete. Address any correspondence, regarding this return, to the taxpayer (child), in care of the parent(s).

    Note:

    H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. PL 110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  2. Adjustment action required:

    1. Math verify the Form 8615.

    2. Update the entity to add "MINOR" to the taxpayer's (child) name.

    3. Add the parent's name(s), if available, as a second name line.

    4. Input the appropriate tax adjustment.

    5. Use reason code 099, the appropriate blocking series and source code.

21.6.4.4.10.2  (10-01-2008)
Parents' Tax Information Requested

  1. Taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800. The Service will supply the information upon request. The request must be:

    • Signed by taxpayer, or a legal representative. A valid Power of Attorney or proof of legal guardianship must accompany the request.

    • Submitted after the close of the parents' tax year.

    Note:

    H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. PL 110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  2. The request must contain:

    • A statement of intent to comply with IRC Section 1(g).

    • A statement of an attempt to obtain the information from the parent(s).

    • An explanation of why the information is not available from the parent(s).

    • Proof the child is under age 18 (e.g., birth certificate).

    • Evidence of unearned income over $1,800 for 2008, $1,700 for 2007 and 2006, and $1,600 for 2005 or 2004 (e.g., copies of current Forms 1099, or prior year return accompanied by an explanation of why Forms 1099 are not available.).

    • The parents' return information (name, address, TIN, and filing status, if available). Sufficient information must be provided to identify the parents' account.

  3. These requests are worked in the paper Adjustment function. Verify all information is present upon receipt of the request.

21.6.4.4.10.3  (10-01-2008)
Rejecting Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800

  1. Reject incomplete requests using Letter 1275C, Photocopy Request Response, or Letter 135C, Power of Attorney Needed to Furnish Information. Advise taxpayer:

    • The request is not processable

    • The specific information needed to process the request

    • To resubmit the request with the required information

  2. Reject the request if the requester did not make a sufficient attempt to obtain the parents' information. Contact the Disclosure Function for assistance, if unable to determine if the requester's attempt was sufficient.

  3. Do not honor the request if the requester does not meet the requirements of IRC Section 1(g).

    1. Close the case.

    2. Notify the requester using Letter 1275C.

    3. State the following in the letter: "We are unable to process your request since you did not establish that you need the requested information for filing your return. IRC Section 1(g) applies if you are under age 18 and you have unearned income of more than $1,800 for 2008." ($1,700 for 2007 and 2006 or $1,600 for 2005 or 2004.)

    Note:

    H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. PL 110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

21.6.4.4.10.4  (10-01-2008)
Processable Forms 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,800

  1. Upon receipt of a processable request, take the following actions:

    1. Advise the requester to file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

    2. Initiate research for the parents' return.

    If the request And Then
    Is processable The return is posted Request the return.
    Is received prior to the return due date or there is a posted extension The return is NOT posted 1. Input TC 930.
    2. Notify the requester of the reason for the delay and the approximate date we can supply the information.
    Is received after the return due date The return is NOT posted and there is no posted extension Notify the requester we cannot satisfy the request and why.

  2. Upon receipt of the parents' return, prepare a response to the taxpayer. The response must include the:

    • Parents' name, Social Security number, and filing status

    • Parents' taxable income from Form 1040, U.S. Individual Income Tax Return

    • Parents' tax from Form 1040, U.S. Individual Income Tax Return

    • Names of other dependent children claimed on the return who may affect the preparation of the requester's Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,800

    Note:

    H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006. PL 110-28, U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007. This provision only applies to children whose earned income does not exceed one-half of the amount of their support.

  3. Advise taxpayer if the tax is from the Tax Table, Tax Rate Schedules, or Schedule D.

  4. Send the completed response and all background information, including the parents' return, to the appropriate Campus or Area Disclosure Office. Disclosure must review the request and response. If both are proper, they will approve the release of the information to the taxpayer.

21.6.4.4.11  (10-01-2008)
Form 8814, Parents' Election to Report Child's Interest and Dividends

  1. The parent of a child under age 18 (born on or after 1/1/1991) may elect to include the gross income of the child in the parents' gross income. The child is not required to file a return if the parents make the election. The following conditions apply:

    • The gross income must be from interest and dividends only (including Alaskan Fund Dividends)

    • For 2008, the gross income must be more than $900 and less than $9,000

    • No estimated tax payments were made in the name or TIN of the child

    • No federal income tax was withheld in the name or TIN of the child

  2. The parents' tax is the total of:

    • The income tax determined after adding the child's income, plus

    • The lesser of $90 or 10% of the child's income over $900.

