21.6.6  Specific Claims and Other Issues (Cont. 1)

21.6.6.3 
Specific Claims Procedures

21.6.6.3.22 
Federal Income Tax Forgiveness for Certain United States (U.S.) Military and Civilian Employees and Other Individuals

21.6.6.3.22.1  (04-17-2014)
9/11 Rescue Worker Claims filed under IRC Section 692(d)

  1. Rescue and recovery workers are eligible for Federal tax relief only to the extent their death is the result of wounds or injury sustained during the 9/11 relief effort. Claims filed from a 9/11 injury which leads to an illness (such as cancer) which then leads to death may be eligible.

  2. Disability payments received for injuries incurred as a direct result of a terrorist attack or for an illness or disease resulting from an injury incurred as a direct result of a terrorist attack can be excluded from income under IRC 104(a)(5) at the time the payments are received. Taxes erroneously paid on qualifying disability payments may be refundable separate from the tax forgiveness provided in the year of death.

  3. Claims are filed on Form 843, Claim For Refund and Request for Abatement and/or Form 1040X, Amended U.S. Individual Income Tax Return. These claims are processed in the Kansas City campus, if received at any other campus, refer to IRM 21.6.6.3.22.2, Killed in Terrorist Action (KITA)/Killed in Action (KIA) and Astronauts Killed in the Line of Duty.

21.6.6.3.22.2  (04-17-2014)
Killed in Terrorist Action (KITA)/Killed in Action (KIA) and Astronauts Killed in the Line of Duty

  1. IRC Section 692 provides for the forgiveness of certain Federal income taxes for certain U.S. military and civilian employees who are killed or die of injuries received as a result of military or terrorist action and Astronauts Killed in the Line of Duty.

  2. In general for KITA/KIA claims the determination of terrorist or military action directed against the U.S. or its allies is made by the Department of Treasury in consultation with the State Department, the Department of Defense, or the Department of Justice.

  3. The Department of Defense provides a DD Form 1300, Report of Casualty, or DD Form 2064, Certificate of Death Overseas, to the decedent's administrator for military and civilian Defense Department employees so that the estate may submit it with a claim under the KITA or KIA provisions.

  4. For Civilian employees of agencies other than the Department of Defense who are victims of terrorist or military actions overseas, relief under the KITA/KIA provisions is based upon certification in a letter signed by the Director General of the Foreign Service, Department of State, or the Director General's delegate. The certification must include the deceased individual's name and social security number, the date of injury, the date of death, and a statement that the individual died as a result of a terroristic or military action outside the United States.

  5. For civilian employees of agencies other than the Department of Defense who are victims of a domestic terrorist or military action, relief under the KITA/KIA provisions must be accompanied by certification that includes:

    • A copy of the death certificate stating the nature of the injury causing death or, if the cause of death is not apparent from the death certificate, a letter from the treating physician, medical examiner, or hospital stating the cause of death, or

    • A certification from the federal employer that includes the name and social security number of the decedent, the date of the injury, the date of death, a statement that the decedent was an employee of the United States on the date of injury and the date of death and, if the death was associated with an event that the Secretary has identified as a military action or terroristic activity in published guidance, a statement identifying the action or activity associated with the death. This certificate may be a form or a letter from the employing agency's personnel department to the decedent's representative.

  6. A copy of the death certificate is required in lieu of certification from the State Department or Department of Defense for the individuals listed below. The death certificate must cite the cause of death as the event qualifying for tax forgiveness. For example, accept a death certificate that states that the death was a result of wounds or injury incurred as a result of the 9/11 terrorist attacks or was a result of an illness or disease that arose from wounds or injury sustained during the 9/11 terrorist attacks or 9/11 relief efforts. If the cause of death is not apparent from the death certificate, accept a letter from the treating physician, medical examiner, or hospital stating the cause of death or other proof such as a certification from the World Trade Center Health Program that the victim was being treated for an illness or disease that arose from wounds or injury sustained during the 9/11 terrorist attacks or 9/11 relief efforts.

    1. Any individual who dies as a result of wounds or injury incurred due to the terrorist attacks against the United States on April 19, 1995, or September 11, 2001, or

    2. Any individual who dies as a result of illness incurred due to a terrorist attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002, unless the individual was a perpetrator of the attacks, or

    3. Any astronaut whose death occurs in the line of duty after December 31, 2002.

  7. Independent contractors working on behalf of the United States government agency are not civilian employees of the United States and are not entitled to relief under the KITA/KIA provisions.

  8. Taxpayer must be a U.S. military or civilian employee on the date of injury and on the date of death.

    Exception:

    The Victims of Terrorism Tax Relief Act of 2001 and the Military Family Tax Relief Act of 2003 amended the Internal Revenue Code to exempt certain individuals from certain income taxes, refer to Publication 3920, Tax Relief for Victims of Terrorist Attacks.

  9. Forgiveness of tax for KITA applies to the year of death and any prior tax year beginning with the last tax year ending before the year of the injury and only applies to the decedent's income.

  10. Forgiveness of tax for KIA applies when a member of the U.S. Armed Forces dies while in active service, if the death occurred in a combat zone or from wounds, disease, or other injury received while serving in a combat zone. The decedent's income tax liability is forgiven for the year the taxpayer died. The prior year(s) is also forgiven only if the taxpayer had entered into a combat zone during the prior year or earlier. The taxpayer's first entry into a combat zone determines which year(s) are considered for forgiveness. In addition to tax for the tax years described in the paragraph above, all taxes and applicable penalties and interest are forgiven on accounts remaining unpaid as of the date of death, regardless of the tax year. These taxes should be abated if assessed, and credited or refunded if collected, after the date of death. Prepaid credits such as income tax withholding are considered paid when withheld.

  11. Interest paid on the refund resulting from KITA/KIA returns/claims is taxable to the recipient.

  12. Calls may be received from survivors of victims due to the conflicts in Iraq and Afghanistan. Extra care must be taken when handling this type of call, due to the sensitivity of the issue.

  13. The literal "KITA" will appear on CC ENMOD, IMFOLE, TXMOD and SUMRY as an indicator. It does not cause a freeze or prevent the issuance of enforcement related notices. Route all account inquires and correspondence to your Area KITA coordinator using Form e-4442/Form 4442 on calls received from the survivors, or a family member, etc. Include the following information:

    • Scenario of the taxpayer's inquiry

    • Contact person's name, phone number, relationship to victim, and mailing address

    • Victim's name and SSN

    Reminder:

    Only KITA/KIA Coordinators or designated employees should make contact with the administrator/surviving spouse. Advise the caller they will be contacted within 5 business days. Route/Fax the Form 4442 to the appropriate Coordinator: Refer to http://serp.enterprise.irs.gov/databases/who-where.dr/kita_kia_coordinators.dr/kita_kia_coordinators.htm for the list of KITA/KIA coordinators. All tax law inquiries should be transferred to the applicable tax law transfer number listed on Servicewide Electronic Research Program (SERP) in the Telephone Transfer Guide (TTG). Starting January 2nd, 2014 refer to IRM 21.1.1.6 (5), (6), and (7), Customer Service Representative (CSR) Duties for new tax law procedures.

  14. All KITA/KIA returns, except Forms 706, Estate Tax Returns should be mailed to the Kansas City Campus. Form 706, Estate Tax Returns refer to IRM 21.7.5.5.3, Special Processing Required for KITA Forms 706.

  15. The Kansas City Processing Center is responsible for taking all necessary action on KITA cases. The KITA/KIA Coordinator in the Kansas City Campus receives all returns (original or amended) and all case files/inquiries from decedent's administrator/surviving spouse, the territory office, other functions within the campus, or other campuses. If returns (original or amended) are received at any other campus, expedite the transfer of the KITA/KIA return/case using Form 3210,Document Transmittal, send to:
    Internal Revenue Service
    333 W. Pershing, Stop 6503, P5
    Kansas City, MO 64108

    If a KITA claim is erroneously scanned into CIS reassign the case to ≡ ≡ ≡ ≡ ≡ ≡ ≡ , (internal use only). If the return meets KITA/KIA criteria and was received from Error Resolution System (ERS), notify ERS suspense that you are keeping the return. The Kansas City KITA Unit performs the required KITA/KIA case action.

  16. Do not refer "Hostage" cases to Kansas City, if the literal "HSTG" displays on CC ENMOD, SUMRY, TXMOD or TDINQ, follow the procedures in IRM 5.19.1.4.12, Taxpayers Taken Hostage in Terrorist Action (HSTG).

  17. When KITA/KIA cases are received from other campuses, Kansas City will open an IDRS control base at their campus the same date of acknowledging the Form 3210, Document Transmittal. When Kansas City receives faxes from other campuses, they will add History item on IDRS "fax recv’d" . The sending campus is responsible for monitoring the case and closing their IDRS control base once the control base is open in Kansas City.

  18. Organization/Function/Program (OFP) - Program 82385 must be used to report time working on KITA/KIA returns.

21.6.6.3.22.2.1  (06-12-2009)
KITA/KIA Procedures for All Functions

  1. KITA/KIA processing is expedited at all times. Follow guidelines in the table below:

    Signature The rules regarding decedent returns apply.
    Income and Deductions Exclude all income and deductions of the decedent only. If a joint return is filed, an allocation is required on joint income (e.g., interest, dividends, etc.) and deductions. Payments and deductions may be allocated differently in community property states.
    Balance Due Returns Payment is usually received with the return. Normal collection procedures apply for deceased taxpayer's balance due returns received without payment.
    Transaction Codes (TC) 420 or 922 The Accounts Management (AM) KITA/KIA Coordinator or designated employee will contact the Compliance KITA/KIA Coordinator. For a list of KITA/KIA Coordinators, refer to http://serp.enterprise.irs.gov/databases/who-where.dr/kita_kia_coordinators.dr/kita_kia_coordinators.htm.
    Due Dates Normal filing dates apply for both the original and any amended returns. Decedent's administrator/surviving spouse may request an extension of time to file which is granted if normal conditions are met.

    Exception:

    For KIA - IRC Section 7508(a) may have already provided additional time to file due to the decedent's service in combat zone.

    Clearing and Deposit Follow normal procedures if a remittance return is received.
    Numbering and Batching KITA/KIA returns are hand carried and batched by current year and prior year.
    Interest and Penalties Refer to IRM 21.6.6.3.22.2.2.1, Interest Computation.

    Reminder:

    Statutory exceptions (refer to IRM 20.1, Penalty Handbook) should be applied liberally when determining if penalties are to be assessed. Before assessing penalties, contact the AM KITA/KIA Coordinator.

  2. Unpostables - The Technical Unit or designated function monitors all actions they have taken on KITA/KIA accounts and will contact Unpostables concerning the resolution of an unpostable condition. A new reason code, "2" was established for Unpostable 164. The criterion for generating is TC 150, TC 290, or TC 300 input to an account containing the KITA or Hostage indicator. The Unpostable function will contact the Kansas City Campus to have them check the Victim's list. If the taxpayer is not on the list, the Unpostable function will process the return. The Kansas City Campus will remove the KITA indicator. If the taxpayer is on the list, the return will be forwarded to the Kansas City Campus. This unpostable check will be bypassed for TC 150 with Computer Condition Code "O" .

21.6.6.3.22.2.2  (10-01-2011)
Technical Unit or Designated Function KITA/KIA and Astronauts Killed in the Line of Duty

  1. All returns (original or amended) and all case files/inquiries are expedited to the Technical Unit or designated function. Except as specified in the following instructions, Normal Procedures must be followed.

  2. If any of the years in question have a:

    1. TC 420 - Contact the appropriate Compliance KITA/KIA Coordinator who will determine the proper case disposition in conjunction with the Area/Territory Office Examination function.

    2. TC 922 - Contact the appropriate campus Compliance KITA/KIA Coordinator who will secure the return and case file. The Underreporter case is closed to the function handling the KITA/KIA return(s).

    3. Open Control - Contact the employee and tell them to send you what they have. Consider all information when working the KITA/KIA case.

    4. -Z Freeze - Refer case to the Fraud Detection Center.

