4.19.3  IMF Automated Underreporter Program (Cont. 1)

4.19.3.7 
Analysis of Each Income Type

4.19.3.7.3 
Interest - General

4.19.3.7.3.2  (09-01-2010)
Original Issue Discount (OID)

  1. A Form 1099-OID IR reflects the original issue discount allocable to the tax year and the qualified stated interest paid or credited on the obligation during the tax year.

    Caution:

    If there is an IR where the OID amount and the W/H amount are identical, refer these cases to the FRP. See IRM 4.19.3.20.9, Disagreed Responses.

  2. Original issue discount is identified on the Case Analysis screen by the literals "99 OID" in the DOC TYPE field and the following literal(s) in the INCOME TYPE field:

    • "S-INT" is the qualified stated interest paid or credited on the obligation during the tax year

    • "OID" is the original issue discount allocable to the tax year, and/or

    • "OIDTO" is the original issue discount on Treasury Obligations.

      Note:

      OID on Treasury Inflation-Indexed Securities is reported in Box 6 on Form 1099-OID

  3. Original issue discount, which is treated as interest income, is the difference between the issue price and stated redemption price of a debt instrument (i.e., bond). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ issued by a brokerage firm or by financial institutions (banks, credit unions, and savings and loans).

  4. Original issue discount (other than original issue discount on an obligation with a term of 1 year or less) is reported on Form 1099-OID.

  5. If the taxpayer reports a partial amount or no amount from a 1099-OID IR, consider whether the taxpayer has made an adjustment for acquisition premium, or some other offset. Original issue discount may be reduced by these offsets provided the taxpayer first included the gross amount of original issue discount on Form 1040, Schedule B, line 1. The line 2 amount should then reflect the taxable amount of original issue discount as adjusted for these offsets.

    Note:

    Pursue the OID issue if the taxpayer reports an incorrect amount of taxable original issue discount due to an improper offset of the gross amount of OID.

  6. If the taxpayer reports a partial amount or no amount from a Form 1099-OID IR and the Schedule B does not reflect any adjustments, consider the OID, S-INT and OIDTO amounts in determining the U/R amount.

  7. If 1099-OID and 1099-INT IR(s) are present from the same payer, and you cannot determine which amount is reported:

    1. Group the OID, S-INT, OIDTO and INT amounts by PAYER EIN.

    2. Compare the group total amount to the total amount reported by the taxpayer for that payer.

    3. If the group total amount is smaller, assign Status Code "R" to the group.

    4. If the group total amount is larger, consider the difference U/R and assign Status Code "U" to the group.

4.19.3.7.3.3  (09-01-2012)
Savings Bonds, Treasury Bills, Treasury Bonds, and Treasury Notes

  1. Interest from U.S. Savings Bonds, Treasury Bills, Treasury Bonds, and Treasury Notes appear on 1099-INT IRs with the literal "BOND" .

    Note:

    OID on Treasury Inflation-Indexed Securities is reported in Box 6 on Form 1099-OID.

  2. Bond interest is identified on the Case Analysis screen by the literal "99INT" in the DOC TYPE field and the literals "BOND" or "TEBND" (Tax Exempt Bond) in the INCOME TYPE field.

    Note:

    TEBND amounts are system deleted.

  3. If the taxpayer reports an amount of savings bond interest that is equal to or greater than the IR(s) amount, consider the IR(s) reported unless the return amount is identified as being from a different payer.

  4. Accept bond interest if the taxpayer indicates the following:

    1. The bond interest is reported each year as it accrues. Accept only if the taxpayer reports an interest amount.

    2. Interest on inherited savings bonds was reported on the decedent's final individual income tax return.

  5. If the taxpayer included Bond income as Capital Gains on Schedule D, Part II, consider the Bond reported. Subtract the Bond Income from the LONG TERM GAIN/(LOSS) field in the Sch D/8814/ECR Tax window and send the IR(s). Include a Special Paragraph using the following verbiage as an example: "The Bond income you reported on Form 1040, line 13 or Schedule D, Capital Gains and Losses, does not qualify for capital gains treatment. Your payers reported this income to us as bond interest, so you must report the income as ordinary income on your tax return." .

  6. If a breakdown of bond interest by payer is not shown on the return or on an attachment and there is only one IR:

    1. Compare the amount reported on Form 1040, Form 1040A, lines 8a , or Form 1040EZ, line 2.

    2. If the taxpayer reports a larger amount, consider the IR fully reported.

    3. If the taxpayer reports a lesser amount, allow credit for the amount reported.

  7. If the taxpayer reports bond interest but does not identify the payer and there is more than one BOND IR:

    1. Group by income type BOND.

      Note:

      If INT IRs are present it may be necessary to add INT IRs to the group.

    2. Compare the group total to the amount of reported bond interest.

    3. If the group total amount is smaller, assign Status Code "R" to the group.

    4. If the group total amount is larger, consider the difference U/R and assign Status Code "U" to the group.

    5. If bond amounts are U/R, Send PARAGRAPH 64 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

      Exception:

      If the specific U/R amount matches an IR - PARAGRAPH 64 may not be appropriate.

  8. If the taxpayer reports an amount as savings bond, T-Bill bond, or note interest, and the 1099-INT IR shows only regular interest, consider the IR reported if the amounts match within $1 ONLY if the taxpayer has not excluded interest on Schedule B, line 3, for college tuition. PARAGRAPH 108 automatically generates when the exclusion is fully disallowed.

  9. 1099-INT IRs should not show EWPEN amounts if only bond interest is present. Treat such IRs as potential Payer Agent data or questionable.

4.19.3.7.3.4  (09-01-2013)
Savings Bond Exclusion

  1. Form 8815, Exclusion of Interest from Series EE U.S. Savings Bonds Issued After 1989, is allowed on Schedule B, line 3.

  2. Bond Interest must be reported on the return before being claimed as a Savings Bond Exclusion on Form 1040 or Form 1040A.

  3. When the taxpayer excludes a savings bond interest amount and the adjusted gross income (AGI) is changed, the Adjusted Gross Income and Savings Bond Exclusion windows may display when the Return Value window is selected. If the windows do not display, they must be accessed before continuing to the Return Value screen.

  4. The AUR system computes the new excludable savings bond interest amount based on the entries in the Adjusted Gross Income and Savings Bond windows and displays it in the RECOMPUTED SAVINGS BOND EXCLUSION field.

  5. If the Adjusted Gross Income (AGI) window appears, see IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Adjusted gross Income (AGI) Window.

    Reminder:

    Input/verify the amount in the Excluded Savings Bond field of the AGI window.

  6. The savings bond exclusion claimed on Schedule B, line 3 is disallowed when:

    • The new Modified Adjusted Gross Income (MAGI) is $87,850 or more for filing status Single or Head of Household; $139,250 or more for Married Filing Joint or for Qualifying Widow(er)

    • The taxpayer is married filing a separate return

      Note:

      The new MAGI is the amount claimed on Form 8815, line 9, plus U/R income.

  7. The savings bond exclusion claimed on Schedule B, line 3 is adjusted when the new MAGI is greater than:

    • $72,850 for Single and Head of Household filers

    • $109,250 if Married Filing Joint or Qualifying Widow(er)

  8. If the system determines the exclusion claimed should be disallowed in whole or part, an IR is created by the system for the amount of the disallowance and coded with Status Code "U" .

  9. PARAGRAPH 105 automatically generates when the exclusion is adjusted or eliminated. PARAGRAPH 107 automatically generates when the exclusion is eliminated based on the filing status.

  10. If you adjust the Savings Bond Exclusion, enter the amount from Schedule B in the RETURN field of the Summary screen.

4.19.3.7.3.5  (09-01-2012)
Interest Miscellaneous

  1. Interest income may be reduced by any of the following, provided the taxpayer first included this income on Schedule B, line 1. The line 2 amount should then reflect the taxable amount of interest minus these adjustments:

    1. Nominee Distributions - Interest received by the taxpayer that actually belongs to another person, such as a child.

    2. Accrued Interest - Interest on securities transferred between interest payment dates.

    3. Tax-Exempt Interest - (e.g., Municipal Bonds, etc.).

      Note:

      When SS/RR is also present, see IRM 4.19.3.7.17.1 (7), Social Security/Railroad Retirement Benefits - Analyzation.

    4. Amortizable Bond Premium - Premium offsets interest on taxable bonds acquired after December 31, 1987.

    5. Frozen Deposits - An account from which the taxpayer is unable to withdraw funds because the financial institution or others in the area are bankrupt, insolvent, or in receivership.

  2. Pursue the issue if it appears the taxpayer reports an incorrect taxable interest due to improper deduction of these amounts.

  3. PARAGRAPH 85 automatically generates to inform the taxpayer he/she may be subject to Back-Up Withholding when the total of U/R interest, dividends, and patronage dividends is greater than $500.

  4. 1099-INT IRs may reflect an Early Withdrawal Penalty (EWPEN). See IRM 4.19.3.8.5, Early Withdrawal Penalty (EWPEN) - General, for further instructions.

    Caution:

    Taxpayers may net the EWPEN against the interest. See IRM 4.19.3.8.5.1 (3) and (8), Early Withdrawal Penalty (EWPEN) - Analyzation.

  5. If a Form 1099-INT IR, from the U.S. Treasury, with EIN 38-1798424 is shown on the Case Analysis screen, it is credit interest paid to the taxpayer(s) by IRS for refund cases and is fully taxable.

  6. Form 1099-INT IRs may reflect W/H. If there is an indication that the interest account is jointly owned with someone other than the taxpayer's spouse or the filing status is 3:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Send PARAGRAPH 6 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

      See IRM 4.19.3.4.3, Jointly Owned Income, for additional instructions on jointly owned income.

    4. See IRM 4.19.3.15.1, Withholding - General, for further instructions on W/H.

  7. A fully U/R interest IR with a payee EIN is considered self-employment income. Input an Income Identify Code to assess Self-Employment Tax. IRM 4.19.3.14.1 (4) and (5), Self-Employment Tax and Exhibit 4.19.3-9, Income Identify Codes.

  8. If interest is U/R, enter the amount from Form 1040, line 8a, Form 1040A, line 8a, or Form 1040EZ, line 2, in the RETURN field on the Summary screen.

4.19.3.7.4  (09-01-2003)
Dividends and Capital Gain Distributions

  1. Dividends are distributions paid by corporations, partnerships, and/or estates and trusts. They are reported on Form 1099-DIV and on Schedules K-1 from Form 1065 (U.S. Return of Partnership Income), Form 1041 (U.S. Income Tax Return for Estates & Trusts), and Form 1120-S.

  2. Capital gain distributions are normally paid by regulated investment companies, mutual funds, and real estate investment trusts from their net long-term capital gains.

4.19.3.7.4.1  (09-01-2013)
Dividends - General

  1. The types of dividends compared are:

    • Ordinary Dividends - Entire amount is taxable

    • Capital Gain Distributions - Are considered taxable

  2. Dividends are identified on the Case Analysis screen by the literal "99DIV" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    • "ORDIV" - Ordinary dividends

    • "QDIV" - Qualified Dividends may be eligible for 15% Capital Gains rate

    • "NDDIS" - Non-dividend distributions (non-taxable)

    • "INEXP" -Investment Expenses (information only/system deleted)

  3. The AUR system considers each of the following amounts separately:

    • Ordinary Dividends

    • Capital Gain Distributions (including 28% rate, 5 year gain, 1250 gain and 1202 gain)

  4. If a 1099-DIV IR with multiple income types is U/R, and the tolerance for issuing a notice is met, screen all elements of the IR.

4.19.3.7.4.2  (09-01-2012)
Dividends - Analyzation

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ :

    • Keogh (HR-10) or 403(b) accounts

    • SEP or IRA accounts

    • Municipal Bond funds

    • Pension Plan or Profit Sharing Plan (including a 401(k) plan)

    • Capital Construction Fund (CCF) account

    Note:

    If W/H is reported, allow; if not reported ≡ ≡ ≡ ≡

  2. Compare ORDIV amounts with entries on:

    1. Form 1040 or Form 1040A, line 9a.

      Note:

      Qualified dividends reported on line 9b must be included in total dividends reported on line 9a. If the taxpayer reduces the dividends amount by the qualified dividend amount, the difference is U/R. Send PARAGRAPH 65 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    2. Form 1040 or Form 1040A, Schedule B, Part II.

    3. Form 1040, Schedule E, Parts II, III, and/or IV. The amounts must match within $1 or be clearly identified as Dividend Income.

  3. Compare IR(s) on the Case Analysis screen with individual items listed on Schedule B, if attached. The taxpayer may use an attachment in lieu of Schedule B.

  4. Dividend IRs display Ordinary Dividends (ORDIV), Qualified Dividends (QDIV), Capital Gain Distributions (CG), and non-dividend distributions (non-taxable) as separate amounts.

    1. The QDIV are included in the ORDIV.

    2. If the sum of the ORDIV and the CG amounts matches the sum of dividends reported on Schedule B, line 5, consider the IR(s) fully reported.

  5. If individual IR(s) do not match the amount claimed on the return:

    1. Group ordinary dividend amounts from the same payer.

    2. Compare the group total amount to the total ordinary dividends reported for that payer.

    3. If the group total amount is smaller, assign Status Code "R" to the group.

    4. If the group total amount is larger, assign Status Code "U" to the group.

  6. If a breakdown of ordinary dividend by payer is not shown on the return or on an attachment and there is only one IR:

    1. Compare the amount reported on Form 1040, Form 1040A, line 9a.

    2. If the taxpayer reports a larger amount, consider the IR fully reported.

    3. If the taxpayer reports a lesser amount, allow credit for the amount reported.

  7. If a breakdown of dividends by payer is not shown on the return and there is more than one dividend IR:

    1. Group all ordinary dividends together.

      Note:

      The Group function is a tool to assist the TEs in computing the correct U/R amount. It may not be necessary to use the Group function if the correct U/R can be determined without it.

    2. Compare the group total amount to the total reported dividends.

    3. If the group total amount is smaller, assign Status Code "R" to the group.

    4. If the group total amount is larger, consider the difference U/R and assign Status Code "U" to the group.

    5. If dividends amounts are U/R send PARAGRAPH 64 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

      Exception:

      If the specific U/R amount matches an IR - PARAGRAPH 64 may not be appropriate.

  8. Dividends and interest income are often interchanged by the taxpayer. Check any interest income areas when comparing IRs (e.g., credit union dividends). Check any dividend income areas when comparing INT amounts. Offset dividend income against interest income ONLY if one of the following applies:

    1. The same amount (within $1) AND the same payer are reported; OR

    2. An unidentified amount matches the U/R dividend amount within $1.

  9. If dividend income is listed on Schedule B but is not added into the AGI:

    1. Consider the income U/R. Create an IR for any income the taxpayer reported on Schedule B for which we do not have a corresponding IR.

    2. If interest and/or dividend amounts are U/R, send PARAGRAPH 57 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  10. If the taxpayer reports ordinary dividends on Schedule D/Form 8949, lines 1, 2, or 3 column d or lines 8, 9 or 10 column d:

    1. Consider the amount(s) in columns (e) and (g), (cost or other basis) U/R.

    2. To arrive at the amount to input in the REPORTED AMOUNT field, subtract the columns (e) and (g) amounts from the information return.

      Caution:

      Delete the dividend income from the LONG TERM GAIN (LOSS) field in the Sch D/8814/ECR Tax window.

    3. Send PARAGRAPH 52 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  11. If you notice a math error on Schedule B:

    1. Create an IR for any reported dividend amount(s) for which we do not have a corresponding IR.

    2. Group by income type ORDIV.

    3. Compare the group total amount to the total dividends reported.

    4. If the group total is smaller, consider reported and assign Status Code "R" to the group.

    5. If the group total is larger, consider the difference U/R and assign Status Code "U" to the group.

    6. Send PARAGRAPH 79 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  12. During Case Analysis do not screen the QDIV element of the IRs enter a status code "N" . The taxpayer determines the portion of QDIV (from Form 1099-DIV, Box 1b) that is entered on Form 1040 or Form 1040A, line 9b. For all 99DIV IRs where the ORDIV element is fully or partially U/R and a QDIV element is present, take the following action:

    1. Mark the QDIV element(s) with Send Indicator "S" .

    2. PARAGRAPH 4 automatically generates.

    Note:

    Any changes to reported QDIV are used in determining the proper Schedule D tax rate and will not impact the AGI.

