4.19.3  IMF Automated Underreporter Program (Cont. 2)

4.19.3.7 
Analysis of Each Income Type

4.19.3.7.18  (09-01-2003)
Other Income - General

  1. Other income is reported on Form 1099-MISC.

  2. Other income is identified on the Case Analysis screen by the literal "99MISC" in the DOC TYPE field and the literal "OTINC" in the INCOME TYPE field.

4.19.3.7.18.1  (09-01-2013)
Other Income (OTINC) - Analyzation

  1. Compare Form 1099-MISC OTINC amounts with entries on:

    1. Schedule C, line 6.

    2. Schedule F, lines 8 or 43.

    3. Form 4835, line 6.

    Note:

    If Alaska Permanent Fund Dividends, compare to Form 1040A, line 13 or Form 1040EZ, line 3.

  2. If it can be determined from the payer name or business activity that it is the same income, consider OTINC reported if it is included in larger total for the applicable taxpayer on the following Schedules:

    1. Schedule C or C-EZ, line 1

    2. Schedule F, lines 1a or 2

    Note:

    When determining the U/R amount consider NEC IR(s) as well as OTINC IR(s).

  3. Comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as OTINC:

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21. The taxpayer must provide enough information on line 21 or an attachment to isolate the amount he/she is reporting from the payer in question.

    5. Schedule D, Part I, lines 1, 2, or 3 column (d) or Part II, line 8, 9 or 10 column (d) - The taxpayer may report the sale of timber, coal, easements, right-of-way (ROW), land damages, etc. on these lines. Consider the OTINC reported if the sales price matches the IR within $1.

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

    7. Schedule E, Part I.

    8. Form 2106, line 7.

  4. The OTINC amount on a Form 1099-MISC IR represents the full value of Other Income. If the taxpayer reports a lesser amount, consider the difference U/R, unless documentation is attached to the return (i.e., taxpayer claimed fair market value).

  5. Accept OTINC as reported if:

    1. 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).

      Exception:

      Do not consider OTINC reported if Form W-2 and 1099-MISC are from the same payer or the income is from the Alaska Permanent Fund Dividend.

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

      Exception:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ or the income is from the Alaska Permanent Fund Dividend.

    3. The taxpayer has identified the payments as disaster or FEMA mitigation, made under any of the following; the Hazard Mitigation Grant Program (HMGP), the pre-Disaster Mitigation Program (PDM) or the Flood Mitigation Assistance Program (FMA).

4.19.3.7.18.2  (09-01-2013)
Other Income Miscellaneous

  1. The OTINC amount may represent a court award/settlement amount, as indicated on the taxpayer's attachment. The full amount is to be reported on Form 1040, line 21. The following items are to be included as Ordinary Income:

    1. Interest on any award.

    2. Compensation for lost wages or lost profits unless awarded due to personal physical injury or sickness.

    3. Punitive damages. It does not matter if they relate to a physical injury or physical sickness.

    4. Amounts received in settlement of pension rights (if the taxpayer did not contribute to the plan).

    5. Damages for patent or copyright infringement, breach of contract or interference with business operations that replace ordinary income.

    6. Back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.

    7. Damages received for emotional distress due to a personal injury that is unrelated to a physical injury or sickness (e.g., employment discrimination or injury to reputation).

  2. The Judgment Fund Branch of the United States Department of Agriculture (USDA) paid cash settlements and granted loan cancellations as a result of a 1999 class action discrimination suit filed by farmers. See IRM 21.6.4.4.9.3, USDA Discrimination Settlement Payments, for additional information.

  3. Any legal fees associated with the award/settlement are generally taken as a deduction on Schedule A. Gains from reimbursements for damages, casualty and theft, etc., are reported on Form 4684 and Form 4797.

    Exception:

    If the settlement involves: an unlawful discrimination suit, a claim against the U.S. Government or a claim made under section 1862(b)(3)(A) of the Social Security Act, see (4) below.

    1. Taxpayers are only allowed to deduct legal expenses incurred in attempting to produce or collect taxable income. For business related legal expenses, Schedules C, C-EZ, E, part I, and/or F may be used.

    2. If the taxpayer nets the amount for legal fees, pursue the deducted amount as U/R. If Schedule A is filed, include this amount in the GROSS JOB AND MISC EXPENSE field (line 23) of the Schedule A window in Return Value and send a Special Paragraph to inform the taxpayer that legal fees are an itemized deduction that are reduced by 2% of adjusted gross income. If no Schedule A is filed, send a Special Paragraph to inform the taxpayer they may now qualify for Itemized Deductions.

  4. Any legal expenses, up to the settlement included in gross income, from: an unlawful discrimination suit, a claim against the U.S. Government or a claim made under section 1862(b)(3)(A) of the Social Security Act, may be deducted as an adjustment to income on page 1 of Form 1040. Any legal expenses over the amount of income are deductible as a miscellaneous itemized deduction subject to the 2% limit.

    1. Consider any deducted amount over the reported settlement as U/R income.

    2. If Schedule A is filed, include the over-deducted amount in the GROSS JOB AND MISC EXPENSE field of the Schedule A window in Return Value and send a Special Paragraph to inform the taxpayer that legal fees over the amount of settlement income are an itemized deduction that are reduced by 2% of adjusted gross income.

    3. If no Schedule A is filed, send a Special Paragraph to inform the taxpayer they may now qualify for Itemized Deductions

  5. OTINC paid by an auto manufacturer to a motor vehicle salesperson is not subject to SE Tax and CANNOT be reported on Schedule C or Schedule C-EZ. If it is the only income reported on Schedule C or Schedule C-EZ:

    1. Disallow the expenses.

    2. Adjust SE Tax as appropriate.

    3. Send a Special Paragraph to inform the taxpayer of the adjustment using the following verbiage as an example: "Automotive manufacturer incentive payments made to a vehicle salesperson may not be offset by Schedule C or Schedule C-EZ expenses. We disallowed the expenses and refigured your tax."

  6. If OTINC is partially reported on Schedule C, C-EZ, or F, treat as self-employment income. Enter Income Identify Code "PB" , "PF" , "SB" , or "SF" as applicable in the INC CD field on the Case Analysis screen. See Exhibit 4.19.3-9, Income Identify Codes.

  7. If OTINC is reported and the taxpayer should have paid SE Tax but did not, the SE Tax must be computed or recomputed if OTINC is asterisked or a notice is sent for another issue(s). Include the reported OTINC 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 OTINC IR elements on the notice when adjusting SE tax.

    Caution:

    If the OTINC 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-MISC IRs with OTINC amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  9. If Other Income is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.19  (09-01-2003)
Gambling Income - General

  1. Gambling income represents gross winnings from a gambling activity.

  2. Gambling income is reported on Form W-2 G, Certain Gambling Winnings.

  3. Gambling income is identified on the Case Analysis screen by the literal "W-2G" in the DOC TYPE field and the literal "GAMBL" in the INCOME TYPE field.

4.19.3.7.19.1  (09-01-2013)
Gambling Income - Analyzation

  1. Comparisons for the following must match within $1 or be CLEARLY IDENTIFIED as GAMBL:

    1. Form 1040, line 7.

    2. Form 1040, line 21.

    3. Form 1040A, line 7.

    4. Form 1040EZ, line 1.

    5. Schedule C, Part I, lines 1 or 6 (or Schedule C-EZ, line 1), if payer or business activity indicates that it is the same income. See IRM 4.19.3.7.19.2 (11) and (12), Gambling Losses, for additional information.

    6. Schedule F, lines 8 or 43.

  2. If the taxpayer reports gambling income on Schedule D, Part II, compare the amount reported, with the IR and take the following action:

    1. If the amount reported, column (h), is equal to 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.

      Note:

      If reported on Schedule D, Part II, subtract the gambling income from the LONG TERM GAIN/LOSS field in the SCHD/8814/ECR Tax window and send a Special Paragraph using the following verbiage as an example: "Gambling winnings are ordinary income and do not qualify for capital gains treatment. "

  3. Gambling income may erroneously display as discrepant if an amount is present on Form W-2 G, Box 7 (winnings from identical wagers). This amount displays on the IR by the literal "IDWAG" . Disregard IDWAG amounts. The system automatically assigns Status Code "X" to IDWAG amounts. Consider gambling income reported if the amount the taxpayer reports matches the GAMBL IR within $1.