  3. Examine returns for completeness. If missing items can be determined from other parts of the return or attachments, complete the missing section. "KITA/KIA" must be stamped or written across the top of the return. Returns/claims filed due to the Victims of Terrorism Tax Relief Act of 2001 should be identified as KITA anthrax, or KITA 9/11. Returns filed due to the Military Family Tax Relief Act of 2003 should be identified as KITA astronauts. Care must be taken when processing statute year claims to prevent erroneous abatements, refer to IRM 25.6.1.5, Basic Guide for Processing Cases with Statute of Limitations Issues.

  4. Check Command Code (CC) ENMOD for the literal "KITA" next to the Name Control. If not present, use CC ENMOD/ENREQ to input the indicator "1" in the KITA field of CC INCHG. Use "No source document" (NSD). Enter "KITA " or "KIA" and the event in the remarks. This action will generate a TC 016 on ENMOD. To turn off the setting input indicator "9" .

  5. Verify the dependent TINs. If invalid and unable to find a valid TIN, contact the claimant.

  6. All contact with the administrator/surviving spouse is made through the appropriate KITA/KIA Coordinator or designated employee. Record all activities on document history sheets. The documentation must include the date and action. Both tax years must be kept in the same file. If only one return is received, such as the 2010 original return, call or write the victim's family and/or representative to remind them of the forgiveness available on the other tax years. Do not delay the processing of the return you received.

  7. A certification from the Department of Defense, the Department of State, or a death certificate must accompany all returns and claims for refund. Returns filed for victims due to the Victims of Terrorism Tax Relief Act of 2001 and due to the Military Family Tax Relief Act of 2003 are verified against a listing maintained by the Kansas City KITA Project Office. If the taxpayer's name is not on the list you must request a certified copy of the death certificate prior to issuing a refund. Kansas City will indicate the need to secure a certified death certificate on cases sent to your office.

  8. In KIA cases, the date of entry into a combat zone is needed to process the return/claim. This date may be found on CC IMFOLE, or noted on the claim/return. For additional information on how to identify the entry and exit dates for combat zone refer to IRM 5.19.10.6.3, Combat Zone Freeze Code.

  9. Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer must accompany all returns and claims for refund. Refer to IRM 3.11.3.10.2, Documentary Evidence for procedures on identifying a correctly completed Form 1310.

    Note:

    A Form 1310 is not required if the surviving spouse is filing an original or amended joint return with the decedent, or the administrator is filing an original Form 1040, U.S. Individual Income Tax Return, Form 1040A, U.S. Individual Income Tax Return, Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, or Form 1040NR, U.S. Nonresident Alien Income Tax Return, for the decedent and a court certificate showing their appointment is attached to the return.

  10. Contact must be made, when possible, by telephone. If unable to reach the administrator/surviving spouse after two calls, request the information in a letter. Before disclosing any tax information, you must be sure you are speaking with the taxpayer or authorized representative, refer to IRM 21.1.3.2.3, Required Taxpayer Authentication. Before leaving a message on a taxpayer's answering machine, refer to IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail.

  11. In all cases, ask the administrator/surviving spouse to provide the information in 30 days. Inform them that without the supporting information we will not be able to issue a refund. Also, we may have to increase the tax they owe or reduce the refund.

  12. If no reply is received within 45 days, call or send a follow-up letter. Tell the administrator/surviving spouse to provide the information in 10 days, then wait 15 days for a reply.

  13. If no reply is received after the second contact, call or send another follow-up letter. Wait an additional 15 days for a reply.

  14. If no reply to the third request, follow normal "No Consideration" procedures in IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.

  15. For joint returns, if the missing/incomplete information is the allocation of income/deductions, process as a normal joint return. Verify the tax is correct for filing status 2 and edit if necessary. Apply the ≡ ≡ ≡ ≡ "tax tolerance" only if it benefits the taxpayer.

    Note:

    Do not edit the Return Processing Date (RPD) when any of the above applies.

  16. Edit a CCC "U" on all "no reply" returns in addition to the other actions specified in the Correspondence Action Chart, except when any of the following apply:

    • The only correspondence item was for withholding support

    • The correspondence was not required

    • All correspondence conditions were not included when the first correspondence was sent

  17. For late "no reply" returns, honor the original received date.

  18. Send the administrator/surviving spouse a letter informing them to file a Form 1040X with the required information. Remember, if a manual refund is not issued (no "O" code), the original return will unpost. Call the Kansas City KITA Office at ≡ ≡ ≡ ≡ ≡ ≡ (internal use only), and let them know the return will unpost. When the Unpostable Function calls the KITA office they will be told to post the return. Make sure all of your actions are clearly documented on the history sheet you attach to the return. The return will post when input the second time.

  19. The CCC "O" may also be present if a taxpayer is issued a manual refund before the return posts. Refer to IRM 21.6.3.6.7.7.4Return Posting with Computer Condition Code (CCC) "O" , for additional information.

  20. The following applies to ALL KITA/KIA original returns:

    1. Edit (in red) the return, beginning with the total tax line. Apply the ≡ ≡ ≡ tax tolerance only if it benefits the taxpayer. Edit, if applicable, all items following the tax including the minimum payment/credit amount and the "refund" amount, or the "amount owed." Enter Computer Condition Code (CCC) "Y" . Code the entity portion and address. Enter the appropriate CCC (F, W, L, etc.). Refer to (23) below if a joint return.

    2. Prepare a manual refund, if applicable: enter CCC "O" on the return. Follow normal procedures including research for outstanding balances. Attach a copy of the manual refund form to the return. Refer to IRM 21.6.6.3.22.2.2.1, Interest Computation.

      Note:

      If outstanding balances, send the appropriate offset letter prior to satisfying the debts.

      Exception:

      Contact the Kansas City KITA Office at ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (internal use only), if any of the following conditions are present:
      • Non-filer/SFR (Substitute for Return) for two years or more
      • Underreporter with balance due for two years or more
      • Examination assessment over $2,000 (per tax year) with a balance due

    3. Notate the following in the lower left hand corner of page 1 of the Form 1040/1040A/1040EZ:
      • KITA or KIA
      • Employee name
      • Employee telephone number

    4. Hand carry the return to Batching with Form 3210. If an error code generates during processing, the ERS Function will suspend the document and contact the employee. All math errors must be resolved prior to the processing of the return. Contact the victim's family and/or representative if necessary.

    5. Contact the victim's family and/or representative, via telephone or letter, regarding the adjustment actions taken on KITA amended or original tax returns. Provide the tax forgiveness amounts, the refund amounts including the Recovery Rebate Credit (if changed from the taxpayer's amount), the anticipated dates the refunds should be received, interest amount allowed with the refund, and the IRS employee name, identification number, telephone number, and address to contact if there are any questions.

    6. Monitor for posting and to confirm the refund, if any, is issued.

    7. Destroy copies of returns used for monitoring purposes and all duplicate information.

    8. File all other documentation, including the history sheets, by inputting a TC 290 .00 on the latest KITA/KIA year filed. In remarks put: "KITA" or "KIA" documentation.

  21. The following applies to ALL KITA/KIA amended returns:

    1. Math verify for completeness.

    2. Adjust the tax. Apply the ≡ ≡ tax tolerance only if it benefits the taxpayer. Use Reason Code 99, Source Code 1, hold code 4, if the adjustment results in an overpayment, and use the appropriate blocking series. Enter "KITA" or "KIA" and the event in the remarks. DO NOT ADJUST THE INCOME. Leave the control base open and monitor until all actions have posted.

      Note:

      Adjustments made to an electronically filed return account must use blocking series 05 (do not use blocking series 18).

    3. Prepare a manual refund if applicable. Refer to IRM 21.6.6.3.22.2.2.1, Interest Computation.

    4. All claim disallowances must be reviewed by the KITA Project coordinator.

  22. If the return/claim is filed due to the Victims of Terrorism Tax Relief Act of 2001 or the Military Family Tax Relief Act of 2003, the following applies:

    Note:

    Only: KITA Anthrax, KITA 9/11, KITA Oklahoma City, KITA Pentagon, KITA Astronaut.

    1. Refer to Publication 3920, Tax Relief for Victims of Terrorist Attacks, for taxes not eligible for forgiveness.

    2. Tax on income the decedent would have received if the decedent had not died; such as paycheck, dividends, etc., is forgiven.

    3. Death benefits paid by the employer, if they are paid as a result of the decedent being a victim of the terrorist attack, are excluded. If these death benefits would have been received for any cause of death, then normal rules apply.

    4. A minimum tax relief benefit of $10,000 is provided to victims of April 19, 1995, September 11, 2001, Anthrax, and any astronaut whose death occurs in the line of duty after December 31, 2002. This minimum applies to the original and amended Form 1040, and Form 1041 returns. Publication 3920, Tax Relief for Victims of Terrorist Attacks, suggests to the taxpayer to file the amended and original returns together. To determine if the individual has been given the minimum relief, consider the total tax forgiven. Penalties and interest previously paid on tax liability forgiven by the Act are not included in the computation of the minimum relief. Also included is the tax forgiven on the Form 1040 (a worksheet is included in Publication 3920). If necessary, check IDRS for adjustments to the years involved. If unable to determine if all returns are filed, contact the administrator/surviving spouse. Refer to IRM 21.6.6.3.22.2.2 (6) above for correspondence procedures. Question whether a Form 1040 or other returns will be filed. Tell the administrator/surviving spouse to send the returns to you. If you receive a return that has not come through the Kansas City KITA Office, call ≡ ≡ ≡ ≡ ≡ ≡ (internal use only), so the information can be added to the national database. Refer to IRM 21.7.4.4.1, Form 1041, U.S. Income Tax Return for Estates and Trust, for additional information on Form 1041. Per normal procedures, if the taxpayer has questions you are unable to answer, write them up and refer to your work leader or manager. Apologize to the taxpayer for not being able to answer the inquiry immediately. Inform them they will receive a response as soon as possible but no later than 3 business days.

      Note:

      Do not delay refunds waiting to receive additional returns. If the return (amended or original) you have is processable, complete the case processing expeditiously. If additional return(s) are received, the account must be adjusted accordingly.


    5. If the minimum amount has not been forgiven, the taxpayer can claim a payment/credit up to $10,000 on the "Other Payments" line of the last taxable year. The taxpayer has been instructed to write "Section 692(d)(2)" . Normal statute procedures apply, claim for refund must be filed within 3 years from the time the previously filed income tax return or 2 years from the time the tax was paid, whichever is later. Refer to IRM 21.6.6.3.22.2.2.1, Interest Computation on the Minimum Benefit.

    6. If a Form 1040X, Amended U.S. Individual Income Tax Return, is filed to claim the relief, the amount can be entered on Line 15, with the same write-in, to allow the credit input TC 290.00 if no other adjustment is required. Use the credit reference number 766 to allow the credit or credit reference number 767 (with a minus sign) to decrease a previously posted credit. Use reason code (RC) 99, source code (SC) 1, the appropriate hold code, and blocking series.

  23. Joint returns - Only the decedent's part of the joint income tax liability is eligible for the refund or tax forgiveness. Refer to the worksheet in Publication 3920, Tax Relief for Victims of Terrorist Attacks. To determine the part attributable to the decedent, the person filing the claim must complete the following steps:

    1. Figure the income tax for which the decedent would have been liable as if a separate return had been filed.

    2. Figure the income tax for which the spouse would have been liable as if a separate return had been filed.

    3. Multiply the joint tax liability by a fraction. The top number of the fraction is the amount in a) above. The bottom number of the fraction is the total of a) and b). The result is the decedent's tax liability that is eligible for the refund or tax forgiveness. Apply the ≡ ≡ ≡ tax tolerance only if it benefits the taxpayer.

  24. If the decedent's administrator/surviving spouse is unable to complete the process in (23) above, they should attach a statement of all income and deductions indicating which belongs to each spouse. You must then make the proper division.