4.19.3.7.4.3  (09-01-2012)
Dividends Miscellaneous

  1. The taxpayer may report a net dividend amount based on the payer's estimated percentage of taxability (especially utility companies). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. PARAGRAPH 85 automatically generates to inform the taxpayer he/she may be subject to Back-Up Withholding when the total of U/R interest, dividends, and patronage dividends is greater than $500.

  3. Dividends from money market funds may be reported under a different name. If a dividend amount on a 1099-DIV IR matches an amount on Schedule B, consider the IR reported unless there is an IR(s) for that individual payer.

  4. Restricted stock transferred to an employee as compensation for services may accrue dividends. Even though these dividends are reported on Form 1099-DIV, they should be treated as wages. Consider the income reported if the amount was included with wages.

  5. Reinvestment dividends are not allowable as an exclusion.

  6. Form 1099-DIV IRs may reflect W/H. If there is an indication that the dividend account is jointly owned with someone other than the taxpayer's spouse or the filing status is 3:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send PARAGRAPH 6 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

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

      Note:

      See IRM 4.19.3.4.3, Jointly Owned Income, for further instructions on joint ownership.

    3. See IRM 4.19.3.15.1, Withholding - General, for further instructions on W/H.

  7. A fully U/R Dividend IR with a payee EIN is considered self-employment income. Input an Income Identify Code to assess Self-Employment Tax. See IRM 4.19.3.14.1 (4) and (5), Self-Employment Tax and Exhibit 4.19.3-9, Income Identify Codes.

  8. Nominee dividends may be deducted provided the taxpayer first included this income on Schedule B, line 5.

  9. If dividends are U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.4.4  (12-22-2004)
Capital Gain Distributions - General

  1. Capital Gain Distributions are identified in the Case Analysis screen by the literal "99DIV" in the DOC TYPE field and "CG" - Capital Gain Distributions - Income Identify Code "SD" displays for Capital Gain Distributions in the INCOME TYPE field.

  2. The AUR system considers Capital Gain Distributions separately from Ordinary Dividends.

    Note:

    If Capital Gains are U/R and the tolerance for issuing a notice is met, screen all elements of the IR.

4.19.3.7.4.5  (09-01-2013)
Capital Gain Distributions - Analyzation

  1. Compare capital gain distributions amounts with entries on:

    1. Form 1040, line 13.

    2. Form 1040A, line 10.

    3. Schedule D, line 13, column (h).

    4. Form 8949, line 3, column (h). (The taxpayer may use an attachment in lieu of Form 8949)

    Note:

    Verify that the taxpayer has reported capital gain distributions on Schedule D, line 13, and that the proper amount was carried over to Form 1040, line 13, or if no Schedule D is present that the taxpayer reported the capital gain distributions directly on Form 1040, line 13, or Form 1040A, line 10.

    Note:

    When the taxpayer reports Capital Gain Distributions directly on Form 1040, line 13 (Form 1040A, line 10), the Schedule D/8814 window in Return Value MUST be accessed manually. See IRM 4.19.3.12.2 (1), Sch D/8814/ECR Tax Window.

  2. If the taxpayer provides a breakdown of capital gains (for example on an attachment), be sure that the amount was properly transferred to either Schedule D, line 13, column (h) or Form 1040, line 13 (or Form 1040A, line 10) before considering them reported. If not, then consider the amount U/R and send PARAGRAPH 3 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  3. If a breakdown of capital gain distributions is not shown on the return and there is more than one capital gain distribution IR:

    1. Group by income type CG.

      Note:

      The Group function is a tool to assist the TEs in computing the correct U/R amount. It may not be necessary to use the Group function if the correct U/R can be determined without it.

    2. Compare the group total amount to the amount reported on Schedule D, line 13, column (h) or if Schedule D is not attached, Form 1040, line 13, or Form 1040A, line 10.

    3. If the group total amount is smaller, assign Status Code "R" to the group.

    4. If the group total amount is larger than the amount reported, consider the difference U/R and assign Status Code "U" to the group.

      Note:

      If the reported dividend amount matches the sum of the ORDIV and CG on the IR(s), consider the capital gain distributions fully reported.

    5. If capital gains amount are U/R, send PARAGRAPH 64 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

      Exception:

      If the specific U/R amount matches an IR - PARAGRAPH 64 may not be appropriate.

  4. Compare the amounts reported on Schedule D, line 13, column (h) (or if no Schedule D is present, Form 1040, line 13) or Form 1040A, line 10 with the CG amounts from the 99DIV IRs. If the taxpayer reported a lesser amount, the difference is U/R.

  5. Capital Gain Dividends reported on Form 1099-DIV with a "S" or "P" in the TP field on the Case Analysis screen default with an Income Identify Code of "SD" for long term capital gain/loss belonging on Schedule D, Part II. If the TP field contains an "E" for EIN, the user MUST ENTER an Income Identify Code of "SD" .

  6. Change the Income Identify Code on partially U/R CG elements when you can determine from the taxpayer's reported amount that:

    1. The CG distributions do not belong on Schedule D. Input the appropriate Income Identify Code. (e.g., "PB" for the income to be treated as primary business subject to self-employment tax). See Exhibit 4.19.3-9, Income Identify Codes.

      Note:

      Capital gain distributions which have an Income Identify Code of "PB" , "PF" , "SB" , "SF" , or "CG" IRs with a payee EIN display on the Summary screen as Nonemployee Compensation. Send the taxpayer a Special Paragraph explaining that our CG income is shown on the notice as Nonemployee Compensation and is subject to self-employment tax.

    2. The Capital Gain distributions are determined to be a short term capital gain/loss belonging on Schedule D, Part I. Input an Income Identify Code of "ST" .

  7. Capital Gain IRs with Income Identify Codes of "SD" or "ST" are screened using the following procedures:

    1. Enter a Status Code of "U" on the CG element containing Income Identify Code of "SD" or "ST" .

    2. The Adjusted Gross Income window displays. Input/verify the fields.

    3. The COMPUTE SCHEDULE D LOSS window displays. Refer to IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - SCHEDULE D LOSS, to determine the correct field entries.

      Note:

      If there are U/R CG and the taxpayer reports a capital loss on Form 1040, line 13, enter a zero (0) in both fields on the COMPUTE SCHEDULE D LOSS window. It may be necessary to blank out both fields first. This will prevent the system from using losses in excess of $3,000 ($1,500 if MFS) to offset U/R Schedule D income. PARAGRAPH 24 automatically generates when CG are treated as ordinary income due to loss limitations.

    4. The cursor returns to the IR CD field of the IR where it was before the windows displayed. The field is blank.

      Note:

      The AGI and COMPUTE SCHEDULE D LOSS windows only display automatically when a Status Code of "U" is initially entered. It is not necessary to access these windows again unless the field entries need to be changed.

    5. Input a Status Code ("U" , "R" , or "N" ) and the reported amount, if applicable, for the CG elements containing Income Identify Code of "SD" or "ST" .

    6. The system uses the information on the COMPUTE SCHEDULE D LOSS window to determine the correct U/R amount of Schedule D income. The total U/R Schedule D income amount is included in the TOTAL AGI CHANGE field on the Case Analysis screen.

  8. If Capital Gain Distributions are U/R, enter the return amount from Schedule D, line 13 (Form 1040, line 13, if no Schedule D is attached, Form 1040A, line 10) in the RETURN field of the Summary Screen.

4.19.3.7.5  (09-01-2003)
State and Local Income Tax Refunds (SITR) - General

  1. State and local income tax refunds (SITR) are taxable in the year received if the taxpayer itemized deductions in the previous year and claimed a deduction for state and/or local income taxes that resulted in a tax benefit.

  2. The prior year filing status code is used in figuring the AUR year taxable SITR amount.

  3. SITR payments are reported on Form 1099-G, Certain Government Payments.

  4. State income tax refunds are identified on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "SITR" in the INCOME TYPE field.

4.19.3.7.5.1  (03-28-2011)
State and Local Income Tax Refunds (SITR) - Analyzation

  1. Taxpayers that pay Alternative Minimum Tax do not derive a benefit from SITR. The AUR program now identifies taxpayers who paid ALT MIN Tax in the prior year before considering SITR unreported. Therefore, only pursue system identified (i.e., asterisked) SITR discrepant IRs. If the case is open for other issues, mark the non-asterisked SITR IR(s) with status code "D" , "N" or "R" .

  2. State and local income tax refunds (SITR) are potentially U/R if there is no SITR amount on Form 1040, line 10.

  3. Input/verify the required amounts on the SITR window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - State and Local Income Tax Refunds.

    Note:

    An entry in the STATE/LOCAL W/H field is required only when the taxpayer has netted. See (13) below for additional information.

  4. PARAGRAPH 69 automatically generates when SITR is U/R.

  5. Form 1099-G IRs with reported SITR amounts for other than the prior tax year are deleted by the system. The literal "X" displays in the IR CODE field of the Case Analysis screen.

  6. When any of the following conditions are present, mark all SITR IRs (including those system identified as discrepant) with Status Code "D" , "N" , or "R" :

    1. SITR worksheets are attached to the return.

    2. The taxpayer indicates that there is no tax benefit due to Alternative Minimum Tax.

  7. The AUR system will not compute an U/R SITR if Form 1040, line 10 does not equal the total of the SITR IRs ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ If Form 1040, line 10 is zero (0) or blank, the AUR system computes the correct U/R SITR amount.

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. The taxpayer claimed itemized deductions for the prior AUR tax year, AND

    2. The prior year total itemized deductions are greater than his/her standard deduction, AND

    3. The prior year state/local tax deduction is less than (including zero) the SITR IR(s).

    4. Form 1040, line 10 does not equal the SITR IR(s).

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. If the system computed a SITR refund, the current year filing status code has changed from the prior year, and the PRIOR YEAR TOTAL ITEMIZED DED field on the SITR window is less than or equal to 0 (zero), the system displays the following message: "Warning: SITR refund. Prior Yr Sch A info needed, access RTVUE on IDRS."

    If And Then
    The current year filing status is "1" , "3" , or "4" and, the prior year filing status was equal to "2" or "5" It can be determined that the taxpayer's SSN in the prior year was a secondary SSN Research the Primary and Secondary SSNs using IDRS CC RTVUE
    The current year filing status is "2" or "5" The prior year filing status is "1" , "3" , or "4" Access IDRS CC RTVUE for each spouse that has a SITR IR

    Note:

    Mark the applicable SITR IR with status code "N" or "D" if the spouse did not claim state/local taxes on the prior year Schedule A.

    Caution:

    If spouse reported SITR on current year return and prior year filing status was 1, 3, or 4 and spouse did not itemize, enter amount of SITR reported as a miscellaneous deduction in the SCH C EXP/MISC Adjustment window, to refund amount. Send a Special Paragraph using the following verbiage as an example: "Since state and local taxes were not claimed as an itemized deduction on either your or your spouse's 2011 tax return, you are not required to report the refund for the spouse who did not itemize deductions. We have reduced the amount reported on line 10 of your return. This change is reflected on our notice as a miscellaneous adjustment."

    Verify that the PRIOR YEAR fields on the SITR window match RTVUE and correct if necessary.

  10. If the system computed a SITR refund and the current year filing status code has not changed from the prior year, the system displays the following message: "Warning: SITR refund."

    1. Access IDRS CC RTVUE.

    2. Verify that the PRIOR YEAR fields on the SITR window match RTVUE and correct if necessary.

  11. PARAGRAPH 16 automatically generates when SITR is O/R because the taxpayer did not claim itemized deductions for the prior AUR tax year.

  12. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  13. If the difference between the sum of state and local income tax withheld and the SITR IR(s) is equal to or greater than the taxpayer's current AUR tax year Schedule A, line 5 amount, this indicates the taxpayer netted.

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. If the taxpayer netted SITR, the system alerts the tax examiner to send an appropriate paragraph. If a notice is sent for any other issue, send PARAGRAPH 141 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  14. Do not refund apparent O/R SITR for taxpayers who are minors or who are claimed as a dependent on someone else's return. Delete the SITR IRs for minors and dependents claimed on someone else's return.

  15. If the taxpayer filed "married filing jointly" in the prior year, and filed "married filing separately" in the current AUR tax year and reported one-half of the SITR amount, consider the SITR fully reported.

  16. If SITR is U/R, enter the return amount in the RETURN field of the Summary screen.

4.19.3.7.6  (09-01-2003)
Nonemployee Compensation (NEC) - General

  1. Nonemployee compensation is fees, commissions, or any other compensation paid by a business to an individual who is not an employee.

  2. Nonemployee compensation is reported on Form 1099-MISC.

  3. Nonemployee compensation is identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "NEC" in the INCOME TYPE field.

4.19.3.7.6.1  (09-01-2013)
Nonemployee Compensation (NEC) - Analyzation

  1. Compare NEC amounts with entries on:

    1. Schedule C, Part 1.

    2. Schedule C-EZ, Part II.

    3. Schedule E, Part II - See IRM 4.19.3.7.6.1 (3), Nonemployee Compensation(NEC) - Analyzation.

    4. Schedule F, Part I or III.

    5. Form 4835 (Farm Rental Income and Expenses), Part I.

    Note:

    Consider NEC reported if it is included in a larger total for the applicable taxpayer on Schedule C, C-EZ, F or Form 4835, unless the IR is obviously not the same type of income.

  2. When comparing NEC IRs with entries on any line not specifically identified for NEC, the amount must match within $1 or be CLEARLY IDENTIFIED by payer name, activity or as NEC income:

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

    5. Schedule D, Part I, lines 1, 2 , or 3 column (d) or Part II, lines 8, 9 or 10, column (d).

    6. Form 8949, Part I, line 1 column (d) or Part II, line 3, column (d).

    7. Schedule E, Part I.

    8. Form 2106, (Employee Business Expenses) line 7 - Give credit when NEC IR is related to the occupation (or activity) shown on Form 2106. See (4) below.

    9. Form 4797 (Sales of Business Property), Parts I, II, or III.

    10. Form 6252 (Installment Sale Income), line 5 or line 21.

    11. Form 3903 (Moving Expenses), line 4.

    Note:

    The taxpayer may report the sale of timber, coal, easements, right-of-way (ROW), land damages, etc. on the designated lines for Schedule D, Form 8949 or Form 4797. Consider the NEC reported if the sales price matches the IR within $1.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. An amount on the return matches within $1. Also give credit for reported amounts identified as being from the same payer.

    2. The taxpayer is incorporated (payer name must include CORP, INC, LC, LLC, PA, SC, or PC) and pays wages to himself/herself (the name and/or address of the payer is similar to or matches the name and/or address of the taxpayer). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. The taxpayer appears to be a partner or shareholder as shown on Schedule E, Part II. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. The taxpayer is in the medical profession and has reported wages from a medical professional corporation (payer name must include CORP, INC, LC, LLC, PA, SC, PC, clinic or group) but not a hospital or medical center. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. The taxpayer is an employee of an institution and has ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. The taxpayer nets the amount for reimbursed expenses reported on Form 1099-MISC and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    7. Form 3115, Application for Change in Accounting Method, is attached and the taxpayer is an insurance agent, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  4. If Form 2106, column A, line 7 is greater than line 6, the taxpayer ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The U/R amount cannot exceed the amount on Form 2106, column A, line 8. To arrive at the amount to input in the RETURN field, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the payer is an oil, gas, or petroleum company:

    1. Consider the IR(s) reported if it is included (identified by payer or activity) in a larger total on Schedule C, C-EZ, or Schedule E, Part I.

    2. Depletion should NOT be deducted on Schedule C, Part II, or Schedule E, Part I, unless the business activity is related to a natural resource (e.g., oil, gas, mineral, timber).

    3. Consider the depletion amount U/R if that depletion was deducted from income that is clearly NEC (Schedule C, line 12, or Schedule E, line 20). To arrive at the amount to input in the SHOWN ON RETURN field, subtract the depletion amount from the IR amount(s).