  4. If neither gambling income nor gambling losses are reported, consider the entire IR(s) U/R.

  5. If the taxpayer did not itemize his/her deductions, send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

4.19.3.7.19.2  (08-16-2011)
Gambling Losses

  1. If the taxpayer itemizes deductions on Schedule A, he/she may deduct gambling losses equal to gambling winnings. If the taxpayer deducts gambling losses on Schedule A but reports no winnings, disallow gambling losses on Schedule A.

    Exception:

    If there are U/R Gambling IRs, pursue the Gambling IRs and allow the reported Gambling Losses up to the amount of the U/R Gambling IRs.

  2. If the taxpayer did not file Schedule A, he/she may deduct gambling losses in excess of the applicable standard deduction amount for his/her filing status. Send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  3. The taxpayer is eligible to itemize deductions when deductions on Schedule A exceed the applicable standard deduction amounts for their filing status. See IRM 4.19.3.11, Standard Deduction, for further information.

  4. Gambling losses are O/D if:

    1. They exceed gambling winnings.

    2. They are deducted twice. (The taxpayer reports net gambling winnings and also deducts gambling losses on Schedule A.)

    3. They are directly deducted from gambling winnings, and the taxpayer is not eligible to itemize deductions. (Gambling losses offset against gambling winnings are less than the standard deduction amount.)

  5. When the taxpayer is claiming gambling losses on Form 1040, Schedule A and, is not claiming any gambling winnings on Form 1040, line 21 AND there are no GAMBL IR(s):

    1. Select the Schedule A window and disallow the amount of losses the taxpayer claimed by entering zero (0) in the GAMBLING LOSS OF OTHER MISC RECOMPUTED field.

    2. DO NOT adjust the GAMBLING LOSS OF OTHER MISC PER RETURN, TOTAL DEDUCTIONS fields.

    3. Send PARAGRAPH 144 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  6. When the taxpayer claims more losses on Form 1040, Schedule A than winnings (on Form 1040, line 21), take the following action:

    1. Select the Schedule A window and enter the allowable reported losses (up to the reported winnings PLUS any U/R gambling) in the GAMBLING LOSS OF OTHER MISC RECOMPUTED field.

    2. DO NOT adjust the GAMBLING LOSS OF OTHER MISC PER RETURN, TOTAL DEDUCTIONS fields.

    3. Send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  7. When the taxpayer nets gambling losses against gambling winnings and either filed or did not file a Schedule A (or an attached Schedule A was not used because it was less than the standard deduction):

    1. Mark the GAMBL IR(s) U/R for the amount of loss claimed.

    2. Select the Schedule A window.

    3. If no Schedule A filed and the allowable gambling losses now exceed the standard deduction amount, enter a zero (0) in the GAMBLING LOSS OF OTHER MISC PER RETURN, TOTAL DEDUCTIONS fields. Include the gambling losses (up to the gambling winnings amount) in the GAMBLING LOSS OF OTHER MISC RECOMPUTED field. If appropriate, update any other fields in the Schedule A window.

    4. If Schedule A filed, DO NOT adjust the GAMBLING LOSS OF OTHER MISC PER RETURN, TOTAL DEDUCTIONS fields. Update the GAMBLING LOSS OF OTHER MISC RECOMPUTED field with the amount of the allowable losses.

    5. Send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

      Caution:

      If the filing status is 3 and/or the taxpayer checks the box on Schedule A, line 30 or writes "IE" (Itemized Elected) on the left dotted portion of Form 1040, line 40, DO NOT adjust the Schedule A window. Consider the gambling U/R and send PARAGRAPH 42.

  8. If the taxpayer filed a Schedule A, verify that the GAMBLING LOSS OF OTHER MISC PER RETURN and GAMBLING LOSS OF OTHER MISC RECOMPUTED fields contain the correct amounts.

  9. Verify the TOTAL DEDUCTIONS fields include the allowable amount of gambling losses. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Schedule A window, for further instructions.

  10. If the taxpayer did not file a Schedule A and gambling losses are less than the standard deduction amount, no entry is necessary on the Schedule A window. Send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  11. Only taxpayers who conduct gambling as a business (i.e., "professional gambler" ) are permitted to report gambling income and losses on a Schedule C. The taxpayer may claim gambling losses only up to the amount of gambling income. If the taxpayer claims gambling losses in excess of gambling income, disallow the portion of gambling losses in excess of income.

    1. Enter the total gambling losses claimed in the PRIM/SEC SCH C EXPENSE PER RETURN field of the MISC ADJUSTMENT/SCHEDULE C EXPENSE window.

    2. Enter the allowable gambling losses in the PRIM/SEC SCH C EXPENSE NOW field of the MISC ADJUSTMENT/SCHEDULE C EXPENSE window.

    3. Adjust SE tax as appropriate.

    4. Send PARAGRAPH 144 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  12. If it appears that gambling is not the primary source of income for the taxpayer (example: the taxpayer lists their occupation as other than "professional gambler" and/or reports significant earned income from non-gambling sources), take the following action:

    1. Use the MISC ADJUSTMENT/SCHEDULE C EXPENSE window to disallow the expenses claimed on Schedule C.

    2. Enter the disallowed amount as a positive in the PRIM/SEC SCH C EXPENSE PER RETURN field.

    3. Enter a zero (0) in the PRIM/SEC SCH C EXPENSE NOW field.

    4. Adjust SE Tax as appropriate.

    5. Enter the gambling losses (up to the gambling winnings) in the GAMBLING LOSS OF OTHER MISC RECOMPUTED field of the Schedule A window.

    6. See (7) through (9) above for other actions to take in the Schedule A window, depending on the situation.

    7. Send PARAGRAPH 14 (See Exhibit 4.19.3-7, CP PARAGRAPHS)

    8. If the taxpayer did not file a Schedule A and the gambling losses now qualify the taxpayer to use Schedule A, send PARAGRAPH 42 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  13. Form W-2 G IRs with GAMBL amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  14. If gambling winnings are U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.20  (09-01-2012)
Cancellation of Debt (DBTCN) - General

  1. Cancellation of Debt is generally considered income to the taxpayer if a debt owed to the Federal Government, financial institution, credit union or other creditor was discharged and is not otherwise excluded from gross income.

  2. Cancellation of Debt is reported on Form 1099-C, Cancellation of Debt.

  3. Cancellation of Debt is identified on the Case Analysis screen by the literal "1099C" in the DOC TYPE field and the literal "DBTCN" , "INTFG" , or "FMV" in the INCOME TYPE field.

    Note:

    Only pursue DBTCN U/R amounts.

4.19.3.7.20.1  (09-01-2013)
Cancellation of Debt (DBTCN) - Analyzation

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

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

  3. Comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as DBTCN:

    1. Form 1040, line 21.

    2. Schedule C, Part I, line 6 (or Schedule C-EZ, line 1).

    3. Schedule E, Part I, lines 3 and 4.

    4. Schedule F, Part I, lines 3a, 4a, 5b, 6a, and 8; or, Part III, lines 39a - 43.

    5. Give credit for amounts computed or explained on an attachment that are identified as being from the same payer.

    Exception:

    If the taxpayer reports the full amount of the IR and then zeroes it out, request the taxpayer either get a corrected statement from the payer or submit a completed Form 982.

    Exception:

    If Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment), is attached with an entry on line 2, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. An IR with a literal of DBTCN may also have a Bankruptcy Indicator (BI) of "1" . Check these IRs for a BI: 1 located under the PAYER field of the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  5. If there are two DBTCN IRs with identical payer names and money amounts and one IR is for the primary taxpayer and the other is for the spouse, delete one IR.