  25. If the member of the Armed Forces was domiciled in a community property state and the spouse reported half the military pay on a separate return, the spouse can get a refund of taxes paid on his or her share of the pay for the years involved. The forgiveness of unpaid tax on the military pay would also apply to the half owed by the spouse for the years involved.

  26. Kansas City will prepare a weekly report.

21.6.6.3.22.2.2.1  (10-01-2008)
Interest Computation on the Minimum Benefit

  1. Following is information on the date from which interest should be computed on the $10,000 minimum benefit (make-up payment) and any actual payments a victim made with respect to tax that the Act now forgives.

  2. Normal rules apply unless otherwise specified. The "make-up" payment is considered paid on the date of enactment of the Act, January 23, 2002. Following normal rules regarding the accrual of interest, the interest may or may not be computed on that payment from that date.

  3. Interest will not begin to accrue prior to the filing of a return with respect to a victim who had a filing obligation prior to the enactment of the Act. Victims who did not have a filing requirement, (for example, children who had not earned sufficient income to have a filing requirement) will be paid interest on the "make-up" payment from January 23, 2002, even if a return claiming the $10,000 minimum relief is not filed until a later date, so long as the return or claim for refund is timely under IRC Section 6511.
    Examples:

    • A first responder who died in 2014 from a cancer covered under the World Trade Center Health Program had an income tax liability of $17,500 for 2011, $18,025 for 2012 and $7,000 for 2013. He filed his tax returns on time each year and paid all of his tax when due. The total, $42,525, is eligible for tax forgiveness. However, the $17,500 refund for 2011 must be requested by April 15, 2015.

    • A child wounded in the September 11 attacks dies in 2012 as a result of those wounds and never had any income tax liability. She qualifies for the minimum relief of $10,000. The $10,000 is treated as a tax payment for 2012 and will be refunded if tax forgiveness is requested by April 15, 2016.

21.6.6.3.23  (10-01-2008)
Virgin Island Form 1040 and 1040A

  1. Route claims received from taxpayers residing in the Virgin Islands to the Austin Campus for processing. Follow procedures below:

    1. Check the transaction code (TC) 150 DLN for blocking series 630-639 (Virgin Island).

    2. Write "Virgin Island" on the transmittal.

    3. Send a Letter 86C to the taxpayer advising of the transfer.

21.6.6.3.24  (11-14-2008)
Electronic Filing System (e-file)

  1. Refer to IRM 21.7.4.4.4.15, Modernized e-file Program (MeF) for Corporate and Exempt Organization Returns, for information on electronically filed Form 1120, U.S. Corporation Income Tax Return, Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations, Form 1120S, U.S. Income Tax Return for an S Corporation, and Form 990, Return of Organization Exempt From Income Tax. Utilize Command Code (CC) TRDBV, or CC RTVUE, or CC BRTVU, if TRDBV is unavailable, to verify return information in lieu of requesting an Electronic Filing (ELF) return (hard copy print). Only obtain a hard copy of the ELF return if it must be reprocessed or reinput.

  2. For tax years prior to 1998, use CC ESTAB or CC ELFRQ.

  3. For tax year 1998 and subsequent, use CC TRPRT to request graphic prints. The TRPRT graphic will be available nationwide regardless of where the return was filed. The TRPRT print is not considered the original return. The print will be labeled "TRPRT PRINT DO NOT PROCESS" . Refer to IRM 21.5.2.4.23.1, Reprocessing Electronic Returns. However, when the return must be reprocessed, the TRPRT print will be used. Refer to IRM 21.2.2.4.4.6, TRDB CC TRPRT (Tax Return Print) Input, for additional information on TRDBV and TRPRT.

    Note:

    When reprocessing an E-file return, you must check the TRPRT print for the Personal Identification Number (PIN). If there is no PIN on the TRPRT print, you must request Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, refer to (4) below, and attach a copy of the Form 8453 to the TRPRT print.

  4. Do not use blocking series 18 for e-filed returns. Use the applicable blocking series for the type of return/situation you are adjusting. Refer to Returns Processing Adjustment Blocking Series in Document 6209, Section 4.14, Adjustment Blocking Series, for a listing of adjustment blocking series.

    Note:

    Refer to IRM 21.5.4.4, Math Error Procedures Processing and IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.

  5. Request Form 8453,U.S. Individual Income Tax Transmittal for an IRS e-file Return, if needed. When using CC ESTAB, enter the applicable MFT and "8453" for the form. If 8453 is not input for the form, the request will be systemically rejected. When using CC ELFRQ, use action "2" .

    Note:

    For tax year 2003 and subsequent, the DLN of the Form 8453, can be obtained through Command Code (CC) R8453. Input R8453, space and the taxpayer's social security number. For tax years prior to 2003, use the DLN of the original return.

  6. DO NOT attach information (e.g., loose forms, schedules, and correspondence) to an ELF return. To identify an ELF DLN refer to Document 6209, Section 4.3, Campus and File Location Codes. Use the following procedures:

    1. File the information using TC 290 with the applicable blocking series for the type of return/situation you are adjusting using the non-refile DLN.

    2. DO NOT use an "attachment" or "association form" .

      Note:

      These procedures are not needed for documents scanned into Correspondence Imaging System (CIS). CIS serves as the retention area for these documents.

  7. Electronic Filing Unit (EFU) may forward Form 3465, Adjustment Request, to the Adjustments/Correspondence Branch with a problem annotated. Take normal adjustment action.

21.6.6.3.25  (10-01-2008)
Form 5330- Return of Excise Taxes Related to Employee Benefit Plans

  1. Take the following action if the taxpayer submits a payment for excise tax and attaches a Form 5330, Return of Excise Taxes Related to Employee Benefit Plans (Voucher Update Document):

    1. Detach and photocopy the Form 5330. Attach Form 1725, Routing Slip, to the photocopy of Form 5330 and route to Ogden, UT 84201–0027, M/S 6552 Attn.: Employee Plan (EP) Accounts Unit (this is the EP unit in Ogden responsible for all "Post Processing" EP work).

    2. Write "Photocopy Only - Do Not Process" across the front of the form.

    3. Route the original Form 5330 to Receipt and Control for processing to the Business Master File (BMF). Receipt and Control has instructions to transship the Form 5330 to Ogden for processing.

    4. Process adjustment per Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return, if necessary, using the Source Code (SC) 1, Reason Code (RC) 099, and appropriate blocking series.

    5. Use a hold code to prevent release of the excise tax payment.

    6. Annotate the Form 1725 that the original Form 5330 was sent to Ogden for processing and that the credit is posted on the IMF.

    7. Advise the EP function of the credit on Individual Master File (IMF) available for transfer to BMF MFT 76.

21.6.6.3.26  (10-01-2013)
Form 8697- Interest Computation Under the Look-Back Method for Completed Long-Term Contracts

  1. Form 8697 is filed by an individual, corporation, estate, or trust. In addition a partnership or S corporation that is not closely held must also file Form 8697. A partnership or S corporation is considered closely held if at any time during any tax year for which there is income under the contract 50% or more (by value) of the beneficial interests in the entity is held (directly or indirectly) by five or fewer persons. Form 8697 is used to figure the interest due or to be refunded under the look-back method of IRC Section 460(b)(2) on certain long-term contracts that are accounted for under either the percentage of completion method or the percentage of completion-capitalized cost method.

  2. Form 8697 must be filed for each tax year in which the taxpayer completed a long-term contract entered into after February 28, 1986. Taxpayers also must file Form 8697 for any tax year in which the total contract price or total contract costs are adjusted for one or more of these long-term contracts from a prior year.

  3. If the taxpayer owes interest or if no interest is to be refunded to the taxpayer, the taxpayer is directed to include any interest due in the amount to be entered for the total tax (after credits and other taxes) on the Form 1040 and to write to the left of the entry "From Form 8697" and the amount of the interest due, and attach a check or money order for the amount payable to “United States Treasury.” The taxpayer should include the tax identification number, daytime phone number, and “Form 8697 Interest” on the check or money order.

  4. If interest is to be refunded, taxpayers are instructed NOT to attach Form 8697 to their Form 1040, U.S. Individual Income Tax Return. The Form 8697 should be filed separately with the IRS at one of the addresses below:

    Individuals All Others
    Internal Revenue Service Philadelphia, PA 19255-0001 Internal Revenue Service Cincinnati, OH 45999-0001

21.6.6.3.26.1  (05-17-2010)
Completing Form 8697

  1. Taxpayer must complete the information at the top of the form above Part I according to the following instructions and complete either Part I or Part II as appropriate:

    • Filing year to show the tax year in which the contracts for which this form is being filed were completed or adjusted.

    • Name as shown on Form 1040, U.S. Individual Income Tax Return. If the taxpayer files a joint return the spouse’s name must be included on Form 8697.

    • Taxpayer must sign the form at the bottom of page 2 unless filed with the Form 1040. If a joint return, the spouse signature is also required.

  2. The look-back method is the process used to determine the interest on the amount of tax liability accelerated or deferred as a result of overestimating or underestimating the total contract price or total contract costs. Taxpayers determine the interest due to or from the government by comparing the tax liability based on estimates of total contract price and total contract costs with the hypothetical tax liability based on the actual total contract price and actual total contract costs.

  3. Taxpayers complete either Part I, Regular Method, or Part II, Simplified Marginal Impact Method, of Form 8697.

  4. In Part I, Regular Method, the amount due or to be refunded is computed by applying the actual tax rate for the particular prior year(s) to the revised taxable income.

  5. In Part II, Simplified Marginal Impact Method, an assumed marginal tax rate is applied to the difference between the estimated and actual total contract price and total contract costs. Generally, this tax rate is the highest statutory tax rate in effect for the particular prior year(s). The tax rates for Part II computations are listed in the Instructions for Form 8697.

21.6.6.3.26.2  (05-17-2010)
Treatment of Interest

  1. IRC Section 460(b)(1) provides any interest required to be paid by the taxpayer is treated as an increase in tax imposed for the taxable year in which the contract was completed. The due date for Form 8697 is the same date that the related income tax return is due, including extensions.

  2. Look-back interest owed to the taxpayer is not treated as an overpayment if it is not an amount previously paid by or collected from the taxpayer. Interest the taxpayer receives under the look-back method is treated as taxable income. It is not a reduction in tax liability. A Form 8697 showing look-back interest refund is not a tax return or claim for refund. It is a non-tax claim against the government to which IRC Section 6511 does not apply. Although IRC Section 6611, which allows interest on any overpayment of an internal revenue tax, does not apply to look-back interest due to a taxpayer, under applicable regulations, rules similar to those under Section 6611 apply. Accordingly, applying a rule similar to that of Section 6611(e), the Service should allow no interest on the look-back interest refunds if it pays the look-back interest (or make an offset) within 45 days after the taxpayer files the claim.

21.6.6.3.26.3  (05-17-2010)
Form 8697 With Additional Interest Due or if No Interest is Due to be Refunded

  1. If interest is due to the IRS or if no interest is to be refunded to the taxpayer, the taxpayer is directed to file Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, to include any interest due in the amount to be entered for "total tax" Transaction Code (TC) 150 with the related income tax return. The taxpayer is directed to write on the dotted line to the left of the entry space “From Form 8697” and the amount of interest due. Forms 8697 showing a balance due are not to be filed separately.

  2. Forms 8697 showing a balance due or Form 8697 that were inadvertently detached or filed separately from the related income tax return, may have been processed under Non-Master File (NMF) procedures resulting in possible duplicate assessments. Research Master File (MF) and Non-Master File (NMF) (MFT 69) and reverse any duplicate assessments on NMF.

  3. If the ASED has expired on Master File, or is within 60 days of the expiration date, route the case to Statute for the assessment to be made. Notate the case that this is a Form 8697 Look-Back interest assessment.

  4. If a loose Form 8697 is received in Accounts Management, research as instructed in (2) above. Research the related income tax return and verify that the Form 8697 liability is included in the total tax liability. Request the appropriate income tax return if necessary. If the liability is not included on the return, assess the look-back interest amount with a transaction code (TC) 290 and allow the computer to assess debit interest (TC 196) on the look-back interest amount. If interest is restricted on the module, compute interest on the TC 290 look-back interest amount and input with TC 340. Do not input credit reference number 251 with the adjustment.