    4. Consider the IR fully U/R if the depletion amount cannot be determined.

  6. Nonemployee Compensation may represent crop insurance proceeds, which are reported on Schedule F, line 6a or 6b, or Form 4835, line 5a or 5b. The taxpayer may elect to postpone the crop insurance proceeds to the year following the damage. If the NEC amount(s) appear to be this type of income, consider the amount reported if:

    1. The box on Schedule F, line 6c, or Form 4835, line 5c, is checked AND

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

  7. If an explanation is attached to the return indicating the fellowship, grant, or stipend was used for tuition, fees, books, supplies, and equipment required for the course, AND:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The taxpayer cannot deduct expenses that exceed the IR.

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

    3. The taxpayer excluded expenses not shown above, then pursue the unallowable expenses. Send PARAGRAPH 124 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  8. If the NEC IR is identifiable as fellowship/grant/stipend income, no explanation of tuition expenses is attached, and the IR is not fully reported, pursue the amount not reported. Send PARAGRAPH 124.

    Exception:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    DO NOT ASSESS SE tax on scholarship/stipend income.

  9. If the taxpayer reports NEC income on Form 1040 or Form 1040A, line 7 and attaches a Form 8919, Uncollected Social Security and Medicare Tax on Wages, to assess the employee share of FICA, the taxpayer is indicating that he/she is NOT LIABLE for SET on NEC because he/she is an employee. Unless an employment status determination has been rendered by the SS-8 group to identify if the taxpayer is an independent contractor or employee, SE Tax must be assessed. To ensure that credit is given for the tax paid on Form 8919:

    1. Do not change the Income Identify Code.

    2. Access the SE Tax window and input the amount of reported NEC in the PRI/SEC INCOME REPORTED FROM Form 8919 field.

      Note:

      DO NOT enter this amount in the "Reported SE Income not on Sch SE" field of the SE Tax window.

    3. If necessary, adjust the PRI/SEC SS/RR WAGES/TIPS field so it does not include the NEC amount from Form 8919.

    4. Enter the Primary/Secondary Form 8919 tax in the PRI/SEC TAX FROM Form 8919 field.

    5. Send PARAGRAPH 12 (See Exhibit 4.19.3-7, CP PARAGRAPHS). See IRM 4.19.3.20.3.23, Self-Employment Tax (SE Tax) vs. Employee Share of FICA.

  10. In order to ensure that the taxpayer is not assessed take the following actions in the Return Value screen:

    1. Enter the Form 8919 tax in the "OTHER MISCELLANEOUS TAXES PER RETURN" field of the "Total Other Taxes" window

    2. Enter zero in the "OTHER MISCELLANEOUS TAXES RECOMPUTED" field of the "Total Other Taxes" window

    3. Enter zero in the "UNCOLLECTED SS/MED TAX ON WAGES PER RETURN" field of the "Total Other Taxes" window

  11. If Form 4137, Social Security and Medicare Tax on Unreported Tip Income, is attached to the return:

    1. Do not change the Income Identify Code.

    2. Access the SST on TIPS window and correct the entries in the PRI/SEC ALLOCATED TIPS, UNREPORTED SS TIPS and/or MEDICARE-ONLY TIPS fields to reflect the actual amount of tip income received (use zero (0) or blank if no tip income was received).

      Reminder:

      Do not adjust the PRI/SEC UNREPORTED TIP TAX field.

    3. Access the SE Tax window and input the reported NEC amount in the PRI/SEC REPRTED SE INC NOT ON SCH SE field.

    4. If necessary, adjust the PRI/SEC SS/RR WAGES/TIPS field so it does not include the NEC amount from Form 4137.

      Reminder:

      Do not assess a tip tax penalty.

    5. Send PARAGRAPH 12 (See Exhibit 4.19.3-7, CP PARAGRAPHS). See IRM 4.19.3.20.3.23, Self-Employment Tax (SE Tax) vs. Employee Share of FICA.

  12. If taxpayers who are members of federally recognized Native American Tribes report Form 1099-MISC tribal-related income on Form 1040, Line 21, do not assess SE Tax if any of the following literals are provided:

    • INDIAN GAMING

    • INDIAN GAMING PROCEEDS

    • IGP

    • INDIAN TRIBAL DISTRIB

    • INDIAN TRIBAL INCOME

    • INDIAN TRIBAL FUND

    • INDIAN TRIBAL EARNINGS

    • NATIVE AMERICAN

    • NATIVE AMERICAN DISTRIB

    • IGE

    • ITI

    • ALASKA PERMANENT FUND

    • ALASKA PERMANENT FUND DIV

    • APF

    • APFD

4.19.3.7.6.2  (09-01-2013)
Nonemployee Compensation (NEC) - Miscellaneous

  1. If a NEC amount on a 1099-MISC IR is U/R, verify the Income Identify Code so the system computes SE Tax correctly. See Exhibit 4.19.3-9, Income Identify Codes.

  2. Underreported NEC is considered self-employment income (Income Identify Code is "PB" , "PF" , "SB" , or "SF" , as applicable) even if there is Form W-2 wage income from the same payer, unless the following applies:

    1. The NEC is partially or fully reported on Form 2106, Form 3903, Form 4835, Form 6252, Form 4797, Schedule D, Form 8949 or Schedule E, Part I. NEC reported on these forms is not subject to SE Tax or considered earned income (Income Identify Code is blank).

      Note:

      Excess reimbursements on Form 2106 must be reported on Form 1040 or Form 1040A, line 7, and are considered earned income. Input Income Identify Code "PE" or "SE"

    2. The taxpayer is a newspaper carrier or magazine seller and is under the age of 18, DO NOT assess SE tax.

    3. The taxpayer is exempt from SE Tax on the net earnings covered by an approved Form 4361 or Form 4029. If the taxpayer writes "Exempt Form 4361 or Form 4029" on Form 1040, line 56, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

      Although taxpayers may exclude Ministers Housing Allowance from NEC, it generally is subject to self-employment (SE) tax. Thus, there may be a difference between net Schedule C (or C-EZ) income and income subject to SE Tax due to the Ministers Housing Allowance.

    4. If the taxpayer indicates that an NEC amount is compensation for a "non-compete" agreement or they are a member of a federally recognized Native American Tribe, the NEC amount is not subject to SE tax. Leave the INCOME IDENTIFY CODE field blank.

    5. If the taxpayer indicates the compensation is for court awards/settlements, See IRM 4.19.3.7.18.2 (1), Other Income Miscellaneous.

  3. If there is reported NEC on which the taxpayer should have paid SE Tax but did not, SE Tax must be computed or recomputed if NEC is asterisked or a CP 2000 is sent for another issue(s). Include the reported NEC amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported NEC IR elements on the notice when adjusting SE tax.

    Caution:

    If the NEC amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  4. If the taxpayer reports NEC income, but indicates he/she worked as an employee and

    1. Paid the employee percentage of FICA (5.65%), follow the instructions in IRM 4.19.3.7.6.1 (9) and/or (11) , Nonemployee Compensation (NEC) - Analyzation.

    2. Did not pay the employee percentage of FICA (5.65%), charge the appropriate amount of SE Tax.

    3. The NEC IR is partially reported on Form 4137 or Form 8919and SS/Medicare tax is paid on the reported amount instead of SE tax, treat the U/R NEC from the partially reported IR as subject to SE Tax and follow the instructions in IRM 4.19.3.7.6.1 (9) and/or (11), Nonemployee Compensation (NEC) - Analyzation.

    4. Send PARAGRAPH 12 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  5. If the taxpayer reports NEC income AND attaches a Form 4137, follow the instructions in IRM 4.19.3.7.6.1 (11), Nonemployee Compensation (NEC) - Analyzation.

  6. If the taxpayer reports NEC income AND attaches a Form 8919, follow the instructions in IRM 4.19.3.7.6.1 (9), Nonemployee Compensation (NEC) - Analyzation.

  7. 1099-MISC IRs may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  8. If there are two or more fully U/R NEC IRs with an out-of-state payee address beyond the reasonable commuting area for the taxpayer (for example, taxpayer lives in Pennsylvania and U/R IRs are for Georgia, etc.), send PARAGRAPH 167 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  9. If the taxpayer participates in a nonqualified deferred compensation plan that does not meet all requirements as specified in IRC 409A, (appears with the literal 409AI on the IR) the payer must report the deferred compensation as income and the amount is subject to an additional tax.

    1. The payer identifies income under IRC 409A on Form 1099-MISC in box 15b.

      Note:

      The amount in Form 1099-MISC box 15b is already included in box 7 (NEC). If NEC is U/R and the difference corresponds to the 409AI amount, pursue the discrepancy as NEC and include a Special Paragraph using the following verbiage as an example: "Income recognized due to participation in a nonqualified deferred compensation plan that did not meet the requirements of Internal Revenue Code Section 409A is considered taxable. You cannot reduce your wages or nonemployee compensation by this amount."

    2. Income subject to IRC 409A regulations is identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "409AI" in the INCOME TYPE field.

      Note:

      Enter Status Code "R" on the "409AI" element(s).

    3. The "409AI" amount is subject to an additional tax. See IRM 4.19.3.14.7, Additional Taxes on Income from Nonqualified Deferred Compensation Plan (IRC Section 409A), for further instructions.

      Reminder:

      Mark the 409AI IR element(s) with Send Indicator "S" when adjusting the additional tax.

  10. If NEC is U/R, enter the GROSS return amount in the RETURN field on the Summary screen.

4.19.3.7.7  (09-01-2012)
Merchant Card and Third Party Network Payments - General

  1. Merchant Card and Third Party Network Payments are payments the taxpayer accepted from merchant cards (credit and debit cards), or received through a third party network (PayPal, Google checkout, etc).

  2. Merchant Card and Third Party Network Payments are reported on Form 1099-K.

  3. Merchant Card and Third Party Network Payments are identified on the Case Analysis screen by the literal "1099K" in the DOC TYPE field and the literal "MERCH" in the INCOME TYPE field.

4.19.3.7.7.1  (09-01-2013)
Merchant Card and Third Party Network Payments - Analyzation

  1. Compare MERCH amounts with entries on:

    1. Schedule C, Part I, line 1.

    2. Schedule C-EZ, Part II, line 1.

    3. Schedule F

    Note:

    Consider MERCH reported if it is included in a larger total for the applicable taxpayer on Schedule C, C-EZ, or F, unless the IR is obviously not the same type of income.

  2. When comparing MERCH IRs with entries on any line not specifically identified for MERCH, the amount must match within $1 or be CLEARLY IDENTIFIED by payer name, activity or as MERCH income:

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

    5. Schedule D, Part I, lines 1, 2 , or 3 column (d) or Part II, lines 8, 9 or 10, column (d)

    6. Schedule E, Part I.

    7. Form 8949, Part I, line 1 column (d) or Part II, line 3, column (d).

    8. Form 4797 (Sales of Business Property), Parts I, II, or III.

    Note:

    The taxpayer may report the sale of timber, coal, easements, right-of-way (ROW), land damages, etc. on the designated lines for Schedule D, Form 8949 or Form 4797. Consider the MERCH reported if the sales price matches the IR within $1.

4.19.3.7.7.2  (09-01-2013)
Merchant Card and Third Party Network Payments - Miscellaneous

  1. If a MERCH amount on a 1099-K IR is U/R, verify the Income Identify Code so the system computes SE Tax correctly. See Exhibit 4.19.3-9, Income Identify Codes.

  2. Underreported MERCH can be considered self-employment income (Income Identify Code is "PB" , "PF" , "SB" , or "SF" , as applicable) even if there is Form W-2 wage income from the same payer.

    Note:

    If MERCH is not subject to SE Tax (MERCH reported on Schedule E) remove the income identify code and leave the field blank.

  3. If there is reported MERCH on which the taxpayer should have paid SE Tax but did not, SE Tax must be computed or recomputed if MERCH is asterisked or a CP 2000 is sent for another issue(s). Include the reported MERCH amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported MERCH IR elements on the notice when adjusting SE tax.

    Caution:

    If the MERCH amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  4. PARAGRAPH 109 automatically generates when the MERCH IR is identified as U/R or used to create a group. If MERCH is not used to create a group, send PARAGRAPH 109.

  5. If MERCH is U/R, enter the GROSS return amount in the RETURN field on the Summary screen.

4.19.3.7.8  (09-01-2003)
Medical Payments - General

  1. Medical payments are compensation paid to doctors, dentists, and other in the medical profession (e.g., Nurse Practitioner, Midwife, Chiropractor, Doctor of Osteopathy, Veterinarian, Podiatrist, etc.)

  2. Medical payments are reported on Form 1099-MISC.

  3. Medical payments are identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "MED" in the INCOME TYPE field.

4.19.3.7.8.1  (09-01-2012)
Medical Payments - Analyzation

  1. Compare MED amounts with entries on:

    1. Schedule C, Part I, or Schedule C-EZ, if it appears to be for a medical practice.

    2. Schedule E, Part II, if it appears to be related to the medical profession.

  2. MED comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as MED payments:

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. Reported wages from a medical professional corporation (payer name must include CORP, INC, LC, LLC, PA, SC, PC, clinic, or group), but not a hospital or medical center or

    2. Is incorporated (payer name must include CORP, INC, LC, LLC, PA, SC or PC) and pays wages to himself/herself (the name and/or address of the payer is similar to or matches the name and/or address of the taxpayer).

      Note:

      If there are no wage IRs displayed on the Case Analysis screen, review the Form W-2 attached to the return.

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ or

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

      Caution:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.8.2  (09-01-2013)
Medical Payments Miscellaneous

  1. If MED payments are U/R and the taxpayer's occupation and/or the payer name on the 1099-MISC IR(s) is NOT related to the medical field, the income may be sick pay or disability payments. Form 1099-MISC are sometimes incorrectly used to report sick pay or disability payments.

    1. Do not consider the U/R MED amount(s) as self-employment income.

    2. Delete the Income Identify Code(s).

  2. If MED payments are U/R and the taxpayer is in the medical profession, treat U/R MED payments as self-employment income. See IRM 4.19.3.14.1, Self-Employment Tax.

  3. If there is reported MED on which the taxpayer should have paid SE Tax but did not, SE Tax must be computed or recomputed, if MED or SE Tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported MED amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported MED IR elements on the notice when adjusting SE tax.

    Caution:

    If the MED amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  4. IRs with MED amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  5. If MED payments are U/R, enter the GROSS return amount in the RETURN field on the Summary screen.

4.19.3.7.9  (09-01-2003)
Fishing Income - General

  1. Fishing income is earned by fishing boat crew members.

  2. Fishing income is reported on Form 1099-MISC.

  3. Fishing income is identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "FISH" in the INCOME TYPE field.

4.19.3.7.9.1  (09-01-2004)
Fishing Income - Analyzation

  1. When comparing FISH amounts with the following entries, the amount must match within $1 or be CLEARLY identified by payer name, activity or as fish income:

    1. Schedule C, Part I (or C-EZ).

    2. Schedule E, Part I.

    3. Schedule E, Part II.

    4. Form 1040, line 21.

4.19.3.7.9.2  (09-01-2013)
Fishing Income Miscellaneous

  1. If a FISH amount on a 1099-MISC IR is U/R, verify the Income Identify Code so the system computes self-employment tax correctly. Valid Income Identify Codes are "PB" , "PF" , "SB" , or "SF" , as applicable. See Exhibit 4.19.3-9, Income Identify Codes.

  2. If there is fishing income reported on which the taxpayer should have paid SE Tax but did not, SE Tax must be computed or recomputed if FISH or SE Tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported FISH amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported FISH IR elements on the notice when adjusting SE tax.

    Caution:

    If the FISH amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  3. Form 1099-MISC IRs with FISH amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  4. If fishing income is U/R, enter the GROSS return amount in the RETURN field on the Summary screen.

4.19.3.7.10  (01-23-2004)
Retirement Plans

  1. Form 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is used to report retirement plan income amounts.

  2. Retirement plans include pensions and annuities, profit-sharing and stock bonus plans, individual retirement accounts (IRAs), employee savings plans, etc. Distributions from retirement plans are not always fully taxable.