  6. If the taxpayer reduces the reported DBTCN amount by the INTFG (interest forgiven) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. Consider the DBTCN reported when, DBTCN is from a Student Loan, and the taxpayer has indicated ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. The Federal Emergency Management Agency (FEMA), operating as a division of the U. S. Department of Homeland Security, has a national program to forgive amounts paid to taxpayers (incorrectly or due to fraud) who are unable to repay these amounts. These IRs are valid. Pursue any U/R amounts.

  9. The Mortgage Forgiveness Debt Relief Act of 2007 (Pub. Law 110-142) created a new exclusion under sections 108(a)(1)(E) and 108(h) for discharged qualified principal residence indebtedness. This exclusion applies to qualified principal residence indebtedness that is discharged on or after January 1, 2007 and before January 1, 2014. The maximum amount that can be treated as qualified principal residence indebtedness is $2 million ($1 million if MFS). Taxpayers must file Form 982 to claim this exclusion.

  10. If the taxpayer has received DBTCN from a Foreclosure or Repossession and the taxpayer is personally liable (recourse debt), the amount by which the canceled debt exceeds the FMV of the property must generally be reported as ordinary income on Form 1040, line 21.

  11. If the taxpayer has received DBTCN from a Foreclosure or Repossession and the taxpayer is not personally liable (non-recourse debt), the gain or loss is computed by comparing the balance of the loan amount with the adjusted basis.

    1. Losses are non-deductible, unless the property was used in trade or business or held for investment. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send a Special Paragraph to inform the taxpayer these losses are not deductible.

    2. Losses in excess of gains from sales of property used in trade or business are deductible as ordinary losses.

    3. Losses in excess of gains from sales of capital assets held for investment are deductible up to $3,000 ($1,500 if married filing separately).

  12. If the taxpayer indicates that the income is not taxable because he/she is insolvent, (e.g., Form 982, Box 1b, is checked or on an attached statement), the taxpayer MUST provide a statement showing the amount of his/her insolvency. If the taxpayer does not provide a breakdown of his/her assets and liabilities, DO NOT consider him/her to be insolvent. The taxpayer is considered insolvent if the net liability amount(s) shown on the attached statement is GREATER than the total fair market value of assets immediately prior to the debt cancellation.

    1. If the DBTCN IR amount(s) is less than or equal to the insolvency amount, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the DBTCN IR amount(s) is more than the insolvency amount, the amount of the taxpayer's insolvency must be considered. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Example:

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

      Note:

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

  13. If the taxpayer indicates that he/she did not report the DBTCN income because he/she filed for Chapter 7 or 11 Bankruptcy, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  14. If the taxpayer states that he/she filed for either Chapter 12 or 13 of the Bankruptcy Code or does not indicate the Chapter, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ send a Special Paragraph to the taxpayer requesting the bankruptcy paperwork.

  15. If the taxpayer indicates that the cancellation or discharge of debt was due to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

4.19.3.7.20.2  (09-01-2004)
Cancellation of Debt (DBTCN) - Miscellaneous

  1. PARAGRAPH 72 automatically generates when DBTCN is U/R.

  2. If DBTCN is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.21  (09-01-2003)
Taxable Grants - General

  1. A grant is subsidized financing paid by a federal, state, or local programs for energy conservation or production projects, and is income to the recipient.

  2. Taxable grants are reported on Form 1099-G.

  3. Taxable grants are identified in the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "GRANT" in the INCOME TYPE field.

4.19.3.7.21.1  (09-01-2003)
Taxable Grants - Analyzation

  1. Compare GRANT amounts with entries on Form 1040, line 21, or an attachment to the return.

    • The amount must match within $1, or

    • Must be identified as grant income

  2. If the payer is the US Department of Agriculture (USDA), compare grant amount(s) with entries on:

    1. Schedule F, lines 4a, 4b, 39a, or 39b.

    2. Schedule F, lines 8 or 43. The amount must match within $1 or be clearly identified as grants.

      Note:

      If a GRANT amount is partially reported on Schedule F, treat as self-employment income. Enter Income Identify Code "PF" or "SF" as applicable in the INC CD field on the Case Analysis screen.

    3. Form 4835, lines 3a or 3b.

4.19.3.7.21.2  (09-01-2004)
Taxable Grants Miscellaneous

  1. Form 1099-G IR(s) with GRANT amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions.

  2. Send PARAGRAPH 124 (See Exhibit 4.19.3-7, CP PARAGRAPHS) only if the GRANT is related to education.

  3. When taxable grants are U/R, enter the return amount in the RETURN field of the Summary screen.

4.19.3.7.22  (09-01-2004)
Substitute Payments in Lieu of Dividends or Interest

  1. Substitute payments in lieu of dividends or interest are made by a broker who transfers a taxpayer's securities for use in a short sale and receives certain substitute dividend or interest payments on the taxpayer's behalf while the short sale is open.

  2. Substitute payments in lieu of dividends or interest are reported on Form 1099-MISC and are identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "PLDIV" in the INCOME TYPE field.

  3. Compare PLDIV amounts with entries on Form 1040, line 21.

    • The amount must match within $1, or

    • Must be clearly identified as substitute payments in lieu of dividends income

  4. Send PARAGRAPH 41 when substitute payments in lieu of dividends or interest are reported as interest or dividends. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  5. If substitute payments in lieu of dividends or interest are U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.23  (09-01-2012)
Securities Sales - General

  1. Securities sales are the proceeds from transactions involving stocks, bonds, other debt obligations, commodities, or forward contracts.

  2. Securities sales income is reported on Form 1099-B and taxpayers are instructed to include these amounts on Schedule D.

    Note:

    The Schedule D no longer provides an area for the taxpayer to individually list their securities transactions. In addition, Schedule D-1 has been replaced with a new Form 8949, Sales and Other Dispositions of Capital Assets.

  3. Securities sales is identified on the Case Analysis screen by the literal "1099B" in the DOC TYPE field and the literal "STOCK" in the INCOME TYPE field. The 1099B IR also reflects the literal "BASIS" to reflect any cost basis reported by the payer, see IRM 4.19.3.7.23.1.1, Cost Basis - Analyzation for additional information.

    Note:

    There are two Category Codes for STOCK. Category 31 contains 100 or fewer IRs. Category 39 contains more than 100 IRs.

4.19.3.7.23.1  (09-01-2013)
Securities Sales - Analyzation

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

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

  2. A CP 2501 must be the first notice sent if the net U/R from STOCK and BASIS IRs is $100,000 or more; otherwise, issue a CP 2000 Notice.

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

  4. Generally, Form 1099-B STOCK IRs contain a CUSIP (Committee on Uniform Security Identification Procedures) number. This number is usually nine characters long, consisting of alpha and/or numeric characters. The CUSIP number identifies the issuer of the security and the type of security. Alpha characters in the 7th and/or 8th position(s) of the CUSIP number denote fixed income obligation securities. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ " ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " . When the taxpayer has reported these amounts, the IRs must be taken into consideration when determining the U/R amount.

    Caution:

    Be careful when determining the position of the CUSIP number containing the alpha characters. The first six digits represent the issuer number and the 4th and 5th and/or 6th positions may contain alpha character(s).

    Note:

    Pursue STOCK IRs whose entity includes nontaxable Municipal Bond, tax free exchange or tax free unless the CUSIP number meets the conditions provided above.

  5. Some securities sales IR(s) appear to be duplicates because the account numbers, the amounts, AND the source (paper or tape) are identical. DO NOT consider these IR(s) as duplicates if the transaction (sales) dates shown on the IR(s) are different.

  6. Compare STOCK amounts with entries on:

    1. Form 8949 , Part I, line 1, column (d) (Short Term).

    2. Form 8949 , Part II, line 3, column (d) (Long Term).

    3. Schedule D, Part I, lines 1, 2 or 3, column (d) (Short Term).

    4. Schedule D, Part II, lines 8, 9 or 10, column (d) (Long Term).

  7. Comparisons with the following entries must match within $1 or be CLEARLY IDENTIFIED as STOCK:

    1. Form 4797, Part II, line 10 and the TP has made a mark-to-market election.

    2. Schedule C, Part I, line 1 and the TP made a mark-to-market election. Send PARAGRAPH 117 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    3. Form 6252, Part I, line 5.