  5. If a balance due Form 8697 is filed separately, before the related income tax return is posted, input TC 930 push code to have the return sent to you after it posts. When the return is received, determine if the Form 8697 liability has been included in the TC 150 amount. If it has been assessed, attach Form 8697 to the return. If it has not been assessed, follow the instructions in paragraph (4) above.

  6. Estimated tax (ES) penalties do not apply to the increased tax reported on the taxpayer's return due to a balance due on a Form 8697, refer to IRM 20.1.3.1.5, Form 8697. However, the computer does not recognize the difference in tax due on the Form 8697 and assesses the ES penalty on the full TC 150 amount. If you receive a taxpayer inquiry questioning the ES Penalty, reduce the TC 150 by the Form 8697 amount, recompute the penalty based on service center error and apologize for the inconvenience.

21.6.6.3.26.4  (10-01-2011)
Refunds Claimed on Form 8697

  1. Prior to January 1, 2005, all refunds claimed on Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, were processed Non Master File (NMF) to MFT 69.

  2. Form 8697 requesting a refund may be filed before the due date of the related income tax return. When a Form 8697 or an amended return containing Form 8697 is received requesting a refund, research the appropriate income tax return module on Master File and NMF (MFT 69) to determine if a manual refund was previously issued. If a refund was previously issued, advise the taxpayer. If not, continue processing. If taxpayer is claiming a refund and a TC 150 has not posted on Master File, the refund must be processed on Non Master File (NMF). Follow procedures in IRM 21.7.12.4.7.2, Processing Form 8697 Claim for Refund, No TC 150 Posted on Master File (MF) .

  3. Verify Line 2 and Line 6 of Part 1 are negative numbers. Verify IMFOLT that the corresponding income tax return has sufficient tax liability for the decrease in tax. The transaction code (TC) 150 plus/minus any other adjustments, TC 290 or TC 300. If the refund requested is less than ≡ ≡ , accept the taxpayer’s figures without verification.

  4. After comparing the liabilities described in (3) above, determine if discrepancies exist between liabilities reported by the taxpayer on the overpaid or amended Form 8697 and the related income tax accounts.

    IF AND THEN
    Discrepancies exist   Close to Examination using local routing procedures.
    NO discrepancies exist IMF - The claim is ≡ ≡ ≡ or more. Refer to Examination as Category A.
    NO discrepancies exist IMF - The claim is less than ≡ ≡ ≡ ≡ ≡ ≡ . Process following normal adjustment procedures.
  5. Refer to IRM 20.1.3.1.5, Form 8697, for interest computation procedures. Input transaction code (TC) 290 for $.00 with Credit Reference Number (CRN) 251 which generates a TC 766 credit for the amount of the look-back interest. Interest allowable on the look-back interest amount is manually computed and input with TC 770.

  6. If the Refund Statute Expiration Date (RSED) (normal RSED period) has expired on the account and you are inputting an adjustment with CRN 251 that will result in an overpayment and a refund on the account, you must input the RSED date shown on the account (minus 1 day) in the "RFSCDT" field on ADJ54. You must input the RSED date minus 1 day, instead of the IRS received date of the claim in order to prevent the refund from being systemically stopped by the computer and from generating a ST29 Transcript in the Statute unit.

21.6.6.3.26.4.1  (05-17-2010)
Filing a Corrected Form 8697 (Synopsis of Form 8697 Instructions for Taxpayers)

  1. Taxpayers must file a corrected Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, only if the amount shown on Part I, line 6, or Part II, line 7, for any prior year changes is a result of:

    • an error the taxpayer made

    • an income tax examination, or

    • the filing of an amended tax return

  2. When completing Part I, line 1, of the corrected Form 8697, follow the instructions but do not enter the adjusted taxable income from Part I, line 3, of the original Form 8697. Refer to the Instructions for Form 8697 for more information.

  3. If the original and corrected Forms 8697 show an amount on the line for interest owed, file Form 8697 with the related amended income tax return.

  4. If the original and corrected Forms 8697 show an amount on the line for interest to be refunded, file Form 8697 separately and write “Amended” in the top margin of the corrected Form 8697.

  5. If the original Form 8697 shows an amount on the line for interest owed, and the corrected Form 8697 shows an amount on the line for interest to be refunded, taxpayers must:

    • File an amended income tax return showing $ .00 interest from Form 8697, and

    • File the corrected Form 8697 separately and do not mark "Amended" at the top of the form

  6. If the original Form 8697 shows an amount on the line for interest to be refunded, and the corrected Form 8697 shows an amount on the line for interest owed, taxpayers must:

    • File the corrected Form 8697 separately showing $ .00 interest to be refunded

    • Write "Amended" at the top of the form, and

    • File an amended return and attach a copy of the corrected Form 8697

21.6.6.3.26.5  (10-01-2011)
Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method, Form 8866

  1. Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method, is used to figure the interest due or to be refunded under the look-back method of IRC Section 167(g)(2) for property placed in service after September 13, 1995, that is depreciated under the income forecast method as described in IRC Section 167(g). Exception: The look-back method does not apply for any property with a cost basis of $100,000 or less.

  2. The income forecast method is limited to depreciation of:

    • Motion Picture

    • Video Tapes

    • Sound Recordings

    • Copyrights

    • Theatrical Productions

    • Books

    • Patents

  3. Form 8866 is almost identical to Part I, Regular Method, of Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. As with Form 8697, taxpayers are instructed to file Form 8866 with the appropriate income tax return if additional interest is owed and to file separately if due a refund.

  4. Follow all procedures in IRM 21.6.6.3.26, Form 8697- Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, for Form 8697 when processing a Form 8866.

21.6.6.3.27  (10-01-2008)
Public Safety Officers Killed in the Line of Duty

  1. If all of the following conditions are satisfied, IRC Section 101(h) generally excludes from income amounts paid:

    • After December 31, 1996, with respect to an officer killed after December 31, 1996

    • After December 31, 2001 with respect to an officer killed on or before December 31, 1996

    • As a survivor annuity

    • On account of the death of a public safety officer, in the line of duty,

    • To the extent that the annuity is attributable to the officer's service as a law enforcement officer

  2. The survivor annuity must be provided under a governmental plan to the surviving spouse (or former spouse) of the public safety officer or to a child of the officer. Public safety officers include law enforcement officers, firefighters, rescue squads, ambulance crews, and certain Federal Emergency Management Agency (FEMA) employees and employees of agencies providing disaster-related assistance to FEMA. The provision does not apply to the death of a public safety officer if it is determined by the appropriate supervising authority that:

    1. The death was caused by the intentional misconduct of the officer or by the officer's intention to bring about the death,

    2. The officer was voluntarily intoxicated at the time of death,

    3. The officer was performing his or her duties in a grossly negligent manner at the time of death, or

    4. The actions of the individual to whom payment is made were a substantial contributing factor to the death of the officer.

  3. If an amended return claims this exclusion, the filer must provide a copy of the death certificate and a letter from the employing agency to substantiate the claim. Follow normal claims processing procedures.

21.6.6.3.28  (10-01-2013)
Insurance Premiums for Retired Public Safety Officers (PSO)

  1. An eligible retired public safety officer (i.e.: law enforcement officer, firefighter, chaplain or member of a rescue squad or ambulance crew) can elect to exclude from income a maximum of $3,000 received from an eligible governmental retirement plan that was used to pay the premiums for accident, health or long-term care insurance. To be eligible for this exclusion, the individual must be separated from service, by reason of disability or attainment of normal retirement age, from the governmental employer that is the sponsor of that governmental retirement plan. An individual who separated from service prior to normal retirement age is not eligible for this exclusion unless the separation from service was by reason of disability. Q&A 20 of Notice 2007-7 contains this rule (and the point about retiring pre-normal retirement age).

  2. An eligible retirement plan is a government plan that is:

    • A qualified trust

    • A Section 403(a) plan

    • A Section 403(b) annuity, or

    • A Section 457(b) plan

  3. Allow the claim if the taxpayer is excluding from income $3,000 or less and indicates "PSO" next to line 16b, Form 1040 or line 12b, Form 1040A or is retired on a disability and is reporting the disability pension on line 7 of Form 1040 or Form 1040A.

    Reminder:

    While the dollar thresholds in the Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General tables refer to the amount of the tax decrease or credit increase, the $3,000 criteria used in this section for PSO exclusions relates to a change of income and not tax.

  4. Disallow any claim in excess of the $3,000 income exclusion, refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. Include in the Letter 105C the following disallowance language: "Under Section 402(l)(2) the exclusion of distributions from governmental plans for health and long term care insurance to a retired Public Safety Officer (PSO) is limited to the lesser of the amount paid for qualified health insurance or $3,000 per year. "

  5. Amounts used to pay qualified insurance premiums that are excluded from gross income under Section 402(l) are not taken into account in determining the itemized deduction for medical care expenses under Section 213

21.6.6.3.29  (10-01-2003)
Exclusion of Income by Junior Reserve Officers Training Corps (JROTC) Instructors

  1. Taxpayers, retired from the military service, are citing IRC Section 134 of the Internal Revenue Code, claiming their compensation as JROTC instructors is tax exempt. A JROTC instructor's salary is fully includable in gross income as compensation for services under IRC Section 61(a)(1).

  2. Disallow the claim, refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. Send the Letter 105C. Include the following information: "We disallowed your claim to exclude compensation received as a JROTC instructor from your income. The amount you received as a JROTC instructor for teaching is characterized as salary, rather than as an allowance. IRC Section 134 does not apply because the salary at issue does not meet the statutory definition of a qualified military benefit. Rev. Rul. 71-307 concluded that the compensation received by JROTC instructors is fully includable in gross income."

21.6.6.3.30  (04-13-2011)
Tax Treatment of Compensation for Exonerated Prisoners

  1. Compensatory damages for physical injuries and physical sickness (including damages received for economic losses flowing from the physical injury or physical sickness) that an individual receives from a state for wrongful conviction and incarceration are excluded from gross income under Section 104(a)(2). The compensatory damages that the individual receives are excluded from gross income whether the individual receives the compensation in a lump sum, periodic payments, or a factoring transaction.

  2. Forward the claim to Examination as CAT-A criteria if the amount of the claim exceeds the criteria amount as outlined in Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General.

21.6.6.3.31  (10-01-2013)
Meal Expense Deduction

  1. A deduction for meal expenses may be available for meals (other than amounts which are lavish and extravagant under the circumstances) consumed while traveling away from home in pursuit of a trade or business. Away from home according to IRC Section 162(a)(2) means traveling away from home in the pursuit of a trade or business that requires the taxpayer to remain away from home overnight at the time of the expense. Away from home overnight means far enough to require sleep or rest. A deduction for a meal expense also may be available in other limited circumstances, such as an entertainment expense.

  2. Generally, IRC Section 274(n) subjects business-related meal and entertainment expenses to a 50 percent deduction limit. A higher percentage may be deducted if meals are consumed while a taxpayer is traveling away from home and is required to remain away from home overnight during, or incident to, any period of service subject to the Department of Transportation's (DOT) hours of service limits. The deductible percentage for tax year 2008 and subsequent years is 80 percent.

    Note:

    Refer to Publication 17, Your Federal Income Tax Return, for complete information and requirements on meal expense deduction and for individuals subject to DOT's "Other Income" and "hours of service" limits. Refer to Publication 463, Travel, Entertainment, Gift and Car Expenses, for more information on when meal expense deductions are allowed, and for more information on this and other exceptions to the 50 percent deduction limit.

  3. Review claim for completeness. If all requirements are met, input the necessary adjustment. If all requirements are not met, refer to IRM 21.5.3.4.6.1 , Disallowance and Partial Disallowance Procedures for claim disallowance. If unable to determine that all requirements are met, refer to IRM 21.5.3.4.7.2.1, Examination Technical Assistance Request.