    Note:

    H.R. 4297, Tax Increase Prevention and Reconciliation Act of 2005, changed the age of the child from 14 to 18 years old, beginning with tax year 2006.

  3. Treat the interest which would be a tax preference item of the child as a tax preference item of the parent.

  4. For more information see the instructions for Form 8814, Parents' Election to Report Child's Interest and Dividends.

21.6.4.4.11.1  (12-09-2005)
Form 8814, Parents' Election to Report Child's Interest and Dividends, Adjustments

  1. A separate Form 8814, Parents' Election to Report Child's Interest and Dividends, must be prepared for each child whose income is reported on the parents' return. If the return is missing or incomplete, refer to IRM 21.5.2, Adjustment Guidelines. Take the following action on complete forms:

    1. Math verify the Form 8814, Parents' Election to Report Child's Interest and Dividends line by line.

    2. Input the appropriate adjustment (increase or decrease).

    3. Use reason code 033, the appropriate blocking series and source code.

21.6.4.4.12  (10-01-2009)
Alternative Minimum Tax (AMT) Changes

  1. The Job and Growth Tax Relief Reconciliation Act of 2003 increased the Alternative Minimum Tax (AMT) exemption amounts for tax years 2003 and 2004.

  2. In accordance with the Economic Growth and Tax Relief Reconciliation Act of 2001, the AMT exemption amounts for 2001 through 2002 are:

    • $49,000 for married filing joint or qualified widow(er) returns

    • $35,750 for single or head of household returns

    • $24,500 for married filing separate returns

  3. In accordance with the Jobs and Growth Tax Relief Reconciliation Act of 2003, section 106, the AMT exemption amounts for 2003 and 2004 are:

    • $58,000 for married filing joint or qualified widow(er) returns

    • $40,250 for single or head of household returns

    • $29,000 for married filing separate return

    Note:

    PL 108-311, Working Families Tax Relief Act of 2004 extended the AMT amounts through 2005.

  4. In accordance with PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005, the AMT exemption amounts for 2006 are:

    • $62,550 for married filing joint or qualified widow(er) returns

    • $42,500 for single or head of household returns

    • $31,275 for married filing separate return

  5. In accordance with PL 110-166, Tax Increase Prevention Act, the AMT exemption amounts for 2007 are:

    • $66,250 for married filing joint or qualified widow(er) returns

    • $44,350 for single or head of household returns

    • $33,125 for married filing separate returns


  6. In accordance with PL 110-343, The Emergency Economic Stabilization Act of 2008, the AMT exemption amounts for 2008 are:

    • $69,950 for married filing joint or qualified widow(er) returns

    • $46,200 for single or head of household returns

    • $34,975 for married filing separate returns

  7. In accordance with PL 111-5, American Recovery and Reinvestment Tax Act of 2009, the AMT exemption amounts for 2009 are:

    • $70,950 for married filing joint or qualified widow(er) returns

    • $46,700 for single or head of household returns

    • $35,475 for married filing separate returns

  8. A provision to allow an individual to offset the entire regular tax liability and AMT liability by personal nonrefundable credits was added by:

    • PL 107-147, Job Creation and Worker Assistance Act of 2002, for tax years 2002 and 2003

    • PL 108-311, Working Families Tax Relief Act of 2004, through tax year 2005

    • PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005

21.6.4.4.13  (10-01-2009)
Alternative Minimum Tax (AMT), child Under Age 18

  1. Taxpayers must use Form 6251, Alternative Minimum Tax-Individuals, to figure Alternative Minimum Tax (AMT) for children under age 18.

  2. If the parent elects to report a child's interest and dividends on the parents' return the child is not subject to AMT.