    Caution:

    See IRM 4.19.3.7.23.1.2, Day Trader Securities - Analyzation, if the TP reported STOCK on either Schedule C or Form 4797 and there is no indication that a mark-to-market election was made.

  8. If Form 8949 (or a similar statement) is attached, use the following items when comparing the IRs to the return:

    • sales date

    • money amount

    • item description (brokerage name or actual stock name)

    • income identify code

  9. Individual STOCK IR(s) are screened using the following procedures:

    1. Mark the STOCK element with Status Code "U" .

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

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

      Note:

      If there is U/R STOCK 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 prevents the system from using losses in excess of $3,000 ($1,500 if MFS) to offset U/R Schedule D income. When STOCK is treated as ordinary income due to loss limitations, PARAGRAPH 24 automatically generates. If the loss per return is less than $3,000 ($1,500 if MFS), toggle off PARAGRAPH 24 from the Summary screen.

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

      Note:

      The Adjusted Gross Income and COMPUTE SCHEDULE D LOSS windows automatically display when a Status Code "U" is entered the first time. It is not necessary to subsequently access these windows 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 STOCK elements.

    6. The system uses the information on the COMPUTE SCHEDULE D LOSS window to determine the correct 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.

  10. If you cannot match the individual IRs, take the following action:

    1. Group the IRs by payer and compare the total to the gross amounts reported by payer on Form 8949 Part I, line 1, column d (Short Term) or Part II, line 3, column d (Long Term).

    2. Compare the group total to the total stock reported for that payer.

      Reminder:

      Use both short and long term stock sales amounts when making the comparison.

    3. If group total amount is smaller, consider the stock reported.

    4. If group total amount is larger, consider the difference underreported.

  11. If a breakdown of stock is not shown on the return or an attachment and there is more than one stock IR, take the following action:

    1. Group by income type income identify code (ST or SD) and compare the total to the gross amounts reported on Schedule D, Part I, lines 1, 2 or 3, column (d) (Short Term) or Part II, lines 8, 9 or 10, column (d) (Long Term).

      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 to the total stock amount reported.

      Reminder:

      Use both short and long term stock sales amounts when making the comparison.

    3. If group total amount is smaller, consider the stock reported.

    4. If group total amount is larger, consider the difference underreported.

  12. If Stock Option Statements are attached to the return consider them during the screening process.

  13. When taxpayers exercise non-statutory (nonqualifying) employee stock options, the gain is reported as ordinary income. Employers include the exercised amount on Form W-2. Box 1 and identify the stock option amount in Box 12 using code "V" . Delete fully U/R STOCK IR(s) when:

    Note:

    The "V" Code displays on WAGE IRs with the literal VCODE.

    1. There are 1-4 STOCK IR(s) (per taxpayer) containing the payer name/item description that corresponds with the payer name on Form W-2 Wages IR AND

    2. Form W-2 Box 12 contains an amount with code "V" that is less than or equal to the total of Form 1099-B STOCK IR amount(s).

      Note:

      See IRM 4.19.3.7.1.1 (13) and (14), Wages - Analyzation, for additional information regarding exercising of employee stock options.

4.19.3.7.23.1.1  (09-01-2013)
Cost Basis - Analyzation

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. The BASIS element displays income identify code of "SC" for Short-term cost basis or "LC" for Long-term cost basis.

  3. A CP 2501 must be the first notice sent if the net U/R from STOCK and BASIS IR(s) is $100,000 or more; otherwise, issue a CP 2000 Notice.

  4. If the STOCK element on an IR containing BASIS is fully UR, use the BASIS amount as the reported amount for STOCK and enter status code "N" or "D" on the BASIS element.

  5. If the STOCK element on an IR containing BASIS ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡

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

  7. If issuing a notice for STOCK and the BASIS amount was considered in determining the UR amount, mark the BASIS IR element(s) with Send Indicator "S" .

4.19.3.7.23.1.2  (09-01-2012)
Day Trader Securities - Analyzation

  1. Transactions from trading activities are reported on Form 8949 (when the TP has NOT made a mark-to-market election per IRC 475) or on Form 4797 (when the TP has made a mark-to-market election).

  2. The gain or loss from the trading of securities is not subject to SE tax.

  3. Taxpayers who engage in the business of buying and selling securities (i.e., a trader or day trader) are allowed to claim business related expenses on Schedule C.

  4. Transactions from day trading activities are subject to the $3,000 ($1,500 if married filing separately) limit on capital losses UNLESS the TP made a mark-to-market election (IRC 475).

  5. If there is no indication that a mark-to-market election was made and the TP reports securities gains on Schedule C (Part I, line 7 is positive) or Form 4797 (Part II, line 10 is positive) and the securities are equal to or greater than the STOCK IR(s), consider the STOCK reported, otherwise the difference is U/R.

  6. If there is no indication that a mark-to-market election was made and the TP reports securities losses on Schedule C (Part I, line 7 is negative) or Form 4797 (Part II, line 10 is negative), take the following actions:

    1. If securities reported are equal to or greater than the STOCK IR(s), consider the STOCK reported, otherwise the difference is U/R.

    2. Disallow any losses in excess of $3,000 ($1,500 if married filing separately). Ensure that any capital losses reported on Schedule D are accounted for in determining the overall disallowed losses amount.

    3. Do not make any adjustments to expenses claimed on Schedule C, Part II, line 28.

    4. Do not make any adjustments to SE tax paid.

    5. Send PARAGRAPH 118 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    6. Issue a CP 2501 if the U/R amount is $100,000 or more, otherwise issue a CP 2000.

4.19.3.7.23.2  (09-01-2012)
Securities Sales Miscellaneous

  1. STOCK amounts may be taxed on Schedule D at the applicable capital gain tax rate. See IRM 4.19.3.12.2, Sch D/8814/ECR Tax Window, for further instructions.

  2. In order for the system to compute the correct tax, the U/R STOCK amount(s) must contain an Income Identify Code. The Income Identify Code for STOCK IRs is defaulted to the appropriate Income Identify Code depending on the designation from box 8 of Form 1099-B. The IR displays either a "ST" (Short Term Gain/Loss) or SD (Long Term Gain/Loss). Do not change the Income Identify Code during screening.

    Note:

    See Exhibit 4.19.3-9, Income Identify Codes.

  3. Form 1099-B IR(s) with STOCK amounts may reflect W/H. See IRM 4.19.3.15.1, Withholding - General, for further instructions. If there is an indication that the securities 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.

  4. PARAGRAPH 166 automatically generates when STOCK is U/R.

  5. If STOCKs are U/R enter the sum of Schedule D, Part I, lines 1, 2 and 3 column (d) and Part II, lines 8, 9 and 10 Column (d) in the RETURN field of the Summary screen.

4.19.3.7.24  (09-01-2004)
Bartering - General

  1. Bartering is an exchange of one taxpayer's property or services for another taxpayer's property or services. The fair market value of property or services received through barter is taxable income.

    Example:

    If a doctor agrees to give an accountant a medical exam in exchange for tax return preparation, the fair market value of the medical exam is taxable to the accountant, and the fair market value of the tax return preparation is taxable to the doctor

  2. If these exchanges occurred through a barter exchange, they are reported to IRS on Form 1099-B. Form 1099-B shows the value of cash, property, services, credits, or scrip received by the taxpayer.

  3. Bartering is identified on the Case Analysis screen by the literal "1099B" in the DOC TYPE field and the literal "BARTR" in the INCOME TYPE field. Bartering is reflected in the Gross Receipts amount on the Income Comparison screen.