21.6.6.3.32  (04-01-2009)
Lottery Winnings

  1. Many lottery winners receive their lottery prizes in yearly installments over a 20 to 26 year period. The winners are sometimes allowed to sell their rights to the future payments, to third parties in exchange for a lump sum payment. These lump sum payments can range from several thousand to several million dollars.

  2. The lump sum payments should be reported as "Other Income" on Form 1040, U.S. Individual Income Tax Return. Taxpayers are filing amended returns to change the income to capital gains. This allows them to benefit from the preferential capital gains tax rates versus the ordinary income tax rates. Disallow the claim, refer to IRM 21.5.3.4.6.1 , Disallowance and Partial Disallowance Procedures. Include in the letter 105C the following disallowance language: "Proceeds from the sale of rights to receive lottery winnings are ordinary income and may not be treated as a capital gain."

21.6.6.3.33  (10-01-2009)
Form 8873, Extraterritorial Income Exclusion

  1. Form 8873, Extraterritorial Income Exclusion, is used to calculate the amount attributable to foreign trading gross receipts that a taxpayer may exclude from gross income for the tax year. The exclusion applies to both corporate and noncorporate taxpayers and is applicable to certain qualifying transactions entered into after September 30, 2000. The Form 8873, should be attached to an income tax return.

  2. Refer to Form 8873, and its Instructions for more details on qualifying foreign trading gross receipts and other information. The form and instructions are available at www.irs.gov.

21.6.6.3.34  (07-11-2011)
Capital Construction Fund (CCF)

  1. The Capital Construction Fund (CCF) was created under a Merchant Marine Act to assist fisherman to acquire fishing vessels or improve a current vessel. The CCF program allows taxpayers to defer taxable income by making contributions to a National Marine Fisheries Service (NMFS) approved depository and eventually use the accumulated funds for purchasing or improving fishing vessels.

  2. Before a taxpayer can open a CCF account, they must enter into an agreement with the Secretary of Commerce through the NMFS. The taxpayer can request an application kit or get additional information from NMFS at the following address:
    NOAA/NMFS, Financial Services Division, F/MB5
    Capital Construction Fund Program
    1315 East-West Highway
    Silver Spring, MD 20910-3282

  3. CCF Eligibility Requirements:

    • Must be a U.S. citizen (individually), a corporation (the president and majority of the board must also be U.S. citizens), or a partnership 75 percent owned by U.S. citizens

    • Must own or lease a vessel

    • The vessel must be built in the U. S.

    • The vessel must operate in the U.S. fisheries or in U.S. foreign trade, non-contiguous domestic trade (for example, Alaska to Seattle), or the Great Lakes

  4. For additional information refer to Publication 595, Capital Construction Fund for Commercial Fishermen

  5. To take the deduction, taxpayers are instructed to subtract the CCF deposit from the amount that would normally be entered on Line 43 of Form 1040, U.S. Individual Income Tax Return. The taxpayer should also write "CCF" and the total amount of these deposits next to Line 43. The CCF deposits should not be deducted on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship), or Form 1040, Schedule C-EZ, Profit or Loss from Business. These claims may also be filed on Form 1040X, Amended U.S. Individual Income Tax Return. Prior to adjusting the account refer to Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General.

21.6.6.3.35  (10-01-2013)
Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No. 107-16), Section 803 — Victims of the Nazi Regime

  1. Section 803 of the Economic Growth and Tax Relief Reconciliation Act of 2001 provides that there will be no federal income tax on excludable restitution payments received by eligible individuals (or their heirs or estates) who were victims of the Nazi regime. Eligible individuals are persons who were persecuted on the basis of race, religion, physical or mental disability, or sexual orientation by Nazi Germany, any other Axis regime, or any other Nazi-controlled or Nazi-allied country. Excludible restitution payments (or distributions) include those payments made payable to an individual (or the individual’s heirs or estate) which is payable by reason of the individual’s status as an eligible individual, and which constitutes the direct or indirect return of, or compensation or reparation for, assets stolen or hidden from, or otherwise lost, to the individual before, during, or immediately after World War II by reason of the individual’s status as an eligible individual. Any proceeds of insurance under policies issued by European insurance companies immediately before or during World War II also qualify for exclusion. Finally, interest payable on the payments described in the previous two sentences qualify for exclusion.

  2. Such restitution payments will not be included in gross income and will not be taken into account for purposes of applying any code section that takes into account excludable income in computing adjusted gross income, including IRC Section 86 (relating to the taxation of social security benefits). The basis of any property received is its fair market value at time of receipt. Section 803 of the Economic Growth and Tax Relief Reconciliation Act of 2011 applies to payments or property received after December 31, 1999. Any interest earned by escrow accounts or settlement funds established pursuant to the settlement of the action entitled "In re: Holocaust Victim Assets Litigation," funds to benefit eligible individuals or their heirs estates created by the International Commission on Holocaust Insurance Claims, or similar funds subject to the administration of U.S. courts to benefit eligible individuals is not taxable. Review claim for completeness. If all requirements are met, input the necessary adjustment. If all requirements are not met, refer to IRM 21.5.3.4.6.1 , Disallowance and Partial Disallowance Procedures for claim disallowance. If unable to determine that all requirements are met, refer to IRM 21.5.3.4.7.2.1, Examination Technical Assistance Request.

21.6.6.3.36  (10-01-2009)
Maritime Claims

  1. Maritime personnel are filing claims for the following:

    • Expenses associated with traveling to and from union halls to seek employment (job search).

    • Refund claims based on deducting meals and incidental expenses (M&IE) at the per diem rate.

  2. Refer claims for expenses associated with traveling to and from union halls, forward the claim to Examination as CAT-A criteria if the amount of the claim exceeds the criteria amount as outlined in Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General.

  3. Refer claims for deductions of meals and incidental expenses while temporarily traveling away from home to Examination as CAT-A criteria if the amount of the claim exceeds the criteria amount as outlined in Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General. as Category A.

    Exception:

    If claim does not have a breakdown of the days, localities, and rates, refer to IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns, for additional information. Send the Letter 916C include the following information: put in the first open paragraph-- "Claims for deductions of incidental expenses at a daily (per diem) rate where meals and lodging are furnished by the employer must identify the number of days, the locality in which the expenses were incurred, and the applicable rate for incidental expenses only for that locality, as provided for in the Federal Travel Regulations." Second open paragraph- "Establishment of the time, place and business purpose requirement may be met with a copy of the ships schedule. Per Rev. Proc. 2011-47, rules are given to permit a per diem rate to substantiate the amount of expenses paid or incurred while traveling away from home."

21.6.6.3.37  (10-01-2013)
Federal Insurance Compensation Act (FICA) Claims Citing North Dakota State University v. United States 255 F.3d 599 (8th Cir. 2001)

  1. FICA claims are being filed for a refund of FICA taxes based on North Dakota State University v. United States. In this decision, the court held that cases involving payments to college or university professors made in exchange for the relinquishment of their tenure rights are not FICA Wages.

  2. The IRS will follow this case only in the 8th circuit and allow claims only to college and university professors within this jurisdiction, only in cases that have the exact facts as North Dakota State University v. United States, and only to the extent the payments were made prior to January 12, 2005.

  3. If the claim did not originate in the Eighth Circuit (that is, did not originate in Arkansas (AR), Iowa ( IA), Minnesota (MN), Missouri (MO), Nebraska (NE), North Dakota (ND), South Dakota (SD), disallow the claim, refer to IRM 21.5.3.4.6.1 , Disallowance and Partial Disallowance Procedures. Send the Letter 105C including the following information: "We disallowed your claim for refund of FICA taxes because the Service is not following the North Dakota State University decision of the Eighth Circuit outside the Eighth Circuit."

  4. If the claim originates in the Eighth Circuit, involves college and university professors, and payments were made before January 12, 2005, allow the claim, following the procedures in IRM 21.7.2.4.6.4.2, Excess FICA Tax Withheld – Employee Claims for Refund.

21.6.6.3.38  (11-26-2013)
Federal Insurance Compensation Act (FICA) and Railroad Retirement Tax Act (RRTA) Claims Citing CSX

  1. Taxpayer claiming a refund of FICA or RRTA tax citing CSX Corporation v. United States or Quality Stores Inc. v. United States, refer to IRM 21.7.2.5.16, Claims Related to CSX Corp. and/or Quality Stores, Inc. Litigation.

21.6.6.3.39  (10-01-2013)
Federal Insurance Compensation Act (FICA) Claims from Medical Residents

  1. Taxpayer is claiming a refund of FICA tax due to Medical Resident Status, these claims are to be worked in a BMF campus route to either Ogden or Cincinnati. If received at any other campus, ensure the case is notated as a FICA claim from medical residents and forward to a BMF campus, if the case is on CIS use the re-route capability. Once received in either Ogden or Cincinnati they will follow procedures in IRM 21.7.2.5.10.2, Employee Claims (Medical/Dental Residents).

21.6.6.3.40  (10-01-2008)
Federal Insurance Compensation Act (FICA) Claims from Major League Baseball Players

  1. Taxpayer is claiming a refund of FICA tax as a Major League Baseball Player, these claims are to be worked in a BMF campus route to either Ogden or Cincinnati. If received at any other campus, ensure the case is notated as a FICA claim from major league baseball player and forward to a BMF campus, if the case is on CIS use the re-route capability. Once received in either Ogden or Cincinnati they will follow procedures in IRM 21.7.2.5.18, Refund Claims/Major League Baseball.

21.6.6.3.41  (10-01-2013)
IRC Section 3121(v) - Federal Insurance Compensation Act (FICA) Claims from Airline Employees and Retirees

  1. Current or retired airline employees whose nonqualified deferred pension benefit plans were terminated during the airlines' bankruptcy proceedings are filing claims for refund. These claims are to be worked in a BMF campus. Reroute to either Ogden or Cincinnati. If received at any other campus, ensure the case is notated as a FICA claim from airline employee or retiree and forward to a BMF campus. If the case is on CIS use the re-route capability. Once received in either Ogden or Cincinnati they will follow procedures in IRM 21.7.2.5.13.2, IRC Section 3121(v) - FICA Claims from Airline Employees and Retirees.

21.6.6.3.42  (02-14-2014)
Indian Fishing Claims filed for refund of Federal Insurance Compensation Act (FICA) taxes

  1. When a taxpayer is filing an Indian fishing claim for refund of FICA taxes which may or may not cite IRC Section 7873. These claims are to be processed in the Ogden campus. Only refer FICA claims. If the claim is for exempt income taxes do NOT refer to Ogden, these claims should be processed in IMF following CAT-A procedures in Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General. If received at any other campus, ensure the case is a FICA claim, notated as a fishing claim and forward expeditiously to the Ogden Service Center, if the case is on CIS use the re-route capability. Once received in Ogden they will follow procedures in IRM 21.7.2.4.6.4.2, Excess FICA Tax Withheld – Employee Claims for Refund.

21.6.6.3.43  (10-01-2013)
Federal Insurance Compensation Act (FICA) Claims from Automotive Industry Employees

  1. Former and/or current employees of the automotive industry who were offered buyouts are filing claims for refund. These claims are to be worked in a BMF campus route to either Ogden or Cincinnati. If received at any other campus, ensure the case is notated as a FICA claim from automotive industry employee and forward to a BMF campus, if the case is on CIS use the re-route capability. Once received in either Ogden or Cincinnati they will follow procedures in IRM 21.7.2.5.17, FICA/Medicare Claims from Automotive Industry Employees.

21.6.6.3.44  (10-01-2013)
Section 218 Federal Insurance Compensation Act (FICA) taxes for State and Local Government Employees

  1. When taxpayer is claiming a refund of FICA tax as a state or local government employee, route these claims to a BMF campus either Ogden or Cincinnati. If received at any other campus, ensure the case is notated as a Section 218 FICA claim for state and government employee and forward to a BMF campus, if the case is on CIS use the re-route capability. Once received in either Ogden or Cincinnati they will follow procedures in IRM 21.7.2.5.15, State and Local Government FICA Under Section 218.