  3. Form 1040 includes separate lines 15a and/or 15b and Form 1040A, lines 11a and/or 11b, for taxpayers to report distributions from IRA accounts. Other pension and annuity payments (including non-IRA distributions that are periodic payments or lump-sum distributions not entitled to special tax treatment on Form 4972, Tax on Lump-Sum Distributions) are reported on Form 1040, lines 16a and/or 16b, or Form 1040A, lines 12a and/or 12b.

    Caution:

    When distributions for Traditional or Roth IRAs, 401(k), 403(b), governmental 457, 501(c)(18)(D), SEP or SIMPLE plans, or qualified retirement plans as defined in section 4974(c) (including Federal Thrift Savings Plan) are determined to be U/R, check for Form 8880, Credit for Qualified Retirement Savings Contribution, and adjust as appropriate. See IRM 4.19.3.13.6, Qualified Retirement Savings Contributions Credit, (QRSC), for more information.

4.19.3.7.10.1  (09-01-2004)
Form 1099-R Information Returns

  1. Form 1099-Rs may display the following literals:

    • "GR/A" - Gross amount

    • "TX/A" - Taxable amount

    • "ECG" - Eligible Capital Gains

      Note:

      Payers must include the capital gain distribution amount in the gross and taxable distribution amount boxes on Form 1099-R.

    • "UNRAP" - Unrealized Appreciation

    • "EMCON" - Employee Contributions from Box 5 of Form 1099-R

      Note:

      "UNRAP" and "EMCON" amounts are system deleted.

  2. A Category of Distribution (COD) code displays in the IND field on the Case Analysis screen and on the Information Return window for Form 1099-R IR(s). The COD contains up to two indicators. For the meaning of each individual indicator, See Exhibit 4.19.3-6, Category of Distribution (COD) Chart - Form 1099-R.

    Note:

    There should be one indicator present in the COD field; however, two indicators may display. Generally two indicators display as an alpha/numeric combination. Consider each indicator individually.

    Example:

    COD "7A" is read as COD 7 (normal distribution) and COD A (qualifies for 10 year tax option on Form 4972). Zero (0) has no meaning and is considered a blank space. The only valid numeric/numeric COD combinations are: 8 and 1, 8 and 2, or 8 and 4. If the 1099-R IR contains any other numeric/numeric combination (e.g., 14) disregard the second indicator.

  3. Consider the indicators on any attached Form 1099-R, Box 7 the most accurate information available. If attached documents indicate that the displayed COD is incorrect and the COD code is "J" , "L" , "S" , "1" , "5" , or "7" (MUST BE COD 7 WITH A PGR INDICATOR OF 1), modify the IR to show the correct COD code.

  4. Use COD codes to compare Form 1099-R IR amounts with the proper placement on the tax return.

  5. The following hint text displays on all 1099-R IRs:

    • TOTAL DIST IND

    • TAX AMT NOT DET

    Note:

    A "1" indicates the applicable box(es) was checked on the IR. A "blank" indicates the applicable box was not checked.

  6. Payers report lump-sum credit distributions to Civil Service annuitants on Form 1099-R. The gross credit amount is included with the total of any periodic payments made. The taxpayer must compute and report the taxable credit amount on Form 1040, line 16b.

  7. The taxpayer may erroneously treat 1099-R income as Social Security/Railroad Retirement Benefits, reporting the amount on Form 1040, line 20a and 20b or Form 1040A, line 14a and 14b. See IRM 4.19.3.7.10.5 (5), Railroad Retirement Board (RRB) IRs, for more information.

  8. Taxpayers make donations of cash and/or other assets (generally stocks) to nonprofit organizations and receive an annuity from the nonprofit organizations from their donations. These annuities are partly capital gains from the taxpayer's donated assets as well as annuities. Nonprofit organizations report these capital gains and annuities on Form 1099-R; COD "F" in Box 7 indicates charitable gift annuities and may contain ECG amounts. See IRM 4.19.3.7.10.8, Lump-Sum Distributions, for further instructions.

4.19.3.7.10.2  (09-01-2013)
Identifying Retirement Types

  1. The following references are for specific retirement types and MUST be used in conjunction with the general instructions in IRM 4.19.3.7.10.3, Retirement-Analyzation, and IRM 4.19.3.7.10.4, Rollovers.

  2. See IRM 4.19.3.7.10.5, Railroad Retirement Board (RRB) IRs, when:

    1. Form 1099-R is attached or the IR indicates the payment is from the Railroad Retirement Board.

    2. Form 1099-R shows Taxable Contributory Amount, Taxable Vested Dual Benefit, and/or Taxable Supplemental Annuity.

  3. See IRM 4.19.3.7.10.6, Pensions and Annuities, when:

    1. Form 1099-R is attached and indicates pension/annuity.

    2. Taxpayer reported the distribution on Form 1040, line 16a and/or 16b, Form 1040A, line 12a and/or 12b.

    3. Taxpayer attached a written statement which identifies the income as pension or annuity.

    4. Taxpayer indicates "PSO" next to Form 1040, line 16a/b (or Form 1040A, line 12a/b).

  4. See IRM 4.19.3.7.10.7, IRA Distributions, when:

    1. Form 1099-R is attached and an IRA/SEP distribution is indicated in Box 7.

    2. Taxpayer reported the distribution on Form 1040, line 15a and/or 15b, Form 1040A, line 11a and/or 11b.

    3. Form 1099-R or the IR shows "IRA" in the payer or payee name lines.

    4. Taxpayer attached a written statement identifying income as IRA.

    5. PGR Indicator of "1" is displayed.

    6. The GR/A and TX/A amounts are the same and the payer indicates the taxable amount has not been determined.

    7. Taxpayer indicates "QCD" next to Form 1040, line 15a/b (or Form 1040A, line 11a/b).

    8. Taxpayer indicates "HFD" next to Form 1040, line 15a/b (or Form 1040A, line 11a/b).

    9. COD J is present.

  5. See IRM 4.19.3.7.10.8, Lump-Sum Distributions, when:

    1. Form 1099-R or IR shows COD code "A" .

    2. The IR contains ECG amounts.

  6. See IRM 4.19.3.7.10.9, Employee Savings Plans, when:

    1. The payer name contains the terms "savings plan" , "thrift plan" , "incentive plan" , "profit sharing plan" , "ESOP" , "TRAYSOP" , "PAYSOP" , etc., or

    2. The payer name on the 1099-R IR is similar to the employer's name as shown on the WAGE IR or Form W-2.

4.19.3.7.10.3  (09-01-2013)
Retirement - Analyzation

  1. These are general instructions and MUST be used in conjunction with the instructions for specific retirement types.

  2. Compare retirement plan IRs with entries on:

    Caution:

    If Form 8606 is attached, see IRM 4.19.3.7.10.7 (5) - (8), IRA Distributions, before determining the U/R amount.

    1. Form 1040, line 7, 15a, 15b, 16a, 16b, or 21.

    2. Form 1040A, line 7, 11a, 11b, 12a, or 12b.

    3. Form 1040EZ, line 1.

    4. Form 4972. (If the taxpayer was a teacher, see IRM 4.19.3.7.10.8 (11) c, Lump-Sum Distributions.

    5. Schedule D, see (3) below.

    6. Attachments to Form 1040.

    7. Schedule B - If reported here, also analyze INT or DIV, as applicable.

  3. If the taxpayer included ordinary retirement income as Capital Gains on Schedule D, compare the amount reported, if identified as the same payer, with the IR and take the following action:

    1. If the amount reported, column (h), is equal or greater than the IR amount, consider the income reported.

    2. If the amount reported, column (h), is less than the IR amount, consider the difference U/R.

      Exception:

      If after removing retirement income from Schedule D, the Schedule D remains a loss, consider retirement income fully U/R.

  4. If the taxpayer included ordinary retirement income as Capital Gains on Schedule D and claimed a loss, consider the retirement income fully U/R and consider the loss as overclaimed up to $3,000 ($1,500 if MFS).

    Caution:

    Only recapture the losses related to the retirement income.

    Note:

    If reported on Schedule D, Part II, subtract the retirement income from the LONG TERM GAIN/(LOSS) field in the Sch D/8814/ECR Tax window, if necessary and send PARAGRAPH 134 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    Note:

    If there is U/R retirement reported on Schedule D and the taxpayer reports a capital loss on Form 1040, line 13, enter a zero (0) in both fields on the COMPUTE SCHEDULE D LOSS window. It may be necessary to blank out both fields first. This will prevent the system from using losses in excess of $3,000 ($1,500 if MFS) to offset U/R Schedule D income.

  5. Accurate analysis of retirement plan IRs depend on whether the payer of reported Form 1099-R income is identifiable. The payer is identified if the taxpayer has:

    • Attached Form 1099-R

    • Written a statement

    • Annotated the return

    • Claimed the W/H on a Form 1099-R IR

    • Reported an amount within $1

  6. Do not pursue Form 1099-R IRs with COD codes of :

    Note:

    The system will delete (mark with "X" ) all components of the Form 1099-R IR

    • 6

    • G

    • H

    • N

    • P

    • Q

    • R

    • T

    • W

    Caution:

    When a 5498 ROLVR IR matches the amount on a deleted 1099-R IR ≡ ≡ ≡ ≡ ≡ ≡ , do not use that ROLVR amount for any other IR. See IRM 4.19.3.7.10.4 (3), Rollovers

    Exception:

    If the Form 1099-R is from Railroad Retirement, and has a COD "N" , pursue the IR if not reported.

  7. The Office of Personnel Management (OPM) is the payer of a Civil Service Annuity.

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , unless Form 1040, line 16b or Form 1040A, line 12b is zero or blank.

    2. If Form 1040, line 16b or Form 1040A, line 12b is blank or zero, pursue the "GR/A" .

      Note:

      If case is an ELF, the zero literal will not appear.

  8. If there is an indication the Form 1099-R income is a military retirement distribution, see IRM 4.19.3.7.10.6.1, Military Pensions.

  9. If there is an indication that a pension from a Form 1099-R IR is a disability pension, input an Income Identify Code of "PE" or "SE" , as applicable. Disability pensions (COD "3" ) are considered earned income.

  10. If there is an indication that the distribution is a Qualified Charitable Distribution (QCD), see IRM 4.19.3.7.10.7 (3), IRA Distributions.

  11. When both "GR/A" and "TX/A" amounts are present on the same Form 1099-R IR, the system automatically assigns Status Code "X" to the "GR/A" amount. Change the Status Code if necessary.

  12. If the IR or Form 1099-R attached displays only the "GR/A" literal, pursue the GROSS distribution amount when the taxpayer does not include the distribution on the return.

    Exception:

    If COD J is present, see IRM 4.19.3.7.10.7 (8), IRA Distributions.

  13. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ if the taxpayer discloses an amount, including zero (0) or reports a lesser amount as calculated on Form 8606 or similar worksheet.

    Note:

    If the taxpayer reports an amount less than "GR/A" amount and the distribution code indicates the 10% premature distribution tax should be assessed, modify the IR to calculate the correct amount of the additional tax. See IRM 4.19.3.14.3 (8), 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for additional information.

  14. If the IR or Form 1099-R attached displays only the "TX/A" literal, pursue the TAXABLE distribution amount ONLY.

  15. If a "TX/A" amount is present and the payer indicates the "taxable amount has not been determined" , accept what the taxpayer reports if the taxpayer reports a lesser taxable amount, as calculated on an attached Form 8606, Nondeductible IRAs, or similar worksheet.

    Note:

    If the IR contains both taxable amount not determined and total distribution or the taxpayer writes "rollover" or provides another statement that the distribution was rolled over, see IRM 4.19.3.7.10.4, Rollovers.

  16. If there are multiple Form 1099-R IRs from the same payer, compare the total gross IR amount to the total amount reported by the taxpayer. If the gross amount is not present, use the taxable amount.

  17. Compare the IR amount(s) to the return amount (Form 1040, lines 15a, 15b, 16a, 16b; Form 1040A, lines 11a, 11b, 12a, or 12b).

    If the return amount is Then
    Equal or greater than the IR amount(s) Consider the income reported unless identified as a different payer.
    Less than the IR amount(s)

    Note:

    If the taxpayer indicates that the simplified general rule was used, consider the IR(s) reported.

    Consider the difference U/R if the reported income is identified as the same payer.
    Less than the IR amount(s) AND the reported income is unidentified or identified as a different payer

    Note:

    See IRM 4.19.3.7.10.2, Identifying Retirement Types, for additional information regarding identification of retirement plan IRs.

    Consider the income fully U/R.

  18. Consider Form 1099-R IRs reported when the return indicates that the U/R amount is due to employee contributions AND:

    1. Form 1099-R or similar documentation is attached, and the Box 5 amount matches the U/R amount within $1 or

    2. The Form 1099-R IR contains INCOME TYPE "EMCON" and the amount matches the U/R amount within $1.

4.19.3.7.10.4  (09-01-2010)
Rollovers

  1. The Payee/Payer name line on a Form 1099-R IR may contain the word "rollover" with the date the taxpayer transferred funds into the new plan. Consider the 1099-R IR valid and pursue any U/R income.

  2. Inherited distributions (usually COD "4" ) may be rolled over by a non-spouse beneficiary, in a direct trustee to trustee transfer to an account that was set up to receive the distribution.

  3. A Form 1099-R IR with COD "3" , "5" , "8" , "E" "L" or "U" cannot be rolled over. If a Form 5498, IRA Contribution Information, IR with either ROLV or FMV is present that matches the 1099-R IR ≡ ≡ ≡ ≡ ≡ ≡ ≡ with COD "3" , "5" , "8" , "E" , "L" or "U" , consider the IR reported (payer used the incorrect code) and allow the rollover. When pursuing the issue, PARAGRAPH 34 generates for COD "L" .

  4. Payers may erroneously report rollover contributions in Box 5 (FMV) of Form 5498 instead of Box 2 (ROLVR).

    If Then
    A Form 5498 IR is present with the literal ROLVR ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Consider the income to be rolled over.
    A Form 5498 IR is present with the literal FMV ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ AND FMV is the only element on the IR, Consider the income to be rolled over.
    A Form 5498 IR is present with the literal FMV ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ AND the IR contains other elements, Consider the 1099-R distribution U/R.
    No Form 5498 IR is present with the literals ROLVR or FMV ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (refer to the first and second conditions above), Consider the 1099-R distribution U/R.

    Note:

    It is not necessary to verify Form(s) 5498 attached to the return. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. When a distribution contains a TX/A amount and W/H, the TP receives a net amount (GR/A minus W/H). In order for a distribution to be considered fully rolled over (i.e., tax free), the TP MUST rollover the entire TX/A amount by supplementing the amount withheld with additional monies from another source. Adjust the W/H, if necessary. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

    If AND Then
    The net amount (GR/A minus W/H) is greater than or equal to the TX/A amount on the IR There is an indication of a rollover (per (4) above) Consider the issue resolved
    The GR/A and the TX/A amount on the IR are the same The GR/A is reported on line 15a or 16a and the difference between the IR and the Form 5498 equals the W/H amount and there is no indication that the TP supplemented the rollover amount to account for the W/H and the amount reported on line 15b or 16b does not match the W/H on the IR Consider the difference between the W/H on the IR and the TX/A amount reported as U/R. Send PARAGRAPH 49 (See Exhibit 4.19.3-7, CP PARAGRAPHS) when pursuing the W/H as U/R TX/A from the same IR.
    The GR/A and the TX/A amount on the IR are the same The GR/A is reported (line 15a or 16a) and the difference between the IR and the 5498 does not equal the W/H amount Consider IR fully U/R
    The GR/A and the TX/A amount on the IR are different The GR/A is reported (line 15a or 16a) and the amount on line 15b or 16b does not equal the 5498 ≡ ≡ ≡ ≡ ≡ Consider IR fully U/R

    Note:

    For the conditions listed in the table above, adjust the W/H, as necessary. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

    Note:

    You may need to modify partially rolled over IRs. See IRM 4.19.3.14.3 (11) c, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for additional instruction.