4.19.3.7.24.1  (09-01-2013)
Bartering - Analyzation

  1. Bartering income is reported on:

    1. Schedule C, lines 1 or 6 or C-EZ, line 1.

    2. Schedule F, lines 1a, 2, 3a, 3b, 7, 8, 9, 37, 42, 43, or 44. (Consider bartering reported here only if you can determine from the payer name or business activity that it is farm related income.)

  2. Comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as BARTR:

    1. Form 1040, line 21.

    2. Schedule D.

      Note:

      Payers may erroneously report securities transactions as bartering since both income types are reported on Form 1099-B.

    3. Form 8949.

    4. Schedule E, lines 3 or 4.

    5. Form 4835, lines 2a or 2b, 6 or 7.

  3. Bartering is generally considered self-employment income. If there is reported Bartering on which the taxpayer should have paid SE Tax but did not, SE Tax must be computed or recomputed if BARTR is asterisked or a notice is sent for another issue(s). Include the reported BARTR amount in the PRIM/SEC REPORTED SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.14.1, Self-Employment Tax.

    Reminder:

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

    Caution:

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

    Note:

    Do not assess SE Tax when BARTR is fully or partially reported on Form 4835, Schedule D, Form 8949, or Schedule E, Part I.

  4. Change the Income Identify Code on U/R BARTR IR(s) to "PF" , "SF" , "PB" , or "SB" as applicable.

  5. PARAGRAPH 126 automatically generates when BARTR is U/R.

  6. If Bartering is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.25  (12-26-2007)
Real Estate Transactions - General

  1. Real estate transactions are the proceeds from the transfer (sale or exchange) of real estate.

  2. Real estate transactions are reported on Form 1099-S.

  3. Taxpayers can exclude up to $250,000 ($500,000 if married filing jointly) on the sale of their main home. Any gain in excess of the exclusion amount is reportable income.

  4. Real estate transactions are identified on the Case Analysis screen by the literal "1099S" in the DOC TYPE field and the literal "REAL" in the INCOME TYPE field.

4.19.3.7.25.1  (09-01-2013)
Real Estate Transactions - Analyzation

  1. ONLY screen REAL IR(s) in Category 65. If REAL is asterisked in categories other than 65, the system marks the IRs with Status "X" . If appropriate, close the case with PC 2X. If the case is open because of other income discrepancies, do not screen the non-asterisked REAL IRs.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

  4. Compare REAL amounts with entries on:

    1. Form 4797, Sale of Business Property, lines 1, 2(d), 10(d), 20 or attachments.

    2. Form 6252, Installment Sale Income, lines 5 or 21.

    3. Schedule D, lines 1, 2. 3 or 8, 9,10 (column (d), sales price, or lines 4 or line 11, column(h) (gain), or attachments.

    4. Form 8949, line 1 or 3, column (d)

    5. Form 8824, Like-Kind Exchanges, line 15.

    6. An attachment to the return that includes purchase and sales price.

  5. If the amount reported per (4) above is equal to or greater than the REAL IR(s) amounts and is properly carried forward to page 1 of the Form 1040, consider the issue resolved. If the amount reported is less, or is not properly carried forward to page 1 of the Form 1040, consider the difference U/R.

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

  7. If unable to identify REAL per (4) above, pursue the entire U/R real estate amount(s). Do not apply any exclusion amount.

4.19.3.7.25.2  (09-01-2012)
Real Estate Transactions Miscellaneous

  1. If there is a Schedule C or C-EZ attached to the return and the principal business is listed as real estate broker, real estate sales, building, construction, or remodeling; or the principal business activity code indicates related business, i.e., 233200, 238160, 238900, 531210, etc., consider REAL amount(s) fully reported when:

    1. Gross Receipts on Schedule C or C-EZ are larger than the REAL amount(s),

    2. The taxpayer reports the exact amount of the IR(s) on Schedule C, line 6, C-EZ, line 1, or

    3. The taxpayer includes the real estate sale on an attachment.

  2. If U/R REAL should be reported on Schedule D:

    1. Input Income Identify Code "SD" if the U/R REAL amount(s) is determined to be a long term capital gain/loss, (Schedule D, Part II) or,

    2. Input Income Identify Code "ST" if the U/R REAL amount(s) is determined to be a short term capital gain/loss, (Schedule D, Part I) or,

      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 (8), Capital Gain Distributions - Analyzation, for procedures to access the Schedule D window and U/R the capital gain income.

  3. If there is U/R Schedule D REAL income and the taxpayer reports a capital loss on Form 1040, line 13:

    1. See IRM 4.19.3.7.4.5 (7), Capital Gain Distributions - Analyzation, for procedures to access the Schedule D window and underreporting all Schedule D income.

    2. Enter a zero (0) in both fields on the COMPUTE SCHEDULE D LOSS window. This prevents the system from using losses in excess of $3,000 ($1,500 if MFS).

  4. PARAGRAPH 5 automatically generates when REAL is U/R.

4.19.3.7.26  (09-01-2004)
Refund of Overpaid Mortgage Interest (ROMID) - General

  1. Refund of Overpaid Mortgage Interest Deduction (ROMID) is a refund of interest the taxpayer paid to a lending institution. If the taxpayer receives a refund in the same year he/she paid it, he/she must either:

    1. Reduce the mortgage interest deduction claimed on Schedules A, C, E, F, Form 4835, Form 8829, or

    2. Claim the refund amount on Form 1040, line 21.

  2. ROMID amounts are reported to IRS on Form(s) 1098, Box 3 and are displayed on the Information Return window and the Case Analysis screen with the DOC TYPE of "1098" and the INCOME TYPE of "ROMID" .

4.19.3.7.26.1  (09-01-2004)
Refund of Overpaid Mortgage Interest (ROMID) - Analyzation

  1. Compare ROMID amount(s) with entries on:

    1. Form 1040, line 21. The amount must match within $1 or must be clearly identified as ROMID.

    2. Schedules A, C, E, F, Form 4835, or Form 8829 where it appears the taxpayer netted (subtracted ROMID amount) the mortgage interest amount reported.

      Note:

      Use MORT IR amounts for reference even if they are system deleted.

  2. If the taxpayer did not itemize deductions in the prior year, the ROMID may still be taxable if the taxpayer claimed a mortgage interest deduction on Schedule(s) C, E, F or Form 4835 or Form 8829. Research may be done on IDRS using CC RTVUE to determine if these Schedules or Forms were filed by the taxpayer and if a mortgage interest deduction was claimed. If the taxpayer did not claim the mortgage deduction on his/her prior year return, do not pursue the ROMID issue.

  3. Consider the difference U/R if the ROMID cannot be identified, see (1) above.

  4. See IRM 4.19.3.10.2, Mortgage Interest Deduction (MID) and Points Paid, for instructions on screening mortgage interest (MORT) amounts.

  5. PARAGRAPH 123 automatically generates.

  6. If ROMID is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.7.27  (09-01-2013)
Qualified Education Program Payments - General

  1. Qualified Education Program Payments consist of Qualified Tuition Program (QTP) or Coverdell Education Savings Accounts (CESA) and are reported to IRS on Form 1099-Q, Payments From Qualified Education Programs (Under Section 529 and 530). Amount indicators on the Form 1099-Q reflects Gross Distribution (Box 1); Earnings (Box 2); and QTB (Basis Box 3).

  2. Contributions to a CESA are identified by a Form 5498-ESA, Coverdell ESA Contribution Information, and are non-deductible. If the taxpayer claims an IRA deduction and the amount matches a Form 5498-ESA contribution, disallow the deduction. PARAGRAPH 30 automatically generates.

  3. Qualified Education Program Payments are identified on the Case Analysis screen by the literal "1099Q" in the DOC TYPE field and the literals:

    • GRDIS - Gross Distribution

    • EARN - Gross Earnings

    • QTB - Qualified Tuition Basis

  4. Only EARN (Earnings) is pursued as U/R. Gross Distribution and QTB is for information only and is system deleted. Underreported EARN is treated as ordinary income and NOT as earned income for purposes of computing EIC, Child Care Credit, etc.