21.6.6.3.45  (10-01-2008)
Case/Transcript for U.S. Departing Alien Income Tax Return Form 1040–C

  1. Some aliens must obtain a Certificate of Compliance (also known as an exit or sailing permit) before permanently departing the U.S. or any U.S. Possession. This is obtained by filing Form 2063, U.S. Departing Alien Income Tax Statement or Form 1040-C, U.S. Departing Alien Income Tax Return. A Certificate of Compliance is made when the Director or delegate signs the certificate; refer to IRM 25.6.1.6.7, Case/Transcript for U.S. Departing Alien Income Tax Return (Form 1040-C).

21.6.6.3.46  (04-01-2009)
Abusive Tax Avoidance Transactions (ATAT)

  1. Abusive Tax Avoidance Transactions (ATAT) - Individuals are filing claims and attaching Form 8594, Asset Acquisition Statement Under Section 1060, for the purpose of re-characterizing termination payments from insurance companies as capital gains, even though the payments should be reported as ordinary income.

  2. Baker v. Commissioner, 338 F.3d 789 (7th Cir 2003), has already addressed this issue. The promoter is aware that the IRS was affirmed; however, he continues to erroneously advise his clients, who are typically retired or terminated insurance agents, that their termination payments should be treated as capital gain instead of ordinary income. Termination payments, to which the agent is issued a 1099, are payments that an insurance agent receives for a pre-determined number of years after he stops selling policies for the insurer. This period can vary, but is typically from 3 to 5 years. Individuals are filing claims in order to reclassify their termination payments as capital gain, to obtain refunds for taxes paid in previous years.

  3. Any claims submitted meeting the issue as described should be disallowed, refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. Send a disallowance Letter 105C including the following information "The termination payments from insurance companies are considered ordinary income, and cannot be treated as capital gains."

21.6.6.3.47  (10-01-2010)
IRC Section 165– Theft Loss Conversions

  1. Taxpayers are filing claims for "theft losses deductions" due to corporate misconduct and Ponzi schemes.

  2. Claims are generally filed on Form 1040X, Amended U.S. Individual Income Tax Return, and include comments indicating "theft loss deduction under IRC Section 165" , "Rev. Proc. 2009-20" , or "investment theft loss." The claims may include an opinion letter explaining the theft loss and why it qualifies under IRC Section 165(c)(2) or Revenue Procedure 2009-20.

  3. The theft loss is reported on page 2, Part B of Form 4684, Casualties and Thefts, and flows to the "Other Miscellaneous Deductions" section of Schedule A, Itemized Deductions. The taxpayer may indicate on the miscellaneous deduction line:

    1. Form 4684, Casualties and Thefts, income producing property

    2. IRC Section 165

    3. Investment theft loss

    4. Revenue Procedure 2009-20

    5. Revenue Procedure 2009-20 Appendix A

    6. Rev. Rul. 2009-9

  4. The following subsections provide instructions for processing the different types of IRC Section 165 theft loss conversions.

21.6.6.3.47.1  (10-01-2013)
Claims due to Corporate Misconduct

  1. Notice 2004-27 advised taxpayers that the IRS will disallow theft losses claimed with respect to decreases in the market value of stock purchased on the open market, even if the loss in value of the stock may be attributable to illegal misconduct of the officers or directors of the corporation that issued the stock.

  2. The claims will indicate a "theft loss deduction" or "IRC Section 165 loss deduction" shown on Schedule A, Itemized Deductions, but will not mention a specific Ponzi scheme.

    Note:

    Rev. Rul. 2009-9, which describes the tax treatment of losses from Ponzi schemes, and Rev. Proc. 2009-20, which describes the optional "safe harbor" for those losses, do not apply to losses resulting from stock purchased on the open market. Refer to IRM 21.6.6.3.47.2, Claims due to Ponzi Schemes, do not apply to losses resulting from stock purchased on the open market.

  3. Taxpayers also may attempt to claim theft losses from stock purchased on the open market that result in net operating loss claims (RINTs and TENTs). Coordinate the processing of the net operating loss claim(s) with the amended return claiming the loss. Whenever possible, one employee should be assigned the amended return and the carryback claim(s). The net operating loss claim should be disallowed in conjunction with the amended return.

  4. These claims should be disallowed with appeal rights. The disallowance language is as follows:

    "To qualify for a theft loss, you must verify 1) you had a direct relationship with the "defrauder" or an associate who acted as broker or agent of the "defrauder" , 2) the loss you claim resulted from a taking of property that is illegal under the law of the state where it occurred, 3) the "defrauder" had a specific intent to deprive you of your money or property and 4) all claims for recovery have been closed and completed (for example through litigation, settlement or abandonment)."

    "Additionally, you must verify 5) when it is reasonably certain whether recovery on all reimbursement claims will be received and 6) the amount of the loss is the actual amount of money stolen. There is no evidence that you meet these qualifications; therefore, the deduction has been disallowed. Please be advised that there is no theft loss allowed with respect to decreases in the market value of stock purchased on the open market, even if the loss in value of the stock may be attributable to illegal misconduct of the officers or directors of the corporation that issued the stock."

  5. Refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures, for additional information on disallowance procedures.

21.6.6.3.47.2  (10-01-2013)
Claims due to Ponzi Schemes

  1. Generally, IRC 165(a) allows a deduction for losses sustained during the taxable year and not compensated by insurance or otherwise. For individuals, IRC Section 165(c)(2) allows a deduction for losses incurred in a transaction entered into for profit. Refer to Rev. Rul. 2009-9. A taxpayer claiming a theft loss must prove that the loss resulted from a taking of property that was illegal under the law of the jurisdiction in which it occurred and was done with criminal intent.
    Under IRC 165(e), a theft loss is sustained in the taxable year the taxpayer discovers the loss. The regulations explain that a theft loss is not sustained if, in the year of discovery, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery. Refer to Treasury Regulations Section 1.165-1(d), and 1.165-8(a)(2). No portion of the loss with respect to which reimbursement may be received is sustained until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Thus, if there is a claim for reimbursement, the taxpayer must wait until it is reasonably certain whether recovery on that claim will be received (for example, if the bankruptcy proceeding closes or the taxpayer abandons the claim).

    Note:

    These claims may also create a net operating loss, which generally can be carried back to the 3 preceding years. However, for the 2008 and 2009 tax years, the taxpayer may elect a 3, 4, or 5 year carryback period for the applicable 2008 and 2009 net operating losses. For additional information on net operating loss claims, refer to IRM 21.5.9, Carrybacks. Refer to IRM 21.5.9.5.14.6 and subsequent sections, American Recovery and Reinvestment Act of 2009 – Net Operating Losses, to determine if Rev. Proc. 2009-19, Rev. Proc. 2009-26, or Rev. Proc. 2009-52 apply for extended carryback period.

    Note:

    If a theft loss occurred in another entity, such as an IRA or qualified retirement plan, the theft loss is from that IRA or plan, rather than the individual IRA owner or plan participant.

  2. Amount of the loss: Rev. Rul. 2009-9 provides guidance on determining the amount of the theft loss and has no effective date. Overall, the amount of a theft loss resulting from a fraudulent investment arrangement is generally the initial amount invested in the arrangement, plus any additional investments, less amounts withdrawn, if any, reduced by reimbursements or other recoveries and reduced by claims as to which there is a reasonable prospect of recovery. If an amount was reported to the investor as income in years prior to the discovery of the theft, the investor included the amount in gross income, and the investor reinvested the amount in the arrangement, this amount increases the deductible theft loss.

  3. Safe Harbor Revenue Procedure: Rev. Proc. 2009-20, 2009-14 I.R.B. 749, provides an optional safe harbor under which qualified investors that experienced losses from a specified fraudulent arrangement may treat a qualified loss as a theft loss deduction. The safe harbor requires that taxpayers treat the entire loss as a theft loss deduction (i.e., the taxpayer cannot amend prior returns to eliminate phantom income) and deduct the loss in the year a criminal charge is filed against the lead figure. The amount of the deduction is as follows: multiply the qualified investment by either 95 percent (if the qualified investor is not pursuing any potential third-party recovery) or 75 percent (for a qualified investor that is pursuing or intends to pursue potential third-party recovery); and subtract the sum of any actual recovery and any potential insurance/Securities Investor Protection Corporation (SIPC) recovery.
    Only a qualified investor may use the safe harbor procedures of Rev. Proc. 2009-20. A qualified investor is a United States person (as defined in IRC Section 7701(a)(30) that:

    1. generally qualifies to deduct theft losses under § 165 and § 1.165-8;

    2. did not have actual knowledge of the fraudulent nature of the investment arrangement prior to it becoming known to the general public;

    3. with respect to which the specified fraudulent arrangement is not a tax shelter, as defined in § 6662 (d) (2) (C) (ii); and

    4. transferred cash or property to a specified fraudulent arrangement.


    A qualified investor does not include a person that invested solely in a fund or other entity (separate from the investor for federal income tax purposes) that invested in the specified fraudulent arrangement.
    A qualified investor that is a pass-through entity (such as a partnership or LLC) may flow through proportionate shares of the theft loss to its investors.
    A specified fraudulent arrangement is an arrangement in which a party (the lead figure) receives cash or property from investors; purports (appears) to earn income for the investors; reports income amounts to the investors that are partially or wholly fictitious; makes payments, if any, of purported income or principal to some investors from amounts that other investors invested in the fraudulent arrangement; and appropriates some or all of the investors’ cash or property.
    The Rev. Proc. 2009-20 applies to discovery years beginning after the taxable year ending on December 31, 2007.
    The Rev. Proc. 2009-20 allows a deduction in the year in which the requirements of a qualified loss are satisfied. The requirements of a qualified loss are:

    • The lead figure (or one of the lead figures, if more than one) was charged by indictment or information (not withdrawn or dismissed) under state or federal law with the commission of fraud, embezzlement or a similar crime that, if proven, would meet the definition of theft for purposes of Section 165 of the Internal Revenue Code and Section 1.165-8 (d) of the Income Tax Regulations, under the law of the jurisdiction in which the theft occurred; or

    • The lead figure was the subject of a state or federal criminal complaint (not withdrawn or dismissed) alleging the commission of a crime described in section 4.02 (1) of Rev. Proc. 2009-20, and either the complaint alleged an admission by the lead figure, or the execution of an affidavit by that person admitting the crime; or a receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen.


    Rev. Proc. 2011-58 also added a third category of qualified loss for situations where the lead figure died before criminal charges are brought. The modification requires that a lead figure or associated entity is the subject of a civil complaint or similar documents filed by a government entity that allege substantially all the elements of a specified fraudulent arrangement. In addition, Rev. Proc. 2011-58 clarifies the terms "indictment" , "information" , and "criminal complaint" used to define qualified loss in Rev. Proc. 2009-20.
    The ruling and procedures are available on http://www.irs.gov/.

    Note:

    Rev. Rul. 2009-9 and the optional "safe harbor" described in the Rev. Proc. 2009-20 do not apply to losses that result from a decrease in the market value of stock purchased on the open market, even if the decrease in value of the stock is attributable to corporate misconduct on the part of an officer or employee of the corporation. Procedures for processing claims for a theft loss resulting from a decrease in the market value of stock due to corporate misconduct are described in IRM 21.6.6.3.47.1, Claims due to Corporate Misconduct.

  4. Procedure to claim a theft loss deduction without using the safe harbor: For Ponzi scheme theft loss deduction claims under the general rules of IRC Section 165 and Rev. Rul. 2009-9, the taxpayer must file Schedule A, Itemized Deductions, along with the Form 4684, Casualties and Thefts. The claims may reference "investment theft loss deduction" or "IRC 165 loss deduction" on Schedule A, or a specific Ponzi scheme. Additionally, some claims are filed based on an original or amended Schedule K-1 from a Ponzi theft loss incurred by partnership or trust, refer to IRM 21.6.6.3.47.3, Schedule K-1 and claims due to Ponzi Schemes.