  6. Taxpayers may partially rollover retirement plans reported on Form 1099-R. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ the following apply:

    1. the taxpayer enters the "GR/A" amount on the gross return lines,

    2. a lesser amount on the corresponding taxable line,

    3. a Form 5498 IR is present with the literal "ROLVR" or "FMV" in the INCOME TYPE field AND

    4. has an amount that ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    You may need to modify partially rolled over IRs. See IRM 4.19.3.14.3 (11) c, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for additional instruction.

  7. If a Form 5498 IR with either "ROLVR" or "FMV" is not present to substantiate the rollover (see (6) above), consider the Form 1099-R distribution partially U/R when the taxpayer enters the GR/A amount on the gross return lines, reports a lesser amount on the corresponding taxable return lines.

4.19.3.7.10.5  (09-01-2013)
Railroad Retirement Board (RRB) IRs

  1. Pensions and annuities are reported from the RRB on Form RRB-1099-R.

  2. The RRB files a separate Form RRB-1099-R for each of the following amounts and each of these amounts displays as separate IRs for each taxpayer:

    • Employee Contributions (Box 3)

    • Contributory Amount Paid (Box 4)

    • Vested Dual Benefit (Box 5)

    • Supplemental Annuity (Box 6)

    • Total Gross Paid (Box 7)

    • Prior Year Repayments (Box 8)

  3. The following list contains the symbols and definitions for CODs, positions 1 and 2, for RRB-1099-R documents:

    • "V" - RRB-Vested Dual Benefit - Box 5 - Windfall, fully taxable

    • "X" - RRB-Tier 1

    • "Z" - RRB-Supplemental - Box 6 - Gross amount of supplemental benefits paid

    • "Y" - RRB-Tier 2

  4. Railroad Retirement Board pension income is reported as GR/A on a separate Form RRB-1099-R IR showing COD "X" , "V" , "Z" or "Y" . Group these RRB-1099-R IRs together to determine the total taxable amount. Unless the taxpayer indicates that the simplified general rule was used, the GR/A is considered fully taxable. Compare the total to the amount reported on Form 1040, line 16b or Form 1040A, line 12b. Consider the difference U/R.

    Note:

    If the taxpayer indicates that the simplified general rule was used to reduce the "GR/A" amount(s), consider the IR(s) reported.

  5. The taxpayer may erroneously treat the RRB-1099-R income as Social Security/Railroad Retirement Benefits, reporting the amount on Form 1040, lines 20a and 20b, or Form 1040A, lines 14a and 14b. In this situation, consider the IR(s) fully underreported.

    1. When calculating the taxable SS/RR in the SSA/RRB window, reduce the gross benefits indicated on line 20a (or line 14a on Form 1040A) by the RRB-1099-R amount (create an SS/RR IR for zero, if appropriate).

    2. In the TAXABLE BENEFITS field, enter the amount indicated on line 20b (or line 14b on Form 1040A). This results in a recalculation of taxable SS/RR (often resulting in an overall decrease).

    3. Send PARAGRAPH 131 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

4.19.3.7.10.6  (09-01-2013)
Pensions and Annuities

  1. A pension is generally a series of payments made after retirement for past services with an employer. An annuity is a series of payments under a contract purchased by the taxpayer alone or with the help of an employer. Annuity payments are made regularly for more than one full year.

  2. Total distributions are indicated on either the IR, Form 1099-R with the appropriate box checked, or an attachment to the return.

  3. If the Form 1099-R IR or an attachment shows the income is for support of a minor child:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ when the attached Form 1099-R does not provide a breakdown.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ when the attached Form 1099-R provides a breakdown and the taxpayer reports his/her designated portion.

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ when the attached Form 1099-R provides a breakdown and the taxpayer reports none of the income or less than his/her portion.

  4. If a U/R Form 1099-R IR shows a city, county, or state as the payer and the taxpayer indicated "disabled fireman" or "disabled policeman" on the return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ if the taxpayer is under age 65.

    Note:

    If the TP attaches a copy of a Private Letter Ruling from the IRS to a pension plan administrator indicating that the payments are non-taxable for life, accept the statement and do not pursue regardless of age.

  5. Generally taxpayers must include as income amounts received from personal injury or sickness through an accident or health plan that is paid for by the employer. Pursue any Form 1099-R IRs unless the taxpayer provides a statement and/or documentation that the income is excludable. The taxpayer may provide any of the following (this list is not all inclusive):

    1. Statement that the distribution is excludable under IRC 104 (i.e., line of duty injury).

    2. The disability pension was never converted to a normal pension based on age or length of service.

    3. A Private Letter Ruling from the IRS to a pension plan administrator that the payments are non-taxable for life.

    4. Statement/Documentation from the payer that the income is nontaxable.

    5. Distribution is payment(s) for disability due to injuries received from a terrorist attack or military action. See IRM 4.19.3.7.10.6.1, Military Pensions, for further information on military retirement distributions.

    6. Eligible retired public safety officers (PSO) can elect to exclude a maximum of $3,000 from distributions made directly from a governmental retirement plan to providers of accidental, health, or long-term care insurance. See (6) below.

  6. 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 a maximum of $3,000 from income distributions made from an eligible governmental retirement plan that are used to pay the premiums for accident, health or long-term care insurance. Allow the exclusion if the taxpayer 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.

    Note:

    If it can be determined that the taxpayer is a retired public safety officer who has taken this exclusion, but the literal "PSO" is missing, allow the exclusion up to a maximum of $3,000

    .

  7. Retired ministers are allowed to reduce taxable pension amounts by their housing allowance. Accept the amount reported by the taxpayer if there is an indication that part of the pension is a housing allowance.

4.19.3.7.10.6.1  (09-01-2010)
Military Pensions

  1. Military retirement is funded solely by the United States Government and is administrated by the Defense Finance and Accounting Service Center (DFAS).

    1. Form 1099-R distributions from the DFAS are generally fully taxable.

    2. DFAS retiree payments are distributed on a periodic (monthly) basis and therefore cannot be rolled over.

    3. If the taxpayer reports less than the TX/A amount, pursue the difference and send PARAGRAPH 155 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    Exception:

    If the taxpayer reports a lesser amount and provides a statement from the Veteran’s Administration (VA) awarding disability compensation, confirm that the taxpayer took the correct reduction. Pursue any inconsistencies and send a Special Paragraph to the taxpayer.

  2. Taxpayers who receive favorable disability determinations from the Veteran’s Administration (VA) may be able to reduce the TX/A amount by the amount withheld as determined by the VA. The VA notifies the taxpayer of the percentage awarded and provides a breakdown, including:

    • total amount awarded

    • amount withheld

    • monthly entitlement and

    • payment start date(s)

  3. In order to determine the allowable reduction in the Form 1099-R DFAS retirement distribution (based on the VA disability determination), apply the following formula: multiply the "amount withheld" by the number of months from the "payment start date" to the next "payment start date" .

    Example:

    Total Award Amount Amount Withheld Monthly Entitlement Amount Payment Start Date
    $1,000 $450 $550 March 1, 2012
    $1,000 $0 $1,000 Nov. 1, 2012

    Payment start date of 03/01/12 to next payment start date of 11/01/12 is 8 months x $450 (amount withheld) = $3,600. The taxpayer would be allowed to reduce the Form 1099-R TX/A amount by $3,600.

    Note:

    Occasionally, the amount withheld and monthly award changes over a period of months. When a retroactive award crosses over from a previous year, only consider the AUR tax year in the calculation.

    Example:

    Total Award Amount Amount Withheld Monthly Entitlement Amount Payment Start Date
    $800 $250 $550 Sept. 1, 2011 (prior year)
    $840 $260 $580 Apr. 1, 2012
    $840 $0 $840 Oct. 1, 2012

    Since the first payment start date is in a prior year, use 01/01/12 as the first payment start date. Payment start date of 01/01/12 to next payment start date of 04/01/12 is 3 months x $250 (amount withheld) = $750. From the 04/01/12 payment start date to the next payment start date of 10/01/12 is 6 months x $260 = $1,560. The taxpayer’s total allowable reduction is $2,310 ($750 + $1,560).

4.19.3.7.10.7  (09-01-2013)
IRA Distributions

  1. Traditional Individual Retirement Arrangements (IRA), Simplified Employee Pensions (SEP), Roth IRAs, and SIMPLE IRAs are tax-favored means of saving for retirement.

  2. The following literals may display:

    1. RCONV (Roth Conversions)

    2. RCONT (Roth IRA contribution). If this amount matches the IRA deduction on the return, pursue the issue since Roth IRA contributions are not deductible. PARAGRAPH 30 automatically generates.

  3. Certain taxpayers can make a nontaxable qualified charitable distribution (QCD) from their IRA (traditional or ROTH). Taxpayers indicate that a distribution is a Qualified Charitable Distribution by entering "QCD" next to Form 1040, line 15a/b or Form 1040A, line 11a/b. Consider the Form 1099-R IR(s) resolved when "QCD" is shown next to Form 1040, line 15a/b (or Form 1040A, line 11a/b) AND:

    1. The taxpayer’s age, as shown on the AUR system, is at least 71.

      Note:

      If the AUR system displays an age younger than 71, research IDRS CC INOLES to verify the taxpayer’s age. If the IDRS research shows that the taxpayer did not meet the minimum age of 70 1/2, the distribution is taxable. Pursue any underreported amounts (based on the TX/A element) and include a Special Paragraph using the following verbiage as an example: "Our records indicate that you did not meet the minimum age requirement to qualify for a nontaxable charitable IRA distribution. If our records are in error, please provide documentation showing both your date of birth and the date the distribution was made by the trustee of your IRA. "

    2. The IRA distribution(s), as shown on the 1099-R IR(s), does not exceed $100,000. On a jointly filed return (MFJ), each spouse is allowed up to a $100,000 QCD if the minimum age requirement is met.

      Note:

      Pursue any apparent underreporting of taxable distribution in excess of $100,000 (per spouse) and include a Special Paragraph explaining that nontaxable qualified charitable distributions are limited to $100,000 per spouse.

  4. Taxpayers, who are eligible, can elect to exclude a non-taxable health savings account distribution (HFD) amount once in their lifetime. The exclusion cannot exceed the full amount of the distribution(s) or the limit on the HSA contribution. Taxpayers indicate that a distribution was transferred to their health savings account funding distribution by entering "HFD" next to Form 1040, line 15a/b.

    1. If the taxpayer has reported the full amount of the distribution(s) on Form 8889, Health Savings Accounts, Part I, line 10, consider the 1099-R IR’s resolved.

    2. If the taxpayer has reported the full amount of the distribution(s) on Form 8889, Part III, line 20, this is taxable. Taxpayers are instructed to report the taxable portion on Form 1040, line 21 and indicate "HSA" .

      Note:

      The 10% premature distribution tax may apply. See IRM 4.19.3.14.4, 20% Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions, for further information.

      Reminder:

      Send reported Form 1099-R IR elements when the 10% tax is adjusted.

    3. If the taxpayer indicates the distribution is an HFD and did not complete a Form 8889 consider the distribution fully taxable. Send a Special Paragraph using the following verbiage as an example:" We need more information to determine the taxable amount of your health savings account funding distribution shown on this notice. Please complete and return Form 8889, Health Savings Accounts" .

  5. Form 8606 is used to figure the taxable portion of:

    1. Distributions from Traditional (including inherited), SEP and SIMPLE IRAs (Part I).

    2. Conversions from Traditional, SEP and SIMPLE IRAs to Roth IRAs (Part II).

    3. Distributions from Roth IRAs (Part III).

  6. Form 8606, Part I, is used to figure the taxable portion of nondeductible contributions to Traditional IRAs as well as distributions from Traditional, SEP and SIMPLE IRAs. The total amount is reported on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable amount from Form 8606, line 15 is reported on Form 1040, line 15b or Form 1040A, line 11b. If the total of the Traditional, SEP or SIMPLE IRA distribution IR(s) matches the Form 8606, line 7 amount:

    1. Subtract the Form 8606, line 12 amount from the Form 8606, line 7 amount.

    2. If the result matches the Form 1040, line 15b or the Form 1040A, line 11b amount, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    3. If the result does not match the Form 1040, line 15b or the Form 1040A, line 11b amount, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. Form 8606, Part II, is used to figure the taxable portion of conversions from Traditional, SEP, or SIMPLE IRAs to Roth IRAs. The total amount is reported on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable amount from Form 8606, line 18 is included on Form 1040, line 15b or Form 1040A, line 11b.

    1. Consider the 1099-R distribution IR reported when the taxpayer reports the taxable amount from Form 8606, Line 18, Part II on Form 1040, line 15b or Form 1040A, line 11b (whether or not a matching Form 5498 RCONV is present).

      Note:

      If line 18 is zero or blank, only consider the IR reported if the amount on line 17 is equal to the IR amount.

    2. The 10% premature distribution tax may also apply. see IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for further information.

    3. Form 1099-R IR with COD "N" or COD "R" represent recharacterizations. These are corrections of amounts converted from Traditional, SEP or SIMPLE IRAs to Roth IRAs. Delete any Form 1099-R IRs containing COD "N" or COD "R" .

  8. Form 8606, Part III, is used to figure the taxable portion of non-qualified distributions (COD "J" ) from Roth IRAs. The total amount is reported on Form 1040, line 15a, or Form 1040A, line 11a and the taxable amount from Form 8606, line 25 is included on Form 1040, line 15b or Form 1040A, line 11b.

    1. Consider the 1099-R distribution IR reported when the taxpayer completes Form 8606, Part III and reports the amount from Form 8606, line 25 on Form 1040, line 15b or Form 1040A, line 11b (whether or not a matching Form 5498 RCONT is present) OR

    2. Consider the 1099-R Roth distribution to be a return of regular contributions from a Roth IRA when the amount of the distribution matches the Form 5498 RCONT amount or a statement is attached identifying the amount as a return of regular contribution.

    3. If the taxpayer does not complete Form 8606, Part III, and/or there is no corresponding Form 5498 RCONT IR, consider the Form 1099-R distribution amount fully taxable. PARAGRAPH 83 automatically generates.

      Note:

      If there is no indication that the distribution is a qualified Roth IRA distribution (Form 1099-R COD "Q" or "T" ) or a return of regular contributions from a Roth IRA, pursue the U/R taxable amount.

    4. The 10% premature distribution tax penalty may also apply. See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for further information.

  9. If the taxpayer reports a lesser taxable amount and Form 8606 is not completed, pursue the difference. Send PARAGRAPH 83 unless the IR contains a COD "J" . An IR with COD "J" automatically generates PARAGRAPH 83 (see Exhibit 4.19.3-7, CP PARAGRAPHS).

  10. A return of regular contributions from a Roth IRA or qualified distributions from a Roth IRA are considered non-taxable. To be considered a qualified Roth IRA distribution, the Roth IRA must have been maintained for a minimum of 5 years and meet one of the following conditions:

    Caution:

    Roth IRA distributions made within the 5-taxable-year period are not a qualified distribution. Payers may identify Roth distributions within the first 5 years with COD "J" .

    1. Was made on or after the date the taxpayer reaches age 59 1/2

    2. Was made because the taxpayer was disabled,

    3. Was made to a beneficiary or to the taxpayer's estate after his/her death, or

    4. The distribution (up to $10,000) was used for a qualified first-time home purchase.

    Note:

    Qualified distributions from a Roth IRA may be identified by COD "Q" or "T" . Do not pursue Form 1099-R IRs with COD "Q" or "T" . See IRM 4.19.3.7.10.3 (5), Retirement -Analyzation, for further instructions.

  11. Distributions from a SIMPLE (Savings Incentive Match Plan for Employees) plan are fully taxable as ordinary income. Premature distributions from a SIMPLE plan may be subject to the additional tax on early distributions. Distributions made within the first 2 years are subject to a 25% tax on early distributions and are identified by a COD "S" . See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for further information.

    1. During the 2-year period, to qualify for a tax-free rollover/transfer, amounts in a SIMPLE IRA must be rolled over/transferred into another SIMPLE IRA.

    2. After the 2-year period, amounts in a SIMPLE IRA can be rolled over/transferred tax-free to either another SIMPLE IRA plan or any qualified IRA/deferred compensation plan.