4.19.3.7.27.1  (09-01-2012)
Qualified Education Program Payments - Analyzation

  1. If there is an indication of a Trustee to Trustee transfer (Form 1099-Q, Box 4 is checked), the distribution is nontaxable. Do not pursue the issue.

  2. If a Form 5498-ESA IR is present with the literal "EROLV" in the INCOME TYPE field, and has an amount that matches Form 1099-Q GRDIS ≡ ≡ ≡ ≡ ≡ ≡ ≡ consider the distribution rolled over.

  3. Only pursue net positive EARN amounts. When there are multiple 1099-Q IR(s), combine positive EARN amounts with any negative EARN amounts. If the combined net EARN is negative, do not pursue the EARN issue. Input income status code "N" or "D" .

  4. 1099-Q IRs display a Distribution Type Indicator on the Case Analysis screen based on the information in Form 1099-Q Box 5:

    • IND "1" - Qualified Tuition Program (QTP) from a private educational institution.

    • IND "2" - QTP from a State (or state agent/instrumentality)

    • IND "3" - Coverdell ESA.

      Note:

      If the indicator is blank, the payer did not specify the type of distribution. Consider the IR valid and continue processing.

  5. Generally, QTP or CESA distributions are non-taxable if they are less than the designated beneficiary's qualified education expenses. The taxable amount is reported on Form 1040, line 21. Consider the Form 1099-Q distribution(s) reported when:

    1. The taxpayer indicates the designated beneficiary's qualified education expenses ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ OR

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

      Note:

      A 10% additional tax may also apply. See IRM 4.19.3.14.5, 10% Tax on Qualified Education Program Payments, for further instructions.

4.19.3.7.27.2  (09-01-2013)
Qualified Education Program Payments - Miscellaneous

  1. PARAGRAPH 31 automatically generates when EARN is U/R.

  2. If it is determined that the EARN amount is U/R, enter the return amount in the RETURN field on the Summary screen. The CP 2000 displays the discrepancy as "Education Program Payments" .

4.19.3.7.28  (03-01-2007)
Health Saving Accounts (HSA), Archer Medical Savings Account (AMSA) and Medicare Advantage MSA (MAMSA) Distributions - General

  1. Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA, is used to report the following distributions:

    1. Health Savings Account (HSA).

    2. Archer Medical Savings Accounts (AMSA).

    3. Medicare Advantage Medical Savings Account (MAMSA).

  2. Health Savings Accounts, Archer Medical Savings Accounts and Medicare Advantage MSA distributions are identified on the Case Analysis screen by the literal "99SA" in the DOC TYPE field and the following literals in the INCOME TYPE field:

    • "SAGD" – Gross distribution

    • "SAEEC" – Earnings on excess contributions

      Note:

      The amount of SAEEC is already included in the SAGD amount. Do not pursue the SAEEC amount.

  3. Taxpayers must complete Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section A to compute the correct amount of taxable "AMSA" distributions and Section B to compute the correct amount of taxable "MAMSA" distributions.

  4. Taxpayers must complete Form 8889, Health Savings Accounts, Part II, to compute the correct amount of "HSA" taxable distribution

4.19.3.7.28.1  (09-01-2012)
HSA, AMSA and MAMSA Distributions - Analyzation

  1. Form 1099-SA IRs display an Account Type Indicator on the Case Analysis screen based on the information in Form 1099-SA box 5. This indicator displays in the IND field on the Case Analysis screen and Information Return window(s):

    1. IND "1" - Health Savings Account (HSA)

    2. IND "2" - Archer Medical Savings Account (AMSA)

    3. IND "3" - Medicare Advantage MSA (MAMSA)

  2. If a Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, IR is present with either the literal SARLV or SAFMV only in the Income Type field, and it has an amount ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , consider the distribution to be rolled over. It is not necessary to verify Form(s) 5498-SA attached to the return. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. Compare Form 1099-SA SAGD amounts with:

    INDICATOR WITH THE ENTRY ON
    "1" (HSA) Form 8889, line 14a
    "2" (AMSA) Form 8853, line 6a
    "3" (MAMSA) Form 8853, line 10

    1. If the amount is less than the IR, pursue the difference.

    2. If the amount matches within $1 or is greater, consider the IR reported and see (8) - (9) below.

      Note:

      PARAGRAPH 82 automatically generates when HSA is U/R and Form 8889 is not attached to the tax return.

      Note:

      PARAGRAPH 55 automatically generates when AMSA or MAMSA is U/R and a Form 8853 is not attached to the tax return.

  4. Taxable distributions from Form 1099-SA are subject to an additional tax under the following conditions:

    Note:

    See IRM 4.19.3.14.4, 20% Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions, for more information regarding the additional tax.

    Note:

    The system displays the Form 1099-SA distribution code at the bottom of the Case Analysis screen as DISTRIBUTION CD and in the DIST CD field of the Information Return window.

    1. HSA or AMSA distributions received prior to age 65, with a distribution code of 1 or 5 - 20% tax.

    2. MAMSA distributions - 50% tax.

    Note:

    If the taxpayer did not address the additional 50% tax on MAMSA, manually determine the additional 50% tax and enter the amounts in the OTHER MISCELLANEOUS TAXES field of the Total Other Taxes window. Include a Special Paragraph using the following verbiage as an example: "The proposed increase to your tax includes an additional 50% tax on the distribution from your Medicare Advantage MSA account. The 50% tax does not apply to distributions made on or after the date that the account holder becomes deceased or disabled. If the distribution is exempt from the 50% tax, please provide us with a signed statement explaining why."

    Exception:

    Do not pursue the additional 20% tax on HSA when the box on Form 8889, line 17 a is checked, or on AMSA when the box on Form 8853, line 9a is checked, or 50% tax on MAMSA when the box on Form 8853, line 13a, is checked. See IRM 4.19.3.14.4 (5), 20% Tax on Archer Medical Savings Account (AMSA) Health Savings Account (HSA) Distributions.

    Note:

    If the distribution code on the IR is "0" , delete IR and create an IR to show the distribution code "1" to propose the additional 20% tax for AMSA or HSA.

  5. The taxpayer includes the additional taxes on Form 1040, line 60. See IRM 4.19.3.14.8, Miscellaneous Other Taxes, for further information.

  6. PARAGRAPH 186 automatically generates when AMSA and/or MAMSA distributions are adjusted.

  7. PARAGRAPH 136 automatically generates when HSA distributions are adjusted.

  8. If the taxable HSA distributions are listed on Form 8889, line 16, but are not added to the taxpayer's AGI, consider the Form 8889, line 16, amount as U/R and send PARAGRAPH 80 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    Note:

    If necessary create an IR for the taxable HSA distribution amount.

  9. If the taxable AMSA or MAMSA distributions are listed on Form 8853, line 8 or line 12, but are not added to the taxpayer's AGI, consider the Form 8853, line 8 or line 12, amount as U/R and send PARAGRAPH 197 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    Note:

    If necessary create an IR for the taxable MSA distribution amount.

    Reminder:

    See (4) above when pursuing taxable MAMSA and/or the additional 50% tax.

  10. If the taxpayer reduces his/her gross medical expenses on Schedule A by the amount of the 1099-SA IR instead of using Form 8853 or Form 8889, consider the 1099-SA IR reported.

4.19.3.7.29  (09-01-2003)
Long Term Care Benefits (LTC) - General

  1. Long Term Care Benefits are reported on Form 1099-LTC, Long-Term Care and Accelerated Death Benefits.

  2. LTC is identified on the Case Analysis screen by the literal "99LTC" and the literal "LTCGB" (long term care gross benefits) or "LTCAB" (accelerated death benefits) in the INCOME TYPE field.

  3. Taxpayers must complete Form 8853, Archer MSAs Section C to compute the correct amount for LTC. The taxpayer may write "LTC" on the dotted portion of Form 1040, line 21 to identify the income.