    Note:

    A taxpayer may file amended returns to eliminate from income amounts that were reported as income from the scheme (so called "phantom income" ). The taxpayer must prove that the amounts sought to be excluded in fact were not income that was actually or constructively received by the taxpayer. Input a transaction code (TC) 971 with action code (AC) 651 to identify a Ponzi scheme and forward the claim as CAT-A as outlined in Exhibit 21.5.3-2, Examination Criteria (CAT-A) – General.

    Note:

    Prior to forwarding CAT-A, review tax year 2008 and subsequent years for indication of a previous "safe harbor" election. If the "safe harbor" election has previously been made with respect to the same Ponzi scheme, disallow the taxpayer’s claim. Inform the taxpayer the claim cannot be allowed since the "safe harbor" method was previously utilized as outlined in Rev. Proc 2009-20.

    Note:

    An investment theft loss is not subject to the $100 and 10% of AGI limitations applicable to casualty and theft losses of personal-use property under IRC Section 165(h).

  5. If the taxpayer claims a Ponzi loss utilizing the "safe harbor" method ensure the claim is complete and valid.
    Claims based on a Schedule K-1 may reference the Ponzi scheme in the remarks, but may also have no identifying characteristic to identify the claim as a Ponzi loss; refer to IRM 21.6.6.3.47.3, Schedule K-1 and claims due to Ponzi Schemes.

  6. Procedure to claim a theft loss deduction using the safe harbor: In addition to the requirements for all investment theft loss claims, a complete claim for the "safe harbor" method must include:

    1. Form 4684, Casualties and Thefts with "Revenue Procedure 2009-20" marked at the top of the Form, and the amount from the Rev. Proc. 2009-20 Appendix A, Line 10 "deductible theft loss" entered on the Form 4684 Part I, Section B.

    2. Appendix A, Statement by Taxpayer Using the Procedures in Rev. Proc. 2009-20 to Determine a Theft Loss Deduction Related to a Fraudulent Investment Arrangement, must be completed and signed.


    If any of these elements is missing, reject the claim as outlined in IRM 21.5.3.4.2, Tax Decrease or Credit Increase Processing.

    If the "safe harbor" claim is complete, process as indicated below:

    1. Input a transaction code (TC) 971 with action code (AC) 651.

    2. Ensure the claim is filed on a tax year ending after 12/31/2007 - disallow any "safe harbor" claim on tax year 200712 and earlier as outlined in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.

    3. Verify that no other adjustments related to Ponzi losses have been allowed on any years – if prior adjustments are identified, forward to Examination as CAT-A.

    4. Verify that no other claims for Ponzi losses are currently in the system – if any are located, consolidate the cases to ensure consistent processing.

    5. Forward the claim to Examination as CAT-A criteria if the amount of the claim exceeds the criteria amount as outlined in Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General.

21.6.6.3.47.3  (10-01-2012)
Schedule K-1 and claims due to Ponzi Schemes

  1. As mentioned in IRM 21.6.6.3.47.2, Claims Due to Ponzi Schemes, a taxpayer may have a loss from a flow-through entity that invested with a Ponzi scheme. The loss is taken at the entity level and passed-through to the individual investors. When the taxpayer files a claim due to an amended Schedule K-1 and information with the claim indicates the Schedule K-1 is due to a Ponzi loss, the loss is allowable on the taxpayer’s claim. Any audit related to the Ponzi loss will be conducted on the applicable Partnership, S Corporation or Trust return. Process the claim as follows:

    1. Research IDRS under the Employer Identification Number (EIN) listed on the Schedule K-1 for indication of an amended return for the Partnership, S Corporation or Trust (i.e., TC 976).

      Note:

      EIN's filed for a Trust return can be located on MFT 05, S Corporation on MFT 02 and Partnership returns will be located on MFT 06.

    2. If no TC 976 is located on the EIN, reject the claim as outlined in IRM 21.5.3.4.2, Tax Decrease or Credit Increase Processing. Inform the taxpayer that we have no record of an amended return filed for the Partnership, S Corporation, or Trust.

    3. If a TC 976 is located, allow the taxpayer’s claim, input a transaction code (TC) 971 with action code (AC) 651 to identify a Ponzi scheme. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡

    Note:

    If the claim is due to an original Schedule K-1 or there is no indication of a Ponzi loss, process as a normal Schedule K-1 adjustment.

21.6.6.3.48  (10-01-2013)
Section 3082(a) of the Housing and Economic Recovery Act of 2008 - Disaster Primary Housing Grant Relief

  1. Taxpayers who were affected by Hurricane Katrina, Rita or Wilma and filed a casualty loss on their primary home may have received a housing relief grant in a later year. The housing relief grant is a tax free grant unless the taxpayer claimed a prior year primary home casualty loss. Homeowners who claimed a primary home casualty loss, and then received a housing grant in a later year were required by law to pay tax on all or part of the grant to compensate for the tax benefit of the casualty loss. While individual circumstances varied, this meant some taxpayers ended up paying more tax on the grant than they saved by claiming a casualty loss. Section 3082(a) of the Housing and Economic Recovery Act of 2008 changed this requirement.

  2. Taxpayers may elect to file an amended income tax return for the taxable year in which a deduction with respect to a casualty loss to a principal residence (within the meaning of IRC Section 121) was allowed (and for any taxable year to which such deduction is carried) and reduce (but not below zero) the amount of such reimbursement. Taxpayers must file amended tax returns no later than the due date for filing the tax return for the taxable year in which the taxpayer receives Certain Hurricane-Related Casualty Loss Grant, or July 30, 2009. Taxpayers have one year after the filing of an amended return to pay any underpayment that resulted from the filing of the amended tax return without an imposition of interest and penalties.

  3. The Internal Revenue Service released News Release IR-2008-115 and Notice 2008-95 designed to help eligible homeowners who received housing grants stemming from Hurricanes Katrina, Rita or Wilma, take advantage of this new tax provision. If you receive a call from taxpayers questioning this news release, advise them to follow the guidance in Notice 2008-95.

  4. Taxpayers are instructed to write "Hurricane Grant Relief" on the top of their amended return and to mail it to the Austin campus. The address will contain a unique IRS Code Format Number (CFN - last four digits of the ZIP code) 0255.

  5. Taxpayers are advised to pay the balance due within one year from the date they filed their amended return, to avoid penalties and interest. Taxpayers who do not pay the balance due by the 44th cycle of the filing of the amended return will receive the CP 02H. The CP 02H is a reminder notice for the balance due as a result of an amended tax return filed and reporting a grant received as a result of Hurricane Katrina, Rita or Wilma. If you receive a call from a taxpayer requesting an installment agreement or an extension for time to pay, follow normal payment procedures in IRM 5.19.1, Balance Due. In addition, inform the taxpayer they MUST pay the balance due within one year after the filing of the amended return. Penalties and interest begin to accrue one year from the amended return received date on ANY remaining balance due.

  6. These returns will be centralized in Accounts Management (AM) in the Austin campus. If you receive one of these cases and are not part of the Austin centralized team, follow procedures below to route all related cases to Austin:

    1. Keep all cases together and route/reassign all years at the same time.

    2. If you receive a paper case, route to the Austin AM ICT team (Image Control Team ) at M/S 6567.

    3. If you receive a case that has already been scanned into CIS:

    • Reassign to the Austin Campus IDRS number 0638126186

    • Change the category code to XHRG

    • All cases will become overage on the 120th calendar day after the IRS received date.

    Caution:

    Exam Function:

    Do not send these cases to CAT-A as taxable to non-taxable prior to reassigning to the Austin campus. These returns do not meet CAT-A criteria.

    Statute Function:

    These cases are not restricted by normal statute rules. Follow instructions above to route to the Austin AM ICT if you receive any cases meeting the above criteria.

    Appeals Function:

    Some taxpayers filed an amended return prior to the news release and their claims were denied. If the taxpayer writes in for appeal rights, follow the instructions above to route to the Austin AM ICT.

  7. You can identify these adjustments/claims by:

    • "Hurricane Grant Relief" written on the top of Form 1040X/amended Form 1040/ Form 843

    • Mention of "Section 3082"

    • Mention of Louisiana Road Home Grants or Mississippi Development Authority Hurricane Katrina Homeowner Grant

    • Indication that the taxpayer is removing a prior year Hurricane Katrina, Rita or Wilma casualty loss of their primary home

    • Form 1040X removing/reducing hurricane casualty loss of their primary home

    • Form 1040X removing a hurricane housing grant

    • Form 843 requesting relief from penalties and/or interest as a result of removing/reducing a primary home casualty loss

  8. The amended returns may consist of a variety of adjustments such as:

    • An assessment for 2004 or 2005 reducing a previously claimed primary home casualty loss

    • A decrease of tax due to reducing or eliminating an assessment for 2005, 2006, and/or 2007 reducing a Net Operating Loss (NOL) carryover due to the reduction of a previously claimed primary home casualty loss

    • An assessment for 1999 through 2004 reducing a carryback due to the reduction of a previously claimed primary home casualty loss

    • A decrease of tax due to reducing or eliminating housing grant income received as a result of a hurricane loss

  9. The procedures below are for the Austin AM centralized team only:

    If And Then
    The taxpayer is filing Form 1040X to remove a primary home casualty loss on a prior year return There is no prior balance due on the module.
    1. Input TC 290 for the amended return tax increase.

    2. Use Reason Code 176.

    3. Input TC 270 for .00.

    4. Input TC 340 for .00.

    5. Input TC 770 for .00 if credit interest was allowed on a prior refund.

    6. Input DB-INT-TO-DT (MMDDYYYY - 23C date of the adjustment) (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars).

    7. Input the Amended Claims Date (the later of July 30, 2009, or the due date for the return, including extensions, in the year the grant was received).


    Note: Statute imminent and statute expired years are being bypassed with RC 176.
    The taxpayer is filing Form 1040X to remove a primary home casualty loss on a prior year return There is a prior balance on the module
    Important: Interest and Failure to Pay (FTP) will not be charged on the TC 290 adjustment amount. However, accruing FTP and interest will be assessed on the module balance prior to the TC 290 adjustment and computed to the 23C date of the adjustment following the procedures in the next column. Be sure to check CC INTST prior to inputting your adjustment.
    1. Compare IMFOLT to INTST.

    2. Pull up IMFOLT.

    3. Write down the following from the IMFOLT screen:

      1. Interest date

      2. Total interest

      3. FTP total

    4. Input CC INTST computed to interest date from IMFOLT.

    5. Compare:

      1. Total FTP with total FTP from IMFOLT

      2. Total interest with total interest from IMFOLT

      1. If IMFOLT and INTST match ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Use INTST to calculate the interest and penalty accruals to the 23C date of your adjustment (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars)

      2. If IMFOLT and INTST do NOT match Manually calculate the FTP penalty and interest accruals to the 23C date of your adjustment (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars)

    6. Input TC 290 for the amended return tax increase.

    7. Use RC 176

      • Input TC 270 for accrued FTP amount

      • Input TC 340 for accrued interest amount

      • Input DB-INT-TO-DT (MMDDYYYY - 23C date of the adjustment).

    8. If the module you are adjusting is in status 22, 24 or 26, or ANY module on the account has an installment agreement (I/A) (status 6X), photocopy the first page of the amended return and route the copy to Collections at: Internal Revenue Service Attn: Ken Marek SBSE Collection Policy
      5000 Ellin Road Room C9-363, Lanham, Md 20706-1348
      for manual monitoring.


    Note: Statute imminent and statute expired years are being bypassed with RC 176.
    The taxpayer is filing Form 1040X to remove a primary home casualty loss on a prior year return The casualty loss was carried back (account will have a TC 295 or TC 299) and there is no prior balance due on the module
    Note: Carryforward (Net Operating Loss Deduction claimed on Line 21, Form 1040) are worked using the procedures in 1st Then box above.
    1. Input TC 298 for the amended return tax increase on the module(s) the loss was carried back to.

    2. Input INT-CMPTN-DT from the prior Carryback adjustment (MMDDYYYY) the due date of the return the loss was carried back from, without regard to extensions.

    3. Use RC 177.

    4. Use BS 95 if statute imminent or statute expired. Otherwise, use BS 92 (adjusting with original TC 150 document) or BS 91 (adjusting without original TC 150 document).