  12. IRA distributions do not qualify for special tax treatment on Form 4972. See IRM 4.19.3.7.10.8 (11) and (12), Lump-Sum Distributions. Send PARAGRAPH 152 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  13. COD 5 is used for prohibited transactions such as borrowing from an IRA or using an IRA as security on a loan. If either of these transactions occur, treat the entire value of the account as a distribution to the taxpayer. These distributions are subject to the 10% tax on early distributions from qualified plans and cannot be rolled over. See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs.

4.19.3.7.10.8  (09-01-2013)
Lump-Sum Distributions

  1. A lump sum distribution is income received within a single tax year of the balance to the credit of an employee from an employer's qualified pension, stock bonus or profit sharing plan, employee stock ownership plan (ESOP), qualified annuity plan, etc.

  2. A lump sum distribution may qualify for special tax treatment on Form 4972, Tax on Lump Sum Distributions. The system assigns Income Identify Code of "LS" when the COD is "A" . When the taxpayer reports his/her lump sum distributions on Form 4972, determine if he/she reported the total amount.

    Note:

    AUR does not math verify or screen Form 4972 qualification errors.

  3. If the taxpayer reports the total amount of the lump sum distribution on Form 4972, consider the income reported.

  4. If Form 4972 was used to report the lump sum income AND there are U/R issues other than Lump Sum:

    1. Select the Lump Sum window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Lump Sum Tax.

    2. Enter the amount from Form 4972, line 30, in the PRIMARY or SECONDARY LUMP SUM TAX field, as applicable.

    3. Verify the amount in the Form 1040 ADDITIONAL TAX field on the Other Taxes window when it displays on the Return Value screen.

  5. If there is only one Form 1099-R IR present, and it is only partially reported (i.e., the taxpayer claimed W/H from a 1099-R IR):

    1. Select the Lump Sum Tax window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Lump Sum Tax.

    2. Enter the entire TX/A amount in the ORDINARY INCOME field(s) for the primary and/or secondary taxpayer, as applicable. (Use GR/A amount if the TX/A is not present.)

  6. If an ECG amount is shown on the Form 1099-R IR, the taxpayer may elect not to receive capital gains treatment. The taxpayer should then report the taxable amount of the distribution.

  7. Consider the IR (with ECG amounts) ≡ ≡ ≡ ≡ ≡ ≡ ≡ if any one of the following situations apply:

    1. The gross amount is on Form 1040, line 16a (Form 1040A, line 12a). The taxable amount is on Form 1040 line 16b Form 1040A line 12b).

      Note:

      Taxpayers often incorrectly report Lump Sum Distributions on Form 1040 lines 15a or 15b, or Form 1040A, lines 11a or 11b. Before considering Lump Sum Distribution IRs underreported, review entries on these lines.

    2. The gross or taxable amounts are on Form 4972, Part III, line 10 AND the taxpayer includes the lump sum tax on Form 1040.

    3. An amount on the return matches the gross or taxable amount from the Form 1099-R IR within $1.

    4. The TX/A amount less the ECG amount is on Form 1040, line 16b, and the ECG amount is reported on Schedule D, lines 8, 9, 10, or 13 or Form 8949, Part II, line 3.

  8. The taxpayer may elect to receive capital gains treatment and report the ordinary income and capital gains separately on Form 4972. The entire distribution must be included on the Form 4972, and cannot be allocated between different forms.

    Example:

    The taxpayer cannot report ordinary income from the distribution on Form 4972, line 10, and the ECG income from that particular IR on Schedule D/Form 8949

  9. Capital gains from a lump sum distribution should not be reported on Schedule D if the taxpayer has elected to report the lump sum income on Form 4972. If the taxpayer has erroneously included a Lump Sum CG on Schedule D, exclude the CG from the Schedule D and include the CG amount on Form 4972. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Lump Sum Tax.

    Note:

    Make appropriate changes to the COMPUTE SCHEDULE D LOSS window and the Sch D/8814/ECR Tax window on Return Value when necessary.

  10. The taxpayer may elect to treat the entire distribution (ECG and Ordinary Income) as ordinary income on Form 4972. The amount from Box 2a (Taxable Amount) minus the amount from Box 3 of Form 1099-R should be reported on Form 4972, Part III, line 8. If the taxpayer did not complete Part II of the Form 4972, enter the Taxable Amount from Box 2a of Form 1099-R.

  11. Lump sum distributions do not qualify for the special tax treatment onForm 4972 when:

    1. There is an indication of a partial rollover of a lump sum.

    2. The distribution is an IRA distribution.

    3. The distribution is from a tax-sheltered annuity plan (a 403(b) plan, i.e., Teachers Retirement).

    4. The distribution is a Civil Service annuity.

  12. If any of the conditions in (11) above apply and the income matches either the gross or taxable amount on a Form 1099-R IR, consider the taxable amount U/R.

    1. Select the Lump Sum Tax window.

    2. If the entire amount shown on Form 4972 is considered U/R, input a zero (0) in the PRIMARY/SECONDARY LUMP SUM TAX field, as applicable.

    3. If there is income other than the U/R amount that qualifies for special tax treatment on Form 4972, enter the qualifying amount ONLY in the ORDINARY INCOME field(s) for the primary and/or secondary taxpayers, as applicable, and leave the PRIMARY/SECONDARY LUMP SUM TAX field blank.

    4. Send PARAGRAPH 63 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    5. When the Total Other Tax window displays in Return Value, input/verify the ADDITIONAL TAX PER RETURN field.

  13. Lump sum distributions do not qualify for the special tax treatment on Form 4972 when a portion of the lump sum distribution is from U.S. Retirement Bonds. Disallow the special tax treatment for the bond portion ONLY.

    1. Select the Lump Sum Tax window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Lump Sum Tax.

    2. Enter the qualifying amount of the lump sum distribution in the ORDINARY INCOME or CAPITAL GAIN field for the primary or secondary taxpayer, as applicable.

  14. Consider Lump sum distributions reported ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  15. Enter Income Identify Code "LS" if applicable.

4.19.3.7.10.9  (09-01-2013)
Employee Savings Plans

  1. Distributions from employee savings plans are reported on Form 1099-R.

  2. Consider employee savings plan IRs reported if:

    1. There is an unidentified income amount on Form 1040 or any of its schedules that matches the IR within $1

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

    3. The taxpayer reports the gross amount on Form 1040, line 16a or Form 1040A, line 12a and has reported ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on Form 1040, line 16b or Form 1040A, line 12b.

    4. The taxpayer identifies the taxable portion on Form 1040, line 21, or on an attachment.

    5. The taxpayer reports a taxable amount identified as being from a savings plan (must be the same payer as the IR), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. If a taxpayer is younger than 55, the 10% tax on early distributions from qualified plans is assessed by the system if the COD is "L" , "1" , "5" , or "7" . (COD 7 MUST HAVE PGR IND 1).

    Note:

    If the taxpayer is between 55 and 59 years old and the distribution is paid by an employee savings plan, change the COD indicator to blank so the system does not assert the 10% tax. If the taxpayer reported the 10% tax on his/her employee savings plan, do not modify the employee savings plan IR. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for further information regarding the 10% premature distribution tax.

    Reminder:

    Mark the Form 1099-R IR element(s) with Send Indicator "S" when adjusting the 10% tax.

4.19.3.7.10.10  (09-01-2008)
Retirement Miscellaneous

  1. PARAGRAPH 34 automatically generates when the U/R retirement distribution has COD "L" .

  2. Form 1099-R IRs may be subject to an additional 10% or 25% tax. See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs, for further information.

    Note:

    If it appears the TP has completed Form 5329, but failed to include the taxable distribution on page 1 of the Form 1040 or Form 1040A, send PARAGRAPH 51 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  3. PARAGRAPH 11 automatically generates to inform the taxpayer whenever the proposed tax increase shown on the CP 2000 includes the additional 10% tax on early distributions from qualified plans. See IRM 4.19.3.14.3, 10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs.

  4. Form 1099-R IRs may reflect W/H. Follow instructions in IRM 4.19.3.15.1, Withholding - General.

  5. PARAGRAPH 96 automatically generates when retirement income is U/R regardless of Income Identify Code.

  6. When Form 1099-R IRs are U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.11  (09-01-2003)
Rents and Royalties (R/R) - General

  1. Rent and royalty income is compensation for the use of property or rights by someone other than the owner.

  2. Rents and royalties are reported on Form 1099-MISC or PTK-1 and SBK-1.

  3. Rents and royalties are identified on the Case Analysis screen by the literal "99MIS" or "PTK-1" , or "SBK-1" in the DOC TYPE field and the literal "RENT" , "ROYAL" , or "OTREN" in the INCOME TYPE field.

4.19.3.7.11.1  (09-01-2013)
Rents and Royalties - Analyzation

  1. Compare RENT or ROYAL amounts with entries on:

    1. Schedule E, Part I, lines 3 and 4. If payer names are listed, match specific amounts. If payer names are not listed, group by income type RENT or ROYALTY, as applicable and compare the group total amount to the total reported rents or royalties.

      Note:

      The Group function is a tool to assist the TEs in computing the correct U/R amount. It may not be necessary to use the Group function if the correct U/R can be determined without it.

    2. Schedule E, Part II. Amounts must match within $1 or be identified as rents and royalties.

    3. Schedule C, Part 1, line 1 (or Schedule C-EZ, line 1). If the taxpayer is in the business of rental property, or it can be determined from the payer name or business activity that the income is from the same source, compare the group total to the amount on line 1.

      Note:

      When screening for Rents/Royalties income on Schedule C, also consider any additional IR(s) for NEC, MERCH, MED and/or FISH income to determine the U/R amount.

    4. Schedule C, Part 1, line 6 (if specifically identified as rent/royalty income). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. Schedule F, Part I or Part III. Do not pursue IRs when the amount matches Schedule F, lines 8, or 43 within $1, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and is identified as rent or royalty.

    6. Form 4835, Farm Rental Income and Expenses. Consider the IRs ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ are accounted for first. Otherwise, issue a CP 2000 for the full amount of the IR(s).

    7. Form 2106, line 7, columns A and/or B. The amount must match within $1 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.7.6.1 (4), Nonemployee Compensation(NEC) - Analyzation.

    8. Schedule D, or Form 8949 if income is identified as Coal and Timber royalties, patents, rights of way or easements.

    9. Form 1040, line 21. The amount must match within $1 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    1. Is a member of a federally recognized Native American tribe and there is an indication that the rental income was directly derived from the allotment land directly owned by the taxpayer. The taxpayer may cite the following Revenue Rulings: 67-284 1967-2 CB 55, 62-16 1962-1 CB 7, or 74-13 1974-1 CB 14, 94-65 1994-2 CB 14.

      Note:

      Only income derived from the direct exploitation of the land is considered tax-exempt. Examples include: raising crops and/or livestock, sales of natural resources, and rental of land for grazing purposes. Income derived from capital improvements to the land (e.g., the establishment of a Gambling Casino, etc.) is not directly derived from the land and is fully taxable.

    2. Identifies the rental amount and cites it is excludable under IRC 280(A) or indicates that the rental was for less than fifteen (15) days.

4.19.3.7.11.2  (09-01-2013)
Rents and Royalties Miscellaneous

  1. When the rent or royalty income is partially reported as self-employment income by the taxpayer, identify the RENT or ROYALTY amount as Self-Employment income by entering the appropriate Income Identify Code in the INC CD field on the Case Analysis screen. See Exhibit 4.19.3-9, Income Identify Codes.

  2. If there is reported rent or royalty income reported on which the taxpayer should have paid self-employment tax but did not, SE Tax must be computed or recomputed if the Rent/Royalty or SE Tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported rent or royalty amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported rent or royalty IR elements on the notice when adjusting SE tax.

    Caution:

    If the rent or royalty amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  3. If U/R rent or royalty can be identified as coal/timber royalties, patents, rights of way or easements, it should be reported on Schedule D/Form 8949:

    1. Input Income Identify Code "SD" if the U/R RENT or ROYAL amount(s) is a long term capital gain/loss (Schedule D/Form 8949, Part II).

    2. Input Income Identify Code "ST" if the U/R RENT or ROYAL amount(s) is a short term capital gain/loss (Schedule D/Form 8949, Part I).

      Note:

      Income Identify Code "SD" and "ST" allow the system to compute the Schedule D tax if applicable. See IRM 4.19.3.12.2, Sch D/8814/ECR Tax Window, for further instructions.

    3. See IRM 4.19.3.7.4.5, Capital Gain Distributions - Analyzation, to access the Schedule D window.

  4. If there is U/R Schedule D RENT or ROYAL and the taxpayer reported a capital loss on Form 1040, line 13, see IRM 4.19.3.7.4.5, Capital Gain Distributions - Analyzation, to access the Schedule D window.

  5. Form 1099-MISC IR(s) may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  6. When rent or royalty income is U/R, enter the gross reported amount in the RETURN field of the Summary screen.

4.19.3.7.12  (11-07-2012)
Conduit Income - General

  1. Conduit income is the taxpayer's distributive share from a partnership (Form 1065), Small Business Corporation (Form 1120-S), or Estates and Trusts (Form 1041).

  2. Conduit income is reported on Schedules K-1 filed with Form 1065, Form 1120-S, and Form 1041.

  3. Conduit income is identified on the Case Analysis screen by the literal "SBK-1" , "PTK-1" , or "TRK-1" in the DOC TYPE field and one or more of the following literals in the INCOME TYPE field:

    • "ORINC" - Ordinary Income

    • "REAL" - Real Estate

      Note:

      If REAL is system deleted with a Status Code "X" , remove the Status Code and work the REAL issue.

    • "OTREN" - Other Rental

    • "ROYAL" - Royalties

    • "INT" - Interest Income

    • "DIV" - Dividend Income

    • "BNINC" - Ordinary Business Income

    • "STCG" - Short Term Capital Gains

    • "LTCG" - Long Term Capital Gains

    • "179EX" - Section 179 Expense amounts

    • "G-PAY" - Guaranteed Payment Amounts

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.12.1  (09-01-2013)
Conduit Income - Analyzation

  1. Delete K-1 IRs if the payee or payer area identifies the income as being from:

    • Keogh accounts or 403(b) accounts

    • SEP or IRA accounts

    • Pension Plan or Profit Sharing Plan, including 401(k) plan

    • Municipal Bond funds

  2. When screening conduit IRs, keep the positive and negative amounts separate, but be aware that the taxpayer may have netted the negative IRs against positive IRs and/or the totals on the tax return. Review all forms, schedules and attached explanations to identify gross income amounts.

    Note:

    Ensure that any amounts reported on attachments are properly included on Schedule E and in the AGI on the tax return.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    The taxpayer may combine negative distributive share amounts with Section 179 Expenses and report the total loss on Schedule E, Part II, column (h). If the taxpayer did not claim the Section 179 Expense on Schedule E, Part II, column (i), consider the issue resolved. See (17) below if the taxpayer also claimed the 179EX on column (i).

  4. Schedules K-1 are not required to be attached to the return. If attached, use them as part of the screening process.

  5. Schedules K-1 should not include W/H. Only backup withholding can be reported on a Schedule K-1. W/H amounts shown on a PTK-1 (Form 1065), SBK-1 (Form 1120-S) or TRK-1 (Form 1041) IRs may be the result of erroneously identified/transcribed Schedule K-1 data. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.15.1.1 (2), Withholding - Analyzation, for further instructions.

  6. Conduit income may be found elsewhere on the return and/or attachments. Thoroughly review the entire return, schedules and attachments before pursuing discrepant K-1 amounts.

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Consider each component of a K-1 IR separately. For example, if the taxpayer only reports the INT/DIV portion of the IR on Schedule B but fails to report the remaining K-1 income types included on the IR (e.g. ORINC, G-PAY, etc.), pursue the remaining income types based on the applicable IRM procedures.

    3. Use the Income Comparison screen to assist in determining if the discrepant K-1 income amount is included in a larger total on the return.

  7. Accept conduit income as reported if the amounts match ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Example:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. If a Form 1099-MISC or Schedule K-1 (PTK-1, SBK-1 or TRK-1) IR are present for the same taxpayer, from the same payer AND for an identical money amount, take the following action:

    1. If one of the IRs is considered fully reported ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. If either IR is only partially reported or both are fully underreported, pursue both issues.