  3. See table below for details:

    If ... Then ...
    Tax Year 2008 The alternative minimum tax exemption amount for a child 18 years of age or under or a full-time student under 24 years of age cannot exceed the amount of the child's earned income plus $6,400.
    Tax Year 2007 The alternative minimum tax exemption amount for a child under 18 years of age cannot exceed the amount of the child's earned income plus $6,300.
    Tax Year 2006 The alternative minimum tax exemption amount for a child under 18 years of age cannot exceed the amount of the child's earned income plus $6,050.
    Tax Year 2005 The alternative minimum tax exemption amount for a child under 14 years of age cannot exceed the amount of the child's earned income plus $5,850.

    Note:

    PL 109-222, Tax Increase Prevention and Reconciliation Act of 2005 changed the age of a child from 14 to 18 years old for tax years beginning in 2006. PL 110-28 U.S. Troop Readiness, Veterans Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, changed the age of a child to age 18 or under OR over 18 and a full-time student under age 24 for tax years beginning after May 31, 2007.

  4. Follow normal adjustment procedures if an amended return is received changing the AMT computation. See Publication 929, Tax Rules for Children and Dependents, for additional AMT information.

21.6.4.4.14  (10-01-2008)
Who is Subject to Self-Employment Tax

  1. Taxpayers must pay self-employment (SE) tax on non-exempt trade or business income of $400 or more. The SE Tax does not apply to amounts earned by:

    • Nonresident aliens

    • Members of certain religious sects who have filed for and obtained exemptions on Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits

    • Public officials, except for public officials compensated solely on a fee basis

  2. The SE tax generally applies to the earnings of self-employed persons (such as independent contractors or partners), and not to earnings received by employees.

  3. Income items that are included in computing SE tax are reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), Schedule C–EZ, Net Profit or Loss from Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, Part II, and Schedule F, Profit or Loss From Farming, or sometimes as "other income" on Form 1040, U.S. Individual Income Tax Return.

    Note:

    Form 1040 Instructions specifically provide that income from self-employment should not be reported as "other income" or reported on Schedule E, Part I.

  4. Changes in SE income may change the SE tax and SE tax deduction.

  5. The best source of information for reporting SE tax is the Schedule SE, Self-Employment Tax Instructions for the applicable year. There are a number of special rules relating to SE tax other than the above.

  6. For more details, see Publication 334, Tax Guide for Small Business.

21.6.4.4.14.1  (10-01-2002)
Self-Employment Tax

  1. The Social Security Administration (SSA) determines social security benefits based, in part, on the tax reported on Schedule SE, Self-Employment Tax.

    • Usually taxpayers must pay self employment (SE) tax on all net earnings if over $399.99, regardless of age, even if receiving social security or Medicare benefits (See Publication 17, Your Federal Income Tax, for exceptions).

    • The Medicare portion of the SE tax (2.9%) applies even if the maximum social security tax has been withheld from the employee's wages.

    • SE tax is entered on the appropriate line of Form 1040, U.S. Individual Income Tax Return.

  2. Taxpayers subject to SE tax complete either the Short Schedule SE (Section A) or the Long Schedule SE (Section B).

    1. It may be beneficial for the taxpayer to use the optional method for computing SE tax to obtain social security credit (Part II, Schedule SE, Section B).

    2. Taxpayers filing jointly must file separate Schedules SE if they both have self-employment income.

21.6.4.4.14.2  (10-01-2009)
Self-Employment Tax Adjustments

  1. Taxpayers may file an amended return to change self employment (SE) income and SE tax originally reported. Verify the changes against the tax account information. Research the returns and records of accounts as needed. Correct the SE income and SE tax by the following input:

    1. TC 29X for the adjustment, which includes the SE tax change.

      Caution:

      Do not decrease the posted amounts to less than zero.

    2. Item reference number 889 to increase or decrease the SE tax (line 5, Short Schedule SE, and line 12, Long Schedule SE).

    3. Item reference number 888 to increase or decrease the AGI, when applicable.

    4. Item reference number 886 to increase or decrease the taxable income, when applicable.

    5. Item reference number 878 to increase or decrease the primary SE income (PRIM–SE–INCM) (line 4, Short Schedule SE, and the smaller of line 6 or 9, Long Schedule SE).

    6. Item reference number 879 to increase or decrease the secondary SE income (SECND–SE–INCM) (line 4, Short Schedule SE, and the smaller of line 6 or 9, Long Schedule SE).

    7. Item reference number 895 to increase or decrease the primary Medicare income (PRIM–MEDICARE–INC) (line 4, Short Schedule SE, and line 6, Long Schedule SE).