    5. Input TC 270 for .00.

    6. Input TC 340 for .00.

    7. Input TC 770 for .00 if credit interest was allowed on a prior refund.

    8. Input DB-INT-TO-DT (MMDDYYYY - 23C date of the adjustment) (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars).

    9. Input the amended claims date (the later of July 30, 2009, or the due date for the return, including extensions, in the year the grant was received).

    The taxpayer is filing Form 1040X to remove a primary home casualty loss on a prior year return The casualty loss was carried back (account will have a TC 295 or TC 299) and there is a prior balance due on the module
    Note: Carryforward (Net Operating Loss Deduction claimed on Line 21, Form 1040) are worked using the procedures in the 2nd Then box above.
    Important: Interest and Failure to Pay (FTP) will not be charged on the TC 298 adjustment amount. However, accruing FTP and interest will be assessed on the module balance prior to the TC 298 adjustment and computed to the 23C date of the adjustment following the procedures in the next column. Be sure to check CC INTST prior to inputting your adjustment.
    1. Compare IMFOLT to INTST.

    2. Pull up IMFOLT.

    3. Write down the following from the IMFOLT screen:

      1. Interest date

      2. Total interest

      3. FTP total

    4. Input CC INTST computed to interest date from IMFOLT.

    5. Compare:

      1. Total FTP with total FTP from IMFOLT

      2. Total interest with total interest from IMFOLT

      1. If IMFOLT and INTST match ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Use INTST to calculate the interest and penalty accruals to the 23C date of your adjustment (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars)

      2. If IMFOLT and INTST do NOT match Manually calculate the FTP penalty and interest accruals to the 23C date of your adjustment (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars).

    6. Input TC 298 for the amended return tax increase on the module(s) to which the loss was carried back.

    7. Input INT-CMPTN-DT (MMDDYYYY) the due date of the return the loss was carried back from, without regard to extensions.

    8. Use RC 177.

    9. Use BS 95 If statute imminent or statute expired year. Otherwise, use BS 92 (adjusting with original TC 150 document) or BS 91 (adjusting without original TC 150 document.

    10. If the module you are adjusting is in status 22, 24 or 26, or ANY module on the account has an Installment Agreement (I/A) (status 6X), photocopy the first page of the amended return and route the copy to Collections at: Internal Revenue Service Attn: Ken Marek SBSE Collection Policy
      5000 Ellin Road Room C9-363. Lanham, Md 20706-1348
      for manual monitoring.

    The taxpayer is filing Form 1040X to remove a hurricane housing grant as income (taxable to non-taxable)
    Note: Do not send CAT-A
    The taxpayer never claimed a hurricane primary housing casualty loss in a prior year(s)
    Note: Accept the taxpayers' assertion of not having claimed a primary housing casualty loss; otherwise research prior year accounts for a casualty loss claim.
    Follow normal IRM guidelines to remove the housing grant as income. Housing grants are not taxable unless a primary housing casualty loss was taken on a prior year(s) return.
    Note: Review CC IRPTRO for a Form 1099 matching the grant amount. If a Form 1099 was issued, the grant was not a qualifying grant, and should be claimed as income. Disallow the claim, refer to IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.
    The taxpayer is filing Form 1040X to remove a housing grant as income (taxable to non-taxable)
    Note: Do not send CAT-A
    The taxpayer claimed a hurricane primary housing casualty loss in a prior year and IRS has received a Form 1040X to reduce/eliminate the loss
    1. Input TC 291 to remove the housing grant as income.

    2. Use hold code 4 to hold the notice and the overpayment.

    3. Transfer any portion of the overpayment needed to cover the tax on the prior year(s) hurricane primary housing casualty loss using:

      • Doc Code 24 and credit freeze code 1 (if the amended return on the prior year has not been processed yet), or

      • Bypass Indicator 1 (if the amended return on the prior year has been processed and there is a balance due on the module).

    4. Allow the remainder of the overpayment to refund to the taxpayer.

    5. If the Form 1040X for the prior year primary home casualty loss has not been worked, work per applicable procedures above.

    6. Send a letter to the taxpayer explaining actions taken.

    The taxpayer is filing Form 1040X to remove a housing grant as income (taxable to non-taxable) Note: Do not send CAT-A The taxpayer claimed a hurricane primary housing casualty loss in a prior year but IRS has NOT received the Form 1040X to reduce/eliminate the loss and it is before July 30, 2009, or the due date for the return in the year the grant was received, including extensions.
    1. Remove the housing grant as taxed income.

    2. Do not correspond for the amended return to reduce/remove the prior year primary home casualty loss prior to removing the grant as taxed income.

    3. Send the taxpayer a Letter 076Cwith the following paragraphs:
      Without Carryback
      Send the taxpayer a Letter 076C with the following paragraphs:
      A
      C
      L (open paragraph) We are now considering your home grant as non-taxable income. You must file Form 1040X and make an election under Section 3082(a) of the Housing and Economic Recovery Act of 2008 to reduce or eliminate your primary home casualty loss deduction (but not below zero) by the amount of the grant you received as reimbursement for your loss.
      * (open paragraph) You must file Form 1040X by the due date of the return for the year in which you received the grant; or July 30, 2009. The additional tax due on the prior year may be paid interest and penalty free within one year after you file Form 1040X. You may make payments toward this liability at any time during that period. We will apply any overpayments to the additional tax.
      Note: You may use a different letter if another letter will provide a better response to the taxpayer. Ensure you include the paragraphs above in whatever letter you send.
      Use applicable closing paragraph(s)
      With Carryback Send the taxpayer a Letter 3064C Letter with the following paragraphs:
      F
      L (open paragraph) We are pleased to tell you that we have approved your claim(s).
      * (open paragraph) We are now considering your home grant as non-taxable income. You must file Form 1040X and make an election under Section 3082(a) of the Housing and Economic Recovery Act of 2008 to reduce or eliminate your primary home casualty loss deduction (but not below zero) by the amount of the grant you received as reimbursement for your loss.
      M (open paragraph) If your primary home casualty loss deduction exceeded your income for the year, and you carried the excess loss back to prior tax years as a net operating loss (NOL), you must also file Form 1040X for those years to reduce or eliminate the portion of the NOL that is due to the primary home casualty loss, by the amount of the grant.
      * (open paragraph) You must file Form 1040X by the due date of the return for the year in which you received the grant; or July 30, 2009. The additional tax due on the prior year may be paid interest and penalty free within one year after you file Form 1040X. You may make payments toward this liability at any time during that period. We will apply any overpayments to the additional tax.
      Use applicable closing paragraph(s)
      Note: You may use a different letter if another letter will provide a better response to the taxpayer. Ensure you include the paragraphs above in whatever letter you send.

    4. Allow the Refund.

    5. Close the case, do not suspense.

    The taxpayer is filing Form 1040X to remove a housing grant as income (taxable to non-taxable) Note: Do not send CAT-A The taxpayer claimed a hurricane primary housing casualty loss in a prior year but IRS has NOT received the Form 1040X to reduce/eliminate the loss and it is after July 30, 2009, or the due date for the return in the year the grant was received, including extensions.
    1. Disallow the claim.

    2. Follow procedures in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.

    The taxpayer is filing Form 843 requesting abatement of penalties and/or interest on a prior year primary home casualty loss adjustment The tax IS paid in full and interest and penalty have only been charged on the primary home casualty loss adjustment. Caution: RC 176 cannot be used with TC 290 for .00
    1. Use the applicable TCs to reverse the posted primary home casualty loss adjustment using hold code 4 (holding notice and credit).

    2. Input TC 290 to reassess the casualty loss tax increase. Note: If there is no tax change, only a credit change, input TC 290 for .01.

    3. Use hold code 4.

    4. Use Reason Code 176.

    5. Input TC 270 for .00.

    6. Input TC 340 for .00.

    7. Posting delay code 1.

    8. Input DB-INT-TO-DT (MMDDYYYY - 23C date of the adjustment) (to determine the 23C date, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars).

    9. Input the Amended Claims Date (the latter of July 30, 2009, or the due date for the return, including extensions, in the year the grant was received).
      Note: Statute imminent and statute expired years are being bypassed with RC 176.
      Since the T/P won't receive an adjustment notice showing penalties and interest abatement, send the taxpayer Letter 2357C (or other applicable letter) advising of penalty and interest abatement.

    The taxpayer is filing Form 843 requesting abatement of penalties and/or interest on a prior year primary home casualty loss adjustment The tax has NOT been paid in full and there is no other unpaid liability in the module
    - OR -
    Interest and penalty was charged in the module on other tax in addition to the primary home casualty loss adjustment.
    1. Use the applicable TCs to reverse the posted primary home casualty loss adjustment. Use hold code 2.

    2. Input TC 290 to reassess the casualty loss amended return tax increase.

    3. Use posting delay code 1.

    4. Use RC 176.

    5. Input TC 270 for .00.

    6. Input TC 340 for .00.

    7. Input DB-INT-TO-DT (MMDDYYYY - 23C date of the adjustment) (23C date can be determined, refer to Document 6209, Section 16.2, Explanation of Output Cycle Calendars).

    8. Input the Amended Claims Date (the later of July 30, 2009, or the due date, including extensions, for the return in the year the grant was received.

    The taxpayer is filing Form 843 requesting abatement of penalties and/or interest on a prior year primary home casualty loss adjustment The tax has NOT been paid in full and there IS other unpaid liability in the module
    1. Use the applicable TCs to reverse the prior primary home casualty loss adjustment using hold code 2.

    2. Wait for the abatement to post.

    3. Follow 2nd If – And – Then box instructions above.

    Taxpayer files a Form 1040X/amended return There are multiple issues including primary home casualty loss adjustments and/or hurricane house grant issues
    1. Prepare two dummy returns, one containing only the hurricane grant relief, Section 3082(a) tax assessment, and the other containing tax assessment for all other issues.

    2. Notate signature on CIS in the signature field.

    3. Have dummy returns scanned into CIS.

    4. Process the "other issues" dummy return using regular IRM procedures.

    5. Process the hurricane grant relief dummy return, using procedures above. Most of the time the other issues adjustment(s) will be input first.

    6. Notify the taxpayer of the actions taken.

  10. Note: Taxpayers who received their home grant before January 1, 2009 have until July 30, 2009 or October 15, 2009 if they filed an extension to amend their primary home casualty loss and one year from that date to pay any resulting tax. Taxpayers who receive a home grant after January 1, 2009 have until the due date of the return, including extension, in the year they receive the grant to amend their primary home casualty loss and one year after the filing of the amended return to pay the tax. Penalties and interest begin to accrue one year from the amended claims date on ANY remaining balance.
    Caution: Do not reject hurricane grant relief Section 3082(a) assessment returns to the taxpayer. If the taxpayer does not supply the amount they received for their hurricane housing grant or other pertinent information, call or correspond and request the missing information.

  11. The procedures below are for the Austin AM centralized team for claims received AFTER July 30, 2009, taxpayer received their grant in 2008 and no extension was filed:

    If And Then
    The taxpayer did not claim a grant as income and is amending a prior year’s return to remove or reduce a previously taken disaster casualty loss The received date is after July 30, 2009, and the taxpayer has full paid the proposed tax assessment Remove or reduce the prior year disaster casualty loss and assess the resulting tax
    The taxpayer did not claim the grant as income and is amending to remove or reduce the prior year disaster casualty loss The received date is after July 30, 2009, and the taxpayer has NOT full paid the proposed tax assessment Remove the prior year disaster casualty loss, assess the tax, and send the taxpayer a letter advising the taxpayer they must pay the balance due by July 30, 2010, to avoid penalties and interest
    The taxpayer did not amend their casualty loss year and is amending the tax return for the year the grant is received to remove the grant from income The received date is after July 30, 2009
    1. Disallow the claim.

    2. Follow procedures in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.

    The taxpayer amended their casualty loss year and full paid the tax and is amending the tax return for the year the grant is received to remove the grant from income The received date is after July 30, 2009. Remove the grant as income

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