  10. If multiple conduit IRs are present from the same payer for the same taxpayer take the following action:

    1. Research IDRS CC IRPTRL for each IR to determine the On File Date.

    2. Consider the IR with the latest On File Date as valid ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    3. If the On File Date is the same for multiple IRs and one is reported, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    4. If the On File Date is the same for multiple IRs and none of the IRs are reported, issue a CP 2501 to pursue all IRs.

  11. IDRS research is required to determine if fully U/R TRK-1 IRs (Trusts) are the result of a fiscal year filling requirement. Using the payer EIN, research IDRS CC BMFOLI to determine the following:

    1. Presence of MFT 05 with a Return Posted indicator of "Y" , denoting that a Schedule K-1 (Form 1041) was filed.

    2. If the MFT 05 indicates 201212 pursue the U/R amount. If other than 201212, consider the issue resolved.

      Note:

      If the EIN(s) is not available on IDRS CC BMFOLI delete the IR(s).

  12. INT is included on Schedule B, Part I, line 1. Pursue any U/R amounts. See IRM 4.19.3.7.3.1, Interest - Analyzation, for further instructions.

    Note:

    When reporting INT income from TRK-1 (Trusts) IRs, the payer name on the IR may not match the payer name on the return. Use the dollar match criteria to determine if the income is properly reported.

  13. DIV is included on Schedule B, Part II, line 5. Pursue any U/R amounts. See IRM 4.19.3.7.4.2, Dividends - Analyzation, for further instructions.

    Note:

    On DIV income from TRK-1 (Trusts) IRs, the payer name on the IR may not match the payer name on the return. Use the dollar match criteria to determine if the income is properly reported.

  14. STCG is reported on Schedule D, line 5. Pursue any U/R amounts including O/D losses. See IRM 4.19.3.7.4.5 (8), Capital Gain Distributions - Analyzation, for further instructions.

    Example:

    If STCG IR(s) is a negative (-) $500 and Schedule D line 5 is negative (-) $750, pursue $250 as U/R (O/D).

  15. LTCG is reported on Schedule D, line 12, column (h). Pursue any U/R amounts including O/D losses. See IRM 4.19.3.7.4.5 (8), Capital Gain Distributions - Analyzation, for further instructions. See example in (14) above.

    Note:

    If the taxpayer did not file a Schedule D, determine if the LTCG is reported directly on the Form 1040, line 13.

  16. ROYAL is reported on Schedule E, Part I, line 4.

  17. Section 179 Expenses are generally reported on Schedule E, Part II, Column (i). Taxpayers may reduce the ORINC, REAL, OTREN or G-PAY amount by the 179EX and report the net income on column (g) or (j). If the ORINC, REAL, OTREN or G-PAY U/R amount matches the 179EX amount on the SBK-1 or PTK-1 IR AND column (i) is blank, consider the IR reported. If the taxpayer also included the 179EX on column (i) this represents a double deduction. Disallow the double deduction and send PARAGRAPH 142 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  18. ORINC, G-PAY and REAL/OTREN (from PTK-1 or SBK-1 IRs) are reported on Schedule E, Part II, Columns (g) and/or (j).

    Note:

    If REAL is system deleted with a Status Code "X" , remove the Status Code and work the REAL issue.

    1. If the taxpayer reports passive income on column (g) or passive loss on column (f) AND attaches Form 8582, Passive Activity Loss Limitations, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. If the taxpayer does not report the payer name/EIN on the Schedule E (or Schedule E is not completed/present) AND attaches Form 8582, Passive Activity Loss Limitation, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    3. If the taxpayer attaches a completed Form 6198, At Risk Limitation, that matches the payer name and/or EIN ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. See (17) above when the PTK-1 and/or SBK-1 IR(s) contain Section 179 Expenses (179EX).

  19. BNINC and REAL/OTREN (from TRK-1 IRs) are reported on Schedule E, Part III, column (d) and/or (f),

    Note:

    If REAL is system deleted with a Status Code "X" , remove the Status Code and work the REAL issue.

    1. If the taxpayer reports passive income on column (d) or passive loss on column (c) AND attaches Form 8582, Passive Activity Loss Limitation, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. If the taxpayer does not report the payer name/EIN on the Schedule E (or Schedule E is not completed/present) AND attaches Form 8582, Passive Activity Loss Limitation, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    3. If the taxpayer attaches a completed Form 6198, At Risk Limitation, that matches the payer name and/or EIN ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  20. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    See (11) above when there are fully U/R TRK-1 IRs.

  21. Always attempt to match ORINC, REAL, OTREN, G-PAY and/or BNINC income element(s) to the amounts reported on the return. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The taxpayer must disclose an amount (including zero) in order to consider the income element(s) partially reported.

    Exception:

    When the return amount, per payer, does not correspond to a specific income element(s), group the element(s) and give credit for reported amounts. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    Issue a CP 2501 when pursing partially reported ORINC, REAL, OTREN, G-PAY and/or BNINC income element(s) and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

4.19.3.7.12.2  (03-28-2011)
Conduit Income Miscellaneous

  1. Conduit amounts (ORINC, REAL, G-PAY, and OTREN) from PTK-1 IRs may be subject to self-employment tax. If any of the following conditions apply, enter Income Identify Code "PB" , "PF" , "SB" , or "SF" as applicable.

    1. The PTK-1 IR is fully U/R and the payer name/EIN is not reported on the tax return.

      Exception:

      Do not assess SE Tax on ORINC, REAL, and OTREN if the payer is a LTD, LLC, LC, LLP, or LP. See IRM 4.19.3.14.1 (12), Self-Employment Tax, for further instructions and See Exhibit 4.19.3-9, Income Identify Codes, for applicable Income Identify Codes.

      Note:

      When determining income subject to SE tax and the taxpayer did not complete Schedule SE, do not include any PTK-1 losses reported on Schedule E from a different partnership name.

    2. The PTK-1 IR is partially reported as self-employment income by the taxpayer. If pursuing the issue because TP reports a loss and the income element is a gain, do not pursue SE tax unless the loss amount was considered on an existing Schedule SE.

      Note:

      When determining income subject to SE tax and the taxpayer did not complete Schedule SE, do not include any PTK-1 losses reported on Schedule E from a different partnership name.

  2. When conduit income is U/R, enter the appropriate return amount in the RETURN field on the Summary screen. For conduit income types reportable on Schedule E Part II and Part III, use the sum of Schedule E lines 32 and 37 as the "per return" amount. If the resulting "per return" amount is negative, enter the actual loss amount in the RETURN field.

  3. If STCG Distributions are U/R or O/D, enter the return amount from Schedule D, line 5, in the RETURN field of the Summary Screen. If LTCG Distributions are U/R or O/D, enter the return amount from Schedule D, line 12 (Form 1040, line 13, if no Schedule D is attached), in the RETURN field of the Summary Screen. If STCG and LTCG distributions are U/R or O/D, enter the return amount from Schedule D, lines 5 and 12 combined in the RETURN field of the Summary Screen.

4.19.3.7.13  (09-01-2010)
Agricultural Subsidies/Market Gain on CCC Loans/Commodity Credit Corporation (CCC) Loans Forfeited

  1. Agricultural subsidies are government payments to farmers or businesses to assist in a policy deemed advantageous to the public. There are many types of Agricultural subsidy payments, including Conservation Reserve Program (CRP) payments, counter-cyclical payments, and market gain. Agricultural subsidies may be a payment in cash or a payment in kind (PIK), including Commodity Credit Corporation (CCC) certificates.

    Note:

    The taxpayer may refer to Agricultural Subsidy payments (Ag Sub) as CRP.

  2. All government payments reported to the IRS must be included in income in the year they are actually or constructively received.

    1. Income is constructively received when it is credited to the taxpayer's account or set apart in any way that makes it available to the taxpayer. It is not necessary that the taxpayer have physical possession of it.

    2. See IRM 4.19.3.7.13.3, Commodity Credit Corporation (CCC) Loans Forfeited, regarding farmer's election for reporting CCC loan proceeds as income in the year of the sale of their commodity rather than the year they actually received the loan.

4.19.3.7.13.1  (09-01-2010)
Agricultural Subsidies/Market Gain on CCC Loans - General

  1. Agricultural subsidies (including CCC certificates) are reported to IRS on Form 1099-G.

  2. Agricultural subsidies (including CCC certificates) are identified on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "AGSUB" in the INCOME TYPE field.

  3. Market gains on CCC Loans are reported to the IRS on Form 1099-G and are identified on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "MRKGN" in the INCOME TYPE field.

4.19.3.7.13.2  (09-01-2013)
Agricultural Subsidies/Market Gain on CCC Loans - Analyzation

  1. Compare the total of AGSUB and MRKGN amounts with entries on:

    1. Schedule F, lines 4a, 4b, 39a, or 39b. If the AGSUB IR(s) is less than or equal to the amount reported on any of these lines, consider the IR(s) reported.

      Note:

      If the total of AGSUB and MRKGN IR(s) is greater than line 4a or 39a, use the line 4b or 39b amount to determine any U/R.

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

    3. Form 4835, Farm Rental Income and Expenses, lines 3a or 3b. If the total of AGSUB and MRKGN IR(s) is less than or equal to the amounts reported on either line, consider the IR(s) reported.

      Note:

      If the total of AGSUB and MRKGN IR(s) is greater than line 3a, use the line 3b amount to determine any U/R.

  2. AGSUB and MRKGN comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as AGSUB and/or MRKGN:

    1. Schedule F, lines 8 or 43.

    2. Schedule F, lines 2 or 37 (agricultural subsidies reported as commodities).

    3. Schedule E, Part I. Check property names on Schedule E, line 1 to clearly identify farm rental.

    4. Form 4835, line 6.

    5. Form 1040, line 21.

  3. Consider AGSUB and MRKGN amounts ≡ ≡ ≡ ≡ ≡ ≡ if a Form W-2 or a WAGE IR shows that the taxpayer is incorporated (payer name must include CORP, INC, LC, LLC, PA, PC, or SC) in a farming business and paid wages to himself/herself (the payer name and/or address is similar to or matches the taxpayer name and/or address). Do not consider AGSUB or MRKGN reported if the W-2 and 1099-G IR are from the same payer.

  4. Agricultural subsidy payments made to members of federally recognized Native American Tribes under programs administered by the Department of Agricultures Stabilization and Conservation Service are exempt from federal income taxes when the subsidy is received as a result of activity occurring on the individual's allotted land. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. Underreported AGSUBs and MRKGNs are considered self-employment income unless the conditions defined below apply; delete the Income Identify Code if:

    1. The agricultural subsidy is fully or partially reported on Form 4835, Form 4797, Form 6252, Schedule D, or Schedule E, Part I

    2. The agricultural subsidy is fully U/R and the only farm income on the return is on Form 4835 or Schedule E, Part I.

  6. The system computes SE Tax when Income Identify Code "PF" or "SF" , is entered for AGSUB and/or MRKGN income.

  7. If there are reported agricultural subsidies and/or market gains on which the taxpayer should have paid self-employment tax but did not, the SE Tax must be computed or recomputed if the AGSUB and/or MRKGN is asterisked or a notice is sent for other issue(s). Include the reported agricultural subsidies and/or market gains amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported agricultural subsidies and/or market gains IR elements on the notice when adjusting SE tax.

    Caution:

    If the agricultural subsidies and/or market gains amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  8. Form 1099-G IRs may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  9. PARAGRAPH 104 automatically generates when MRKGN is U/R, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  10. If AGSUB and/or MRKGN is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.13.3  (03-28-2011)
Commodity Credit Corporation (CCC) Loans Forfeited

  1. Generally, CCC loan proceeds are not reported as income. However, if a taxpayer pledges part or all of his/her production to secure a CCC loan, he/she may elect to report the CCC loan proceeds as income in the year the proceeds are received, instead of the year the crop is sold.

  2. Taxpayers may make the election to report CCC loans on Schedule F, lines 5a, 5b or 40a or Form 4835, line 4a.

  3. CCC loans forfeited are reported on Form 1099-A, Acquisition or Abandonment of Secured Property.

  4. Commodity Credit Certificates received under some government programs are sold or used to pay the CCC loans. These certificates are includable as income and are reported on Form 1099-G.

    1. Compare Form 1099-G IR(s) to amounts identified on the return by the terms "CCC" , "PIK" , or "Storage" .

    2. If income reported under these categories matches the IR(s) within $1, consider the IR(s) reported. If no amount is reported, consider the IR(s) fully U/R.

  5. A farmer may pledge grain or other commodities to secure a loan from the CCC. He/she may also have elected not to include the proceeds of the loan as income in the year it was actually received. If, however, he/she uses the commodity credit certificates to repay the loan, that income is reported on Schedule F, lines 5b, 5c, 40b, or 40c or Form 4835, lines 4b or 4c. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. Commodity Credit Corporation loans forfeited are identified on the Case Analysis screen by the literal "1099A" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    1. "DEBTS" - Debt satisfied.

    2. "FMV" - Fair market value. Disregard the literal "FMV" and the amount on a Form 1099-A IR. (The system automatically assigns Status Code "X" to FMV amounts.)

    3. "AV" -Appraisal value. Disregard the literal "AV" and the amount on a Form 1099-A IR. (The system automatically assigns Status Code "X" to AV amounts.)

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ if:

    1. A Form W-2 or WAGE IR shows that the taxpayer is incorporated (payer name must include CORP, INC, LC, LLC, PA, PC or SC) in a farming business and paid wages to himself/herself (the payer name and/or address is similar to or matches the taxpayer's name and/or address). Do not consider CCC reported if the W-2 and 1099-A IR are from the same payer.

    2. Income from a farming business is reported on Schedule E, Part II.

  8. Compare DEBTS (debt satisfied amounts on Form 1099-A IRs) with entries on Schedule F or Form 4835.

    1. Consider CCC loans fully reported when the amount(s) reported on Schedule F, lines 5b, 40b, or Form 4835, line 4b, equals or exceeds the CCC (DEBTS) IR(s).

    2. If there are amounts reported on Schedule F, lines 5c or 40c, or Form 4835, line 4c ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. Consider CCC loans partially U/R when there is an amount reported on Schedule F, lines 5b or 40b, or Form 4835, line 4b that is less than the DEBTS IR(s).

    4. Consider CCC loans fully U/R when Schedule F, lines 5b or 40b, or Form 4835, line 4b is zero or blank AND there are no entries on Schedule F, lines 5c or 40c, or Form 4835, line 4c.

  9. If a DEBTS amount is U/R, verify the Income Identify Code so the system computes SE tax correctly. The Income Identify Code should be "PF" or "SF" , as applicable. See Exhibit 4.19.3-9, Income Identify Codes. Delete the Income Identify Code for U/R DEBTS amounts if the:

    1. CCC loan forfeited is fully or partially reported on Form 4835 or Schedule E, Part I, or

    2. CCC loan forfeited is fully U/R and the only farm income on the return is on Form 4835 or Schedule E, Part I.

  10. PARAGRAPH 102 automatically generates.

  11. If CCC income is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.14  (09-01-2010)
Patronage Dividends - General

  1. Patronage dividends (PTDIV) are paid by cooperatives. They are considered income unless they are attributable to personal or family items, capital assets, or depreciable assets used in the taxpayer's business.

  2. Patronage dividends are reported to IRS on Form 1099-PATR, Taxable Distributions Received From Cooperatives.

  3. Patronage dividends are identified on the Case Analysis screen by the literal "99PAT" in DOC TYPE field and one of the following literals in the INCOME TYPE field.

    • "PTDIV" - Patronage Dividends

    • "NPAT" - non-Patronage Dividends

    • "PURA" - per Unit Retain Allocations

    • "REDEM" - Redemption

    • "DPAD" - Domestic Production Activities Deduction. Reported on the appropriate line of Form 8903, Domestic Production Activities Deduction

4.19.3.7.14.1  (09-01-2013)
Patronage Dividends - Analyzation

  1. Group the 99PAT income elements (PTDIV, NPAT, REDEM and PURA) from all 1099-PATR IRs and compare the group total with entries on:

    1. Schedule F, lines 3a, 3b, 38a or 38b. If the PATR group amount is less than or equal to the amount reported on any of these lines, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ " ≡ ≡

      Note:

      If the PATR IR group amount is greater than line 3a or 38a, mark the group with Status Code "U" and use the amount on line 3b or 38b to determine the U/R.