    8. Item reference number 896 to increase or decrease the secondary Medicare income (SECND–MEDICARE–INC) (line 4, Short Schedule SE, and line 6, Long Schedule SE).

    9. Use RC 044 when adjusting SE tax.

      Note:

      A reason code is not required for a ripple effect change. See IRM 21.6.7.4.1.3 , Reason Codes.

    If ... Then ...
    Tax Year 2009 Item reference number 878 or 879 cannot exceed $106,800.
    Tax Year 2008 Item reference number 878 or 879 cannot exceed $102,000.
    Tax Year 2007 Item reference number 878 or 879 cannot exceed $97,500.
    Tax Year 2006 Item reference number 878 or 879 cannot exceed $94,200.
    Tax Year 2005 Item reference number 878 or 879 cannot exceed $90,000.

21.6.4.4.14.3  (04-28-2008)
Self-Employment Tax Not Reported

  1. DO NOT assess self-employment tax if taxpayer does not report it on an amended, superseding, or supplemental return.

    1. Math error authority is not applicable to unreported SE tax.

    2. Self-employment tax may ONLY be assessed by Examination through statutory notice of deficiency procedures.

      Exception:

      Self-employment tax may be assessed up to the amount of EITC claimed on original returns. For more information see IRM 21.6.3.4.2.7.7, EIC and SE Tax.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. Use local routing procedures.

    2. Indicate "Questionable SE income" on the routing slip.

    3. The Examination function will determine if the income is subject to SE Tax and take the following action:

    If the income Then
    Is not subject to SE tax The case will be returned to you.
    Is subject to SE tax The case is selected by examination and not returned to originator.

21.6.4.4.14.4  (10-01-2002)
Social Security Act Section 218

  1. Taxpayers may claim a refund of any previously paid SE tax per IRC section 6511(d)(5).

    1. Claims may be filed when Social Security Administration (SSA) and a state government modify or enter into an agreement per the Social Security Act, section 218 and the taxpayer is now classified as a "covered" employee of a state or local government under the modification or agreement.

    2. Claims otherwise barred by the statute of limitations are timely, if filed on or before, the last day of the second year after the calendar year the agreement was made.

21.6.4.4.14.5  (10-01-2002)
Self-Employment Tax Adjustment Records Sent to Social Security Administration

  1. Data from adjustments to self employment (SE) tax is sent to Social Security Administration (SSA) electronically. SSA notifies the Internal Revenue Service if there are discrepancies in adjustment data. Examples of possible discrepancies are:

    • SE tax incorrectly computed on SE tax earnings limit, less the taxpayer's net profit, rather than on the net profit.

    • SE tax reported on net earnings under $400.

    • Reportable tax year incorrect.

    • Money amounts incorrect.

    • Invalid, insufficient, or missing data.

21.6.4.4.14.6  (10-01-2008)
Form 4137, Social Security and Medicare Tax on Unreported Tip Income

  1. Taxpayers earning $20 or more in tips in a calendar month:

    1. Are required to report the income to their employer.

    2. Must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, if the tips are not reported.

    Note:

    The $20 rule applies separately to tips received while working for more than one employer.

  2. Taxpayer files an amended return reporting tip income and tax, without a Form 4137:

    If Then
    Sufficient information is provided Prepare Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and Schedule U, U.S. Schedule of Unreported Tip Income, for 2006 and earlier years.
    Insufficient information is provided Follow procedures in IRM 21.5.3, General Claims Procedures.

  3. Line 2, Schedule U, addresses unreported tip income subject to social security and Medicare tax. Beginning in 2007, Schedule U has been eliminated. Information relating to the social security record is based on the information shown on Form 4137.

  4. If a loose Form 4137 is received and it cannot be determined if the tips and tax were included on the original return:

    1. Research Command Code (CC) RTVUE.

    2. Obtain the original return, if necessary.

  5. Math verify the Form 4137 and Schedule U, for 2006 and earlier years, (either received from the taxpayer or a dummy prepared by Internal Revenue Service).