4.19.3.7.29.1  (09-01-2010)
Long Term Care Benefits (LTC) - Analyzation

  1. Form 1099-LTC contains the following information:

    • Box 1 - Gross long term care benefits paid

    • Box 2 - Accelerated death benefits paid

    • Box 3 - Payment Type

    • Box 4 - Qualified Contract

    • Box 5 - Illness Type

  2. 99LTC IRs display a Payment Type indicator on the Case Analysis screen, based on the information from Form 1099-LTC, Box 3:

    • "0" if the Per Diem and Reimbursement boxes are blank

    • "1" if the Per Diem box is checked

    • "2" if the Reimbursement box is checked

    • "3" if both boxes are checked

  3. 99LTC IRs display an Illness Type indicator on the Case Analysis screen, based on the information from Form 1099-LTC, Box 5:

    • "0" if the Chronically Ill and Terminally Ill boxes are blank

    • "1" if the Chronically Ill box is checked

    • "2" if the Terminally Ill box is checked

    • "3" if both boxes are checked

  4. Form 1099-LTC IRs displays the Payment Type and Illness Type as a two digit indicator:

    • The 1st digit indicator represents the Payment Type

    • The 2nd digit indicator represents the Illness Type

    Example:

    The 99LTC IR contains an indicator "21" . The "2" in the first position represents a Payment Type of "Reimbursement" and the "1" in the second position represents an Illness Type of "Chronically" .

  5. Taxpayers use Form 8853 to determine the taxable portion of either Form 1099-LTC gross long term care benefits or accelerated death benefits paid on a per diem basis.

    Note:

    Taxpayers are instructed not to include per diem accelerated death benefits paid because the insured was terminally ill.

    1. Do not pursue unreported LTCGB or LTCAB when the payment indicator is "2" (reimbursement).

    2. Do not pursue unreported LTCAB when the illness indicator is "2" (terminally ill).

  6. Compare the Form 1099-LTC LTCGB amount with the entry on Form 8853, line 17 and the LTCAB amount with the entry on Form 8853, line 19.

    1. If the amount is less than the IR, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the amount matches within $1, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

      Note:

      PARAGRAPH 55 automatically generates when LTCGB is U/R and Form 8853 is not attached to the tax return. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  7. PARAGRAPH 187 automatically generates when LTC distributions are U/R (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  8. If LTC taxable payments are listed on Form 8853, line 26, but are not added into the taxpayer's AGI:

    1. Consider the Form 8853, line 26 amount U/R.

      Note:

      If necessary create an IR for the taxable LTC payment amount.

    2. Send PARAGRAPH 197 to explain the adjustment to the taxpayer (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  9. If the taxpayer reduces his/her gross medical expenses on Schedule A by the amount of the LTC IR instead of using Form 8853, consider the LTC IR reported.

4.19.3.7.30  (09-01-2006)
Alternative Trade Adjustment Assistance Payments (ATAA) - General

  1. ATAA are payments received from a state agency under the Demonstration Project for Alternative Trade Adjustments Assistance for older workers and must be included as income.

  2. ATAA payments are reported on Form 1099-G.

  3. ATAA payments are identified on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "ATAA" in the INCOME TYPE field.

4.19.3.7.30.1  (10-30-2006)
Alternative Trade Adjustment Assistance (ATAA) Payments - Analyzation

  1. Compare ATAA amounts with entries on Form 1040, line 21 or an attachment to the return.

    • The amount must match within $1, or

    • Must be identified as ATAA payments

  2. PARAGRAPH 132 automatically generates when ATAA is U/R (See Exhibit 4.19.3-7, CP PARAGRAPHS).

4.19.3.7.31  (09-01-2004)
Foreign Source Income

  1. U.S. taxpayers must report income from all sources, including those sources outside (foreign source) the U.S., unless the income is exempt from U.S. tax.

  2. This is true whether or not the taxpayer received a Form(s) W-2 or a Form(s) 1099 from the foreign payer(s).

  3. This applies to earned income (such as wages and tips) and unearned income (interest, dividends, capital gains, pensions, rents, royalties, etc.).

  4. Under certain tax treaties, foreign governments supply the IRS with information regarding income U.S. taxpayers received from sources in their countries.

  5. This information is converted into applicable IRs (Form W-2 and Form 1099) depending on the type(s) of income.

  6. Foreign source IRs are worked in AUR.

4.19.3.7.32  (09-01-2012)
U.S. Citizens Living Abroad - General

  1. A U.S. citizen or resident alien's worldwide income is generally subject to U.S. income tax, regardless of where the taxpayer is living.

  2. U.S. citizens and resident aliens living outside of the United States are generally allowed the same exemptions, deductions, and credits as those living in the United States. However, if the taxpayer chooses to exclude foreign earned income and/or housing cost amounts, no deduction, exclusion, or credit is allowed for any exclusion, deduction, or credit that is associated with the amounts excluded.

    Note:

    If the taxpayer excludes Foreign Earned Income they must use Pub 972 to compute their allowable ACTC.

    Note:

    If the taxpayer excluded his/her income on Form 2555 (Foreign Earned Income) or Form 2555-EZ (Foreign Earned Income), he/she cannot take a foreign tax credit (Form 1116, Foreign Tax Credit) on the same income.

4.19.3.7.32.1  (09-01-2013)
U. S. Citizens Living Abroad - Analyzing Income

  1. When there is an apparent wage discrepancy, compare the amount on Form 2555, line 19 (Form 2555-EZ, Foreign Earned Income Exclusion, line 17) with the entry for wages on the Form 1040. See IRM 4.19.3.7.1.1, Wages - Analyzation.

    1. If the amount of reported wages shown on Form 1040 is equal to or larger than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the wages reported.

    2. If the amount of reported wages shown on Form 1040 is less than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the difference U/R. Send a Special Paragraph informing the taxpayer that all income excluded as Foreign Earned Income must be included in total income first.

      Caution:

      Taxpayers may receive non-cash income in addition to awards, bonuses, commissions, etc., as allowances or reimbursements to cover expenses; all of these are considered earned income. This includes the fair market value of property or facilities provided for lodging, meals, use of car, cost of living, overseas differential, etc. These items are reported on lines 21 a - d and lines 22 a - g of Form 2555. Any amounts shown here may account for the U/R income.

  2. Wages received by employees of the United States government, or any of its agencies, working overseas do not qualify for the exclusion of foreign earned income under section 911 and if partially reported or not reported at all, should be pursued. These employees include:

    • Military personnel - including military personnel assigned to NATO or any other international organization.

    • State Department employees

    • IRS employees

    • DEA employees, etc.

      Note:

      Amounts paid by the U.S. government or its agencies to persons who are not their employees may qualify for foreign earned income exclusion or deduction. If unsure, correspond with the taxpayer for a clarification.

  3. When there is an apparent NEC discrepancy, compare the amount on lines 20a, 20b, and/or 23 of Form 2555 (line 17 of Form 2555-EZ) with the entry for NEC on the Form 1040. See IRM 4.19.3.7.6.1 , Nonemployee Compensation(NEC) - Analyzation.

    1. If the amount of NEC reported on Form 1040 is equal to or larger than the amount(s) shown on lines 20a, 20b, and/or 23 of Form 2555 or line 17 of Form 2555-EZ, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the amount of NEC reported on Form 1040 is less than the amount(s) shown on lines 20a, 20b and/or 23 of Form 2555 (line 17 of Form 2555-EZ) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send a Special Paragraph as stated in (1) b) above.

      Caution:

      If the taxpayer has received reimbursement for housing expenses compare any apparent U/R amount with the entry on line 34 of Form 2555. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Taking the foreign earned income exclusion does not eliminate the requirement to pay self-employment tax on NEC type income. See IRM 4.19.3.14.1, Self-Employment Tax, for further instructions. As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside.

  5. The United States has entered into bilateral Social Security agreements with certain foreign countries to eliminate dual coverage and dual contributions to the social security system for the same work. A bilateral Social Security agreement generally makes sure that SS taxes (including SE tax) are only paid to one country. For a list of countries, see IRM 3.22.3.147.3, Correction Procedures (ME) - EC 209 Form 1040/1040NR.