    2. Form 4835, line 2a or 2b. If the PATR IR group amount is less than or equal to the amount reported on either line, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "" .

      Note:

      If the PATR IR group amount is greater than line 2a, mark the group with Status Code "U" and use the amount on line 2b to determine the U/R.

    3. Schedule E, Part I. If an amount is identified as farm rental AND matches within $1, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ "

      Note:

      Check property names on Schedule E, line 1a and 1b. If the income reported on this line matches the IR group amount(s) within $1, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ "

    4. Schedule E, Part II. If the income is from a farming business,≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ "

      Note:

      If it cannot be determined from Schedule E, Part II that the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. Schedule B, Part II. The amount must match within $1 or be identified by payer name.

    6. Schedule C, line 6, (or Schedule C-EZ, line 1), if the business activity is fishing related or the distribution received is from a cooperative. The amount must match within $1, must be clearly identified as patronage dividends, or must be identified by payer name.

  2. IfForm 8903 is present, see IRM 4.19.3.8.9, Domestic Production Activity Deduction.

  3. Consider PTDIVs ≡ ≡ ≡ ≡ ≡ ≡ if there is a Form W-2 or WAGE IR present that shows the taxpayer is incorporated (payer name must include CORP, INC, LC, LLC, PA, PC or SC) in a farming business, and paid wages to himself/herself (payer name and/or address is similar to or matches the taxpayer's name and/or address). Do not consider PTDIV reported if W-2 and 1099-PATR IR are from the same payer.

4.19.3.7.14.2  (09-01-2013)
Patronage Dividends Miscellaneous

  1. If a 1099-PATR IR amount is U/R, verify the Income Identify Code, so the system computes SE Tax correctly (Income Identify Code "PF" , "SF" , "PB" , or "SB" as applicable). See Exhibit 4.19.3-9, Income Identify Codes. Delete the Income Identify Code if:

    1. The PTDIV is fully or partially reported on Form 4835, Schedule B, or Schedule E, Part I, or

    2. The PTDIV is fully U/R AND the only farm income on the return is on Form 4835 or Schedule E, Part I.

  2. If there are reported PTDIVs on which the taxpayer should pay SE Tax but did not, SE Tax must be computed or recomputed if the 1099-PATR is asterisked or a notice is sent for another issue(s). See IRM 4.19.3.14.1, Self-Employment Tax.

  3. PARAGRAPH 85 automatically generates when the total of U/R interest, dividends, and patronage dividends is greater than $500.

  4. If PTDIV income element(s) is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.15  (09-01-2003)
Crop Insurance - General

  1. Crop insurance proceeds are amounts received by farmers as a result of destruction or damage to crops.

  2. Crop insurance proceeds are reported on Form 1099-MISC, Box 10.

  3. Crop insurance proceeds are identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "CROP" in the INCOME TYPE field.

4.19.3.7.15.1  (09-01-2013)
Crop Insurance - Analyzation

  1. Compare CROP amounts with entries on:

    1. Schedule F, line 6a, 6b, or 41. If the CROP IR(s) is equal to or less than the amounts reported on any of these lines, consider the IR(s) reported.

    2. Form 4835, line 5a or 5b. If the CROP IR(s) is equal to or less than the amounts reported on either of these lines, consider the IR(s) reported.

      Note:

      If the CROP IR(s) is greater than line 5a and the box on line 5c is blank, use the amount on line 5b to determine the U/R.

    3. Schedule F, lines 8 or Form 4835, line 6. The amount must match within $1.

    4. Form 1040, line 21, the amount must match within $1 or be clearly identified as CROP income.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. Form W-2 or WAGE IR is present that shows the taxpayer is incorporated (payer name must include CORP, INC, LC, LLC, PA, PC or SC) in a farming business, and paid wages to himself/herself (payer name and/or address is similar to or matches the taxpayer's name and/or address). Do not consider CROP reported if Form W-2 and Form 1099-MISC are from the same payer.

    2. Income from a farming business is reported on Schedule E, Part II.

      Note:

      If it cannot be determined from Schedule E, Part II that the income is from a farming business, check Schedule SE, line 1 for an indication.

    3. Taxpayer elects to postpone CROP income to the next year by checking the box on Schedule F, line 6c, or Form 4835, line 5c, and attaches a statement.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.15.2  (09-01-2013)
Crop Insurance Miscellaneous

  1. If a CROP amount is U/R, verify the Income Identify Code so the system computes self-employment tax correctly (Income Identify Codes are "PF" or "SF" , as applicable). See Exhibit 4.19.3-9, Income Identify Codes. Delete the Income Identify Code if the crop insurance proceeds are:

    1. Fully or partially reported on Form 4835 or Schedule E, Part I, or

    2. Fully U/R and the only farm income on the return is on Form 4835 or Schedule E, Part 1.

  2. If there are reported crop insurance proceeds on which the taxpayer should have paid SE Tax but did not, the SE Tax must be computed or recomputed if CROP is asterisked or a notice is sent for another issue(s). Include the reported CROP amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the Self-Employment Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

    Send reported CROP IR elements on the notice when adjusting SE tax.

    Caution:

    If the CROP amount is entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field in the SET window in error, an unpostable condition will occur.

  3. PARAGRAPH 103 automatically generates when CROP is U/R.

  4. If CROP is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.16  (08-16-2011)
Unemployment Compensation - General

  1. Unemployment compensation is a benefit paid to qualified individuals during periods of unemployment.

  2. Unemployment compensation is reported on Form 1099-G.

  3. Unemployment compensation displays on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "UNEMP" in the INCOME TYPE field.

4.19.3.7.16.1  (09-01-2012)
Unemployment Compensation - Analyzation

  1. Compare UNEMP amounts with entries on:

    1. Form 1040, line 19.

    2. Form 1040A, line 13.

    3. Form 1040EZ, line 3.

      Note:

      Form 1040A, line 13 and Form 1040EZ, line 3 are designated for the reporting of UNEMP as well as Alaska Permanent Fund dividends. Consider any Alaska Permanent Fund dividend IRs when determining the status of the UNEMP IRs income, and the taxpayer filed a Form 1040A or Form 1040EZ. If necessary, group Alaska Permanent Fund dividend IRs with UNEMP IRs to arrive at the correct U/R amount.

  2. UNEMP comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as UNEMP payments:

    1. Form 1040, line 7.

    2. Form 1040, line 21.

    3. Form 1040A, line 7.

    4. Form 1040EZ, line 1.

    Caution:

    If TP includes unemployment income as wages on line 7, Form 1040 or Form 1040A, see IRM 4.19.3.15.3 (5) and (14), Earned Income Credit.

  3. If the tax return indicates the UNEMP income was repaid and includes an amount, accept as reported. The repaid amount plus reported amount must equal the IR, otherwise pursue the difference.

    Caution:

    If the taxpayer indicated a portion of the UNEMP was repaid in a year other than the current AUR tax year, do not consider that repayment amount. Send a special paragraph to advise the taxpayer that repayments made in a subsequent year(s) may be deducted on Schedule A, as a miscellaneous deduction, in the year they were repaid.

  4. If the EIN begins with "66" and the payer information is in Spanish, this income is not subject to U.S. income tax, delete the IR(s).

  5. If supplemental unemployment benefits are received from a company financed fund, and the taxpayer did not contribute to the fund, they are not considered UNEMP. They are reported on Form W-2 and are fully taxable wages, subject to withholding tax, and should be reported on the wage lines. See IRM 4.19.3.7.1, Wages - General, for further instructions.

4.19.3.7.16.2  (09-01-2005)
Unemployment Compensation Miscellaneous

  1. Unemployment compensation (Form 1099-G) may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  2. If UNEMP is U/R, enter the return amount in the RETURN field on the Summary screen.

  3. PARAGRAPH 67 automatically generates when UNEMP is U/R.

4.19.3.7.17  (09-01-2013)
Social Security/Railroad Retirement Benefits (SS/RR) - General

  1. Social Security and Railroad Retirement Benefits may be partially taxable (by up to 85%) if the modified AGI plus fifty percent of the benefits is greater than the following adjusted base amounts:

    • $25,000 for FS 1, 4 or 5

    • $32,000 for FS 2

    • $25,000 for FS 3 or 6 (and the taxpayer did NOT live with spouse any time during the AUR year)

    • $0 for FS 3 or 6 (and the taxpayer lived with the spouse during the AUR year)

  2. These payments are reported by payers on either Form SSA-1099 (benefits received under Title II of the Social Security Act), or Form RRB-1099 (Tier 1 railroad retirement benefits treated as social security).

    Note:

    See IRM 4.19.3.7.10.5, Railroad Retirement Board (RRB) IRs, for information regarding the amounts reported by the Railroad Retirement Board on Form RRB-1099-R.

  3. Social Security and Railroad Retirement Benefits display on the Case Analysis screen by the literal "SS/RR" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "SS/RR" - taxable Social Security and Railroad Retirement Benefits.

    2. "WCOMP" - Workers' Compensation. Disregard WCOMP amounts. (The system automatically assigns Status Code "X" to WCOMP amounts.)

    3. "REPAY" - benefits that the taxpayer repaid in the current AUR tax year. The system uses this amount to reduce the recomputed SS/RR amount as appropriate.

    4. "11PAY" - portion of SS/RR received in 2012 for 2011 (for information only).

    5. "10PAY" - portion of SS/RR received in 2012 for 2010 (for information only).

    6. "09PAY" - portion of SS/RR received in 2012 for 2009 (for information only).

    7. "08PAY" - portion of SS/RR received in 2012 for 2008 (for information only).

  4. Workers' Compensation payments made in place of Social Security and Railroad Retirement Benefits are considered as SS/RR when computing taxable benefits.

    1. If it appears that the taxpayer reduced the gross SSA benefits (SS/RR element) by the amount of the WCOMP element, pursue the discrepancy.

    2. Mark the WCOMP element with Send Indicator "S" .

    3. PARAGRAPH 100 automatically generates.

4.19.3.7.17.1  (04-07-2009)
Social Security/Railroad Retirement Benefits - Analyzation

  1. When screening SS/RR IRs, check the name line area of the IR(s) to ensure that the benefits are properly credited to the appropriate taxpayer. Delete SS/RR amounts if the payee name line(s) indicates they are payments to a former spouse or dependent children, unless there is an indication the taxpayer in question is one of the actual recipients.

  2. Compare the total of SS/RR amounts with entries on:

    1. Form 1040, line 20a (total benefits) and line 20b (taxable benefits).

    2. Form 1040A, line 14a (total benefits) and line 14b (taxable benefits).

    3. Form 1040, line 21. The amount must match the taxable SS/RR payments within $1 or be identified as Social Security/Railroad Retirement payments.

  3. When the taxpayer is married filing separately (FS 3 or 6) and lived apart from their spouse for the entire year, they are instructed to enter a "D" on the dotted line next to Form 1040, line 20a (Form 1040A, line 14a). If a "D" is present (or a "Y" on an ELF return) on Form 1040, line 20a (Form 1040A, line 14a), enter an "N" in the TP LIVED WITH SPOUSE? field in the SSA RRB Changes window. If a "D" is not present:

    1. Assume the taxpayer lived with his/her spouse and zero is the applicable base amount for FS 3 or 6.

    2. Ensure that the TP LIVED WITH SPOUSE? field is blank.

    3. PARAGRAPH 162 automatically generates.

      Note:

      If there are no SS/RR IR(s) present on the Case Analysis screen, and it appears that the taxpayer did not report the proper taxable amount, because the "D" is not present, and there are no other U/R issues, close the case.

  4. On jointly filed returns, when one of the taxpayers is deceased, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ " when:

    1. Form 1040, line 20a or 20b (Form 1040A, line 14a or 14b) is zero or blank, or

    2. Form 1040, line 20a (Form 1040A, line 14a) is equal to or less than the surviving spouse's SS/RR IR amount(s).

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. The taxable amount of SS/RR payments is computed by the system based on the appropriate entries on the Adjusted Gross Income window and the SSA/RRB window. If the taxpayer files a Credit for the Elderly or Disabled, the system requires you to access the SSA/RRB window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - SSA/RRB window.

    Note:

    Screen SS/RR IR(s) after you analyze all other potentially discrepant income types. After any subsequent analysis that changes the TOTAL AGI CHANGE field, reselect the SSA/RRB window. (After computing the IRA deduction the system automatically recomputes SS/RR.) Recompute all changes to adjustments (SLID, Tuition and Fees, and/or DPAD) to income before selecting this window. See IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper sequence when these issues are present on the same case.

    Caution:

    Be alert for changes made during or after original processing when entering/verifying information in the SSA/RRB window. Send PARAGRAPH 97 (See Exhibit 4.19.3-7, CP PARAGRAPHS) for erroneous changes made during original processing.

  6. If Form 1040, line 20a or Form 1040A, line 14a is greater than the IR amount(s) and an adjustment to SS/RR is necessary, do not send the SS/RR IR(s) to the taxpayer.

    Note:

    After computing the SS/RR, the GROUP TOTAL field on the Case Analysis screen displays the total SS/RR IR amount. Compare this amount to the amount on Form 1040, line 20a or Form 1040A, line 14a.

  7. Verify that the amount in the TAX EXEMPT INTEREST field of the SSA/RRB window is correct. See IRM 4.19.3.7.3.5 (1), Interest Miscellaneous, if the TP improperly excluded tax-exempt interest on Schedule B.

  8. If the repayment amounts exceed the SS/RR amounts, and the taxpayer reports a taxable SS/RR amount, but fails to subtract any or all of his/her payments from the SS/RR amount, the system reduces the recomputed SS/RR amount as appropriate. This results in either a refund to the taxpayer or a reduction to his/her tax.

  9. If there are no SS/RR IRs on the Case Analysis screen, the taxpayer reports a gross amount on Form 1040, line 20a or Form 1040A, line 14a and the amount on Form 1040, line 20b or Form 1040A, line 14b is blank, zero or less than 85% of the gross amount, and there are other U/R issue(s):

    1. Create an IR for the gross amount reported on Form 1040, line 20a or Form 1040A, line 14a.

    2. Access the SSA/RRB window and input/verify the fields.

  10. If the taxpayer reported SS/RR (larger than the IR amount(s)), and the IR shows a REPAY amount, the REPAY IR must be coded with IR Code "D" . Otherwise, the system uses 85% of the REPAY amount as an offset and recomputes the tax.

  11. When the system computes taxable SS/RR, it uses the amount the taxpayer reported as benefits or the total of the IRs (less any REPAY amounts), whichever is greater. If the taxpayer attached documentation stating the SS/RR amounts were repaid in the current AUR tax year and no corresponding IR is present showing the REPAY amount, you must create an IR so the system correctly computes the taxable portion.

    Caution:

    If the taxpayer attached documentation stating the SS/RR amounts were repaid in a year other than the current AUR tax year, advise the taxpayer the repayment amount may be deducted ONLY in the year it was repaid.

4.19.3.7.17.2  (09-01-2013)
Social Security/Railroad Retirement Benefits Miscellaneous

  1. Taxpayers can compute taxable SS/RR benefits following the Lump-Sum Election (LSE) method. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡

    1. The SS/RR IR amount(s) is reported on Form 1040, line 20a, or Form 1040A, line 14a AND

    2. The SS/RR IR displays one or more of the following 11PAY, 10 PAY, 09PAY, or 08PAY, AND

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send PARAGRAPH 71 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  2. Do not pursue potential U/R SS/RR benefits if there is an indication the taxpayer is a resident of one of the following countries:

    • Canada

    • Egypt

    • Germany

    • Ireland

    • Israel

    • Italy

    • Japan

    • Romania

    • The United Kingdom

  3. Form SSA-1099 or Form RRB-1099 may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, and/or see IRM 4.19.3.15.1.2, Withholding and SSTax Miscellaneous, for further instructions.

  4. PARAGRAPH 99 automatically generates when a change to modified AGI impacts the taxable amount of SS/RR.

  5. If SS/RR is adjusted, enter the taxable return amount in the RETURN field on the Summary screen.


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