21.6.4.4.14.7  (04-10-2008)
Form 4137, Social Security and Medicare Tax on Unreported Tip Income, Adjustments

  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

    2. Item reference number 891 to increase or decrease primary unreported tip income (PRIM–UNRPRTD–TIP–INC).

    3. Item reference number 892 to increase or decrease secondary unreported tip income (SECND–UNREPRTED–TIP–INC).

      Note:

      The smaller of line 6 or 10, Form 4137, Social Security and Medicare Tax on Unreported Tip Income, is the item reference number 891 or 892 amount.

    4. Item reference number 898 to increase or decrease primary Medicare tip income (PRIM–MEDICARE–INC).

    5. Item reference number 899 to increase or decrease secondary Medicare tip income (SECND-MEDICARE-INC).

    Note:

    Line 6, Form 4137 is the item reference number 898 or 899 amount.

  2. DO NOT detach Schedule U from returns processed from 1991 through 2006. The information from the input of the item reference numbers is transmitted to Social Security Administration.

21.6.4.4.15  (10-01-2006)
Employees Filing Under the Revenue Act of 1978, Section 530

  1. Certain employers who qualify under the Revenue Act of 1978, Section 530, are allowed to treat their workers as other than employees (such as independent contractors).

    Note:

    No determination is made of whether the workers are employees under common law rules.

    1. An employer that must issue any required information forms (such as Form 1099) must issue this form instead of a Form W-2 for the employer to continue to qualify.

    2. The workers could be employees under the common law rules. If the workers are employees, the workers are not liable for self employment (SE) tax on their earnings from the employer but are liable for the employee's portion of social security and Medicare Taxes.

    3. Workers may apply to determine their status as employees or independent contractors by filing Form SS-8, Determination of Workers Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

21.6.4.4.15.1  (10-01-2008)
Misclassified Workers to File Form 8919, Uncollected Social Security and Medicare Tax on Wages

  1. Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when he or she is actually an employee. When this happens, Form 8919, Uncollected Social Security and Medicare Tax on Wages will be used beginning tax year 2007 by workers who performed services for an employer but the employer did not withhold the worker's share of social security and Medicare taxes.

  2. Employees who were misclassified by their employers as an independent contractor should use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

  3. In addition, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria include:

    • The worker has filed Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, and received a determination letter from the IRS stating they are an employee of the firm.

    • The worker has been designated as a section 530 employee by their employer or by the IRS prior to January 1, 1997.

    • The worker has received other correspondence from the IRS that states they are an employee.

    • The worker has filed Form SS-8 with the IRS and has not yet received a reply.

  4. By using Form 8919 the worker's social security and Medicare taxes will be credited to their social security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

  5. In the past, misclassified workers often used Form 4137, Social Security and Medicare Tax on Unreported Tip Income to report their share of social security and Medicare taxes. Misclassified workers should no longer use this form for 2007 and subsequent years. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare taxes on allocated tips and tips not reported to their employers.

21.6.4.4.15.2  (05-21-2008)
Processing Claims for Refund of Self-Employment Tax by Individual Claiming to Be an Employee

  1. Claims for refund of Self-Employment (SE) Tax by an individual claiming to be an employee who was treated as an independent contractor must include either:

    1. A determination letter from the Internal Revenue Service holding that the taxpayer is an employee, or

    2. A Form W-2 (or corrected Form W-2).

      Note:

      The claim should include Form 8919, Uncollected Social Security and Medicare Tax on Wages, for tax year 2007 and subsequent and for 2006 and prior Form 4137 ,Social Security and Medicare Tax on Unreported Tip Income.

      If And Then
      An incomplete claim is received with a Form SS-8   1. Forward the form to the appropriate function (follow local procedures).
      2. Advise taxpayer the Form SS-8 was forwarded for consideration and to resubmit the claim if a favorable determination is received.
      3. Close IDRS control base.
      An incomplete claim is received without substantiation The claim indicates taxpayer received a favorable determination or a corrected Form W-2. Correspond for the missing information.
      An incomplete claim is received without substantiation The claim does not indicate taxpayer received a favorable determination or corrected Form W-2. 1. Do not consider the claim. Refer to IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.
      2. Enclose a blank Form SS-8.
      3. Advise Taxpayer to file Form SS-8 and forward to the address on the form.

    3. See IRM 21.7.2.4.23, Employee-Employer Status Determinations, for additional information.

21.6.4.4.15.3  (10-01-2004)
Adjustment Considerations

  1. Gross compensation that was paid by the payer shown in the determination letter, or by the payer shown in the corrected Form W-2 and was previously reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), must be included as wages.

  2. The corrected Form W-2 may or may not show any federal withholding, social security or Medicare taxes withheld.

  3. The deduction for the self employment (SE) tax must be added back to the adjusted gross income for tax years 1990 and subsequent.

  4. Social security and Medicare tax must be computed on the gross compensation.

  5. Some previously deducted Schedule C expenses may be claimed as employee business expenses on Form 2106, Employee Business Expenses, and carried to Schedule A, Itemized Deductions, subject to the 2% limitation.

  6. Refer the case to Exam as Category A if the Schedule C deductions included any of the following:

    • Cost of goods

    • Wages

    • Office in home expenses

21.6.4.4.15.4  (01-29-2009)
Processing Complete Claims — Revenue Act of 1978, Section 530

  1. For 2007 and subsequent, process complete claims (with the necessary substantiation) as follows:

    If Then
    Self employment (SE) tax was previously assessed 1. Math verify Form 8919, Uncollected Social Security and Medicare Tax On Wages.
    2. Prepare a dummy Form 8919, if not attached to the claim.
    3. Use the SE tax to offset the employee share of FICA now due (unless withheld by the employer via an adjustment and shown on corrected Form W-2) and input TC 29X to net the difference.
    4. Decrease the SE income (SE–INC and MEDICARE–INC to zero) and use item reference numbers 873 / 874, 878 / 879, 893 / 894 and 895 / 896.
    Note: Do not input item reference number 891 / 892 or 898 / 899.
    5. Use item reference number 889 to decrease SE tax to zero.
    6. Use Reason Code 024.
    SE tax was not previously assessed 1. Follow procedures 1 and 2 above.
    2. Adjust taxpayer's account with TC 29X.
    3. Use item reference numbers 873 / 874 and 893 / 894 as appropriate.
    4. Use Reason Code 024.
    CAUTION: Do not input item reference numbers 889, 878 / 879 or 895 / 896.

  2. For 2006 and prior, process complete claims (with necessary substantiation) as follows:

    If ... Then ...
    Self employment (SE) tax was previously assessed

    1. Math verify Form 4137 , Social Security and Medicare Tax on Unreported Tip Income.

    2. Detach Schedule U, U.S. Schedule of Unreported Tip Income and route to Social Security Administration (SSA) using local procedures.

    3. Prepare a dummy Form 4137 and Schedule U, if not attached to the claim. Change the word "Tip" to the word "Wage " in the Form 4137 title.

    4. Use the SE tax to offset the employee share of FICA now due (unless withheld by the employer via an adjustment and shown on corrected Form W-2). Input TC 29X to net the difference.

    5. Decrease the SE income (SE-INC and MEDICARE-INC to zero) using item reference numbers 878 / 879 and 895 / 896.

      Note:

      Do not input item reference number 891 / 892 or 898 / 899.

    6. Use item reference number 889 to decrease SE tax to zero.
    SE tax was not previously assessed

    1. Follow procedures 1 through 3 above.

    2. Adjust taxpayer's account with TC 29X.

      Caution:

      Do not input item reference numbers 889, 878 / 879 or 895 / 896.

21.6.4.4.15.5  (12-30-2008)
Form 8919, Uncollected Social Security and Medicare Tax on Wages - Adjustments

  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

    2. Credit reference number 873 to increase or decrease Primary Social Security Wages.

    3. Credit reference number 874 to increase or decrease Secondary Social Security Wages.

      Note:

      The smaller of line 6 or 9, Form 8919, Uncollected Social Security and Medicare Tax on Wages, is the credit reference number 873 or 874 amount.

    4. Credit reference number 893 to increase or decrease the Primary Total Wages Amount (Medicare).

    5. Credit reference number 894 to increase or decrease the Secondary Total Wages Amount (Medicare).

      Note:

      Line 6, Form 8919 is the credit reference number 893 or 894 amount.

    Caution:

    When adjusting accounts posted prior to Jan. 1, 2009, you must access CC RTVUE and look at Form 8919 to verify the amounts previously transmitted to SSA.

  2. Use Reason Code 024.

  3. The information from the input of the credit reference numbers is transmitted to Social Security Administration.

21.6.4.4.16  (11-26-2008)
Tax Period Changes

  1. Returns may be processed to an incorrect period or taxpayer requests a change in accounting period. The following procedures are included in this section:

    • Mixed Periods

    • Change in Accounting Period

  2. When a return is posted to an incorrect period it may be necessary to correct the ASED to reflect the correct return received date. Use Command Code (CC) REQ77/FRM77 to input TC 560 to correct the ASED if necessary. See IRM 2.4.19.1, Overview of Command Codes REQ77, FRM77, and FRM7A, for information on REQ77.

  3. Use the following instructions when using TC 560 to correct the ASED:

    1. TC 560 on (CC) REQ77 must be input on IDRS to correct the ASED to show the posting of the correct return.

    2. Input TC 560 on CC REQ77 in Blocking Series 700 to extend the ASED. Use Blocking Series 990–999 to back date / back down the ASED,

21.6.4.4.16.1  (11-26-2008)
Mixed Periods

  1. A mixed period duplicate filing condition ( CP 36, Duplicate Filing Condition) is created when returns from different tax periods, but for the same taxpayer, are processed to the same account.

  2. One of two conditions occur on mixed period cases.

    1. The correct year return posts first.

    2. An incorrect year return posts first.

  3. Beginning May 1, 2003, if you identify a Mixed Period case while staffing the AM toll-free telephone line or are located in a Taxpayer Assistance, prepare Form 4442, Inquiry Referral, and route it to the Campus Accounts Management (AM) paper function where the CP 36 was generated. If CP 36 was not generated, route Form 4442 to the campus that processed the original return.

    Exception:

    If there is an open control on the account, refer the Form 4442 to the employee who has open control.

  4. Request IMFOL/MFTRA on all years involved. Verify the return and attachments. Refer to IRM 21.6.7.4.4, Duplicate or Amended Returns - CP 36 (Duplicate Filing Condition).

  5. For information regarding Economic Stimulus Payments (ESP) and mixed period procedures, see IRM 21.6.3.6.7.7.3, Mixed Period Procedures.

  6. Refer any reprocessable/reinput return for which the ASED has expired or is imminent to the Statute function as indicated below:

    If Then
    Document posted as a TC 150 Within 90 days of expiration
    Document did not post as a TC 150 (e.g., document posted as a TC 976/977 and never posted as a TC 150 Within 180 days of expiration

  7. Do not abate tax on the incorrect module before referring the cases to the Statute function.

  8. Refer to IRM 25.6.1, Statute of Limitations Processes and Procedures, and Document 7368, Basic Guide for Processing Statute Cases.

21.6.4.4.16.2  (10-01-2006)
Correct Year Return Posted First

  1. If the correct year posted first, take the following action:

    1. Transfer any misapplied payments to the correct period.

    2. Use a secondary TC 570 on the credit side, if needed, to prevent refunds from generating.

    3. Input the IDRS actions.

    4. Release the "—A" freeze.

    5. Input a TC 971 Action Code (AC) 002 to cross-reference the other tax period.

  2. Reprocess the second return to the correct period if there is no return posted. Input TC 971, AC 017, on the reprocessable year. See IRM 21.5.2.4.23, Reprocessing Returns/Documents, for information on reprocessing returns. If there is a TC 140 in the module, input TC 599, Closing Code (CC) 18, and TC 971, AC 017, on the reprocessable year. Refer to IRM 5.19.2, Return Delinquency.

  3. If there is a return posted on the other tax period, adjust the tax, credit, and reference fields to reflect the correct return information.

21.6.4.4.16.3  (02-24-2009)
Incorrect Year Posted First

  1. If the incorrect year posted first, take the following action:

    1. Transfer any misapplied payments to the correct period.

    2. Use a secondary TC 570 on the credit side, as needed.

    3. Input TC 570 on the debit side, if a refund was not issued, to suppress CP 60, Credit Reversal Adjustment Notice, issuance.

    4. Increase or decrease tax and credits to reflect the correct figures.

    5. Use blocking series "00."

    6. Include a statement in the Remarks section indicating that because of the mixed period, the TC 976 is now the original return.

    7. Adjust any item reference fields.

    8. Use Hold Code 3 or 4, as needed, if a refund was NOT issued.

    9. Advise taxpayer of corrected figures if the account will now be in balance due status.

    10. Consider any posted penalties.

    11. Analyze the module to determine if ES penalty should be assessed or recomputed.

    12. Input TC 971, Action Code 001. Cross-reference the other tax period. (Transaction Code 971).

    13. Correct the withholding to reflect any refund or offsets previously issued from the incorrect year's modules.

    14. Transfer any other available credit or payments to the account. Net out (subtract) any refunds or offset previously issued.

      Exception:

      If a refund was previously issued or an offset occurred, and EIC was involved, then EIC must be reversed and the refund/offset must be moved/reversed. See IRM 21.5.2.4.23.10, Moving Refunds. Refer to IRM 21.6.3.4.2.7, Earned Income Tax Credit (EIC), for any necessary EIC changes.

    15. When "netting out" any previously issued refund or offset, input a TC 971 AC 173 on the correct year. Cross reference the incorrect year's module.

    16. Correspond with taxpayer if a refund was issued. Advise a processing error was made and an additional refund or balance due notice will be issued.

    17. Refer to IRM 21.4.6, Refund Offset, if TC 896 or TC 898 posted to the module.

  2. Reprocess the incorrect return to the correct module, if a TC 150 is not posted. Input TC 971, AC 017, on the reprocessable year. Use Form 3893, Re-Entry Document Control, and route appropriately. If there is a TC 140 in the module, input TC 599, CC 18 and a TC 971, AC 017, on the reprocessable year.

    Note:

    Use posting delay code for one cycle, on the correct year, if the incorrect year will be in balance due status and the correct year in overpayment status.

  3. See IRM 21.5.2.4.23, R eprocessing Returns/Documents, for information on reprocessing returns. Follow local procedures for bypass DIF scoring.

  4. If there is a return posted on the correct tax period:

    1. Increase or decrease the tax, credit, and reference fields to reflect the correct return information.

    2. Use posting delay code on the correct year for one cycle if the incorrect year will be in balance due status and the correct year will be in overpayment status. Follow the procedures in IRM 21.6.7.4.14, True Duplicate Return, if the posted data matches the second return.

21.6.4.4.17  (10-01-2002)
Accounting Period Change

  1. Individual income tax returns cover an accounting period of either a:

    • Calendar year — January 1 through December 31

    • Fiscal year — 12 month period ending on the last day of any month except December or a period of 52 or 53 weeks (always ending on the same day of the week)

  2. A taxpayer chooses an accounting period when filing the first tax return.

    • It may never be longer than 12 months

    • Approval must be obtained from the Internal Revenue Service to change the established accounting period

    • Taxpayer must file Form 1128, Application to Adopt, Change, or Retain a Tax Year, to request a change

  3. Forward original Form 1128, Application to Adopt, Change, or Retain a Tax Year, requests to the Entity function. The Entity function will determine whether a referral to Headquarters is required (e.g., fiscal year changes).

  4. The taxpayer's return may post to an incorrect period because of a processing error, such as:

    • A calendar year return posting as a fiscal year return

    • A fiscal year return posting as a calendar year return

    • A deceased taxpayers short year return posting as a calendar year return

  5. The tax year ending for a final short year return is the month and year of death. Enter computer condition code "Y" on the return to prevent unpostable condition 162.

21.6.4.4.17.1  (10-01-2006)
Resolving Accounting Period Changes

  1. Take the following action:

    1. Request IMFOL/BMFOL to determine taxpayer's correct filing period.

    2. Request the return posted to the incorrect period(s).

    3. Back out the tax information posted on the incorrect period.

    4. Input TC 170.00 if adjusting withholding and/or transferring timely payments from the module and no TC 17X is on the module.

    5. If TC 17X is present on the module, input TC 171 to reduce to zero or, if applicable, adjust to the amount reported by the taxpayer on the return.

    6. Transfer payments to the correct period, if necessary.

    7. Reprocess the return(s) to the correct tax period.

      Caution:

      DO NOT zero out the tax on Statute years. Refer claims to the Statute function for clearance, if they involve adjusting accounts and reprocessing return on Statute years.

    8. Input an entity transaction to change the fiscal year month (FYM) when taxpayer includes a copy of a previously approved Form 1128, Application to Adopt, Change, or Retain a Tax Year.


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