  6. To establish exemption from U.S. Self-Employment Tax, the taxpayer must obtain a statement from the authorized official or agency of the foreign country containing the following information:

    • Name and address of taxpayer

    • Taxpayer identification number

    • The fact that the self-employment earnings (or employment earnings in the case of employed clergymen) are covered by an agreement between that country and the United States and are subject to the taxes or contributions of that country's social security system and

    • The effective date of the agreement

    The taxpayer must attach a copy of the statement to the tax return for each year exemption from Self-Employment Tax is claimed. The taxpayer must also enter "Exempt, see attached statement" on the line for Self-Employment Tax on the return.

  7. ONLY foreign earned income may be excluded under Section 911. If the taxpayer has not reported all non-earned income (i.e., interest, dividends, pensions, etc.), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. In addition to the foreign earned income exclusion, taxpayers may take a foreign housing exclusion or foreign housing deduction. They cannot take both the foreign housing exclusion and foreign housing deduction unless they are self-employed.

    1. If the housing cost exclusion is claimed, the amount from Form 2555, line 36, is added to the foreign earned income exclusion claimed on Form 2555, line 42.

    2. When the housing cost deduction is claimed, the taxpayer will enter the amount from Form 2555, line 50, to the left of Form 1040, line 36. This amount should be used when entering an amount in the AGI window.

    3. If the taxpayer has claimed the Foreign Earned Income Exclusion, the foreign housing cost exclusion, and the foreign housing deduction, disallow the housing deduction amount if the taxpayer is not self-employed. See IRM 4.19.3.4.9, Miscellaneous, for further instructions on how to disallow the deduction. Send a Special Paragraph to inform the taxpayer of the disallowance.

  9. When both the foreign earned income exclusion and foreign housing exclusion are present, the amount claimed on Form 1040, line 21, may exceed $95,100, ($190,200 if married filing jointly). Any amount identified on Form 1040, line 21 as coming from Form 2555 MUST be considered when calculating the MAGI and base tax. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the taxpayer excludes income on Form 2555.

  10. Income excluded cannot be taken into account when figuring non-refundable credits. When entering earned income on Form 2441, Child and Dependent Care Expenses, taxpayers should be entering total earned income minus the foreign earned income exclusion amount. If all earned income is excluded on Form 2555 or Form 2555-EZ, then the credit cannot be taken. See IRM 4.19.3.13.2, Credit for Child and Dependent Care Expenses.

  11. Taxpayers can take a credit for taxes paid to a foreign government on foreign income by filing a Form 1116, Foreign Tax Credit. However, they cannot take this credit on income that is exempt from tax under the foreign earned income exclusion, the foreign housing cost exclusion or the possession exclusion, discussed later. If the taxpayer has paid tax on both earned and certain unearned income, a separate Form 1116 must be filed for each category of income. Also if the taxpayer is filing a Form 6251, Alternative Minimum Tax - Individuals, a separate Form 1116 must be filed notating "Alt Min" . Generally, taxpayers only use one form.

    1. To compute the Foreign Tax Credit, the taxpayer should complete the top portion to indicate the category of income. If the tax was paid to only one country, then lines 1 - 7 in Column A should contain entries as appropriate. If tax was paid to more than one country, then lines 1 - 7 in Columns B and C should be completed as appropriate.

    2. The taxpayer is instructed to include gross foreign source income on line 3d of the Form 1116. Next, they should enter their gross income from all sources (i.e., wages, interest, dividends, etc.) on line 3e of Form 1116. However taxpayers SHOULD NOT include any excluded amounts here (Form 2555 amounts).

    3. If the taxpayer has entered gross income minus excluded income on line 3e and has computed the rest of the form, allow the credit as shown on line 29 of Form 1116.

    4. If the taxpayer has entered gross income plus the excluded income on line 3e and has computed the rest of the form, disallow the excluded income amount and manually recompute the rest of the form. Enter the recomputed Form 1040, line 47 amount in the recomputed side of the Form 1116 field on the Non-Refundable Credits window. Refer to IRM 4.19.7, IMF Automated Underreporter Technical System Procedures -Non-Refundable Credits, for further instructions.

4.19.3.7.32.2  (09-01-2013)
Foreign Earned Income Exclusion

  1. Taxpayers claiming the Foreign Earned Income Exclusion cannot claim EIC. See IRM 4.19.3.15.3, Earned Income Credit, for further instructions.

  2. The Foreign Earned Income Exclusion allows taxpayers to exclude some or all of the income, up to $95,100, ($190,200 if married filing jointly), they earned in a foreign country during a period in which their "tax home" is in a foreign country and they meet other qualifications (either the Bona Fide Residence Test or the Physical Presence Test). This exclusion is provided under Section 911 of the Internal Revenue Code (IRC).

  3. For this purpose, foreign earned income is compensation for personal services performed in a foreign country, such as:

    • Salaries and wages

    • Commissions

    • Bonuses

    • Professional fees

    • Tips

  4. Foreign unearned income that cannot be excluded is:

    • Dividends

    • Interest

    • Capital Gains

    • Gambling Winnings

    • Alimony

    • Social Security Benefits

    • Pensions and annuities

  5. Variable income that may or may not be excluded is:

    • Business profits

    • Royalties

    • Rents

  6. Taxpayers who excluded foreign earned income on Form 2555, must calculate their base tax at the same tax rate as if they did not exclude income. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the taxpayer excludes income on Form 2555. Include a Special Paragraph using the following verbiage as an example: "Please recompute your Foreign Earned Income Tax Worksheet, using our proposed unreported income. Please return the completed worksheet with your response."

    Caution:

    If the taxpayer excludes income on Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, you must manually calculate the new base tax. Bona Fide residents of American Samoa are not subject to the higher tax rate for excluding income. Enter the manually derived new base tax in the MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the taxpayer used the Schedule D tax method) or the MANUAL SCH J TAX field in the Schedule J Tax window.

  7. When the taxpayer’s response includes the Foreign Earned Income Tax worksheet, it may be necessary to manually override the system derived base tax. If applicable, enter the manually derived new base tax in the:

    1. MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the taxpayer used the Schedule D tax method) or

    2. MANUAL SCH J TAX field in the Schedule J Tax window.

4.19.3.7.33  (09-01-2012)
Resident/Non-Resident Aliens (R/NR)/(Dual Status)

  1. Under U.S. tax laws, resident aliens are generally taxed in the same manner as U.S. citizens. Accordingly a resident alien's income is taxed from all sources, both within and outside the United States. Non-resident aliens, however, are generally taxed only on their income from sources within the United States.

  2. Special rules apply to the taxing of income of non-resident aliens. This depends on whether the income is from investments or from business activities, such as the performance of personal services in the United States.

  3. The Social Security Administration (SSA) may withhold tax from the Social Security benefits of resident aliens in error. The SSA will refund erroneously withheld taxes if the refund can be processed during the same calendar year that the taxes were withheld. Cases for which the SSA was unable to issue a timely refund or cases that were not identified during initial processing could surface in AUR. If the return includes all of the following, do not pursue apparent O/C W/H discrepancies:

    1. A copy of the Form SSA-1042S, Social Security Benefit Statement.

    2. A copy of the "green card" .

    3. A signed statement that indicates the taxpayer is a permanent U.S. Resident/Green Card holder; the SSA taxes were withheld erroneously; his/her green card status has not been revoked; and no benefits were claimed for the tax year as a non-resident alien under an existing income tax treaty.

    Exception:

    The copy of the green card and signed statement requirements in (b) and (c) above do not apply to bona fide residents of American Samoa.

    Note:

    If the taxpayer filed a complete return, the withholding credit should have been allowed during initial processing.

4.19.3.7.34  (09-01-2009)
Form 1040NR (U.S. Nonresident Alien Income Tax Return) Filers

  1. These cases require special handling, refer to the lead.

4.19.3.8  (09-01-2013)
Adjustments to Income

  1. The following sections contain instructions for recalculating adjustment action(s) taken on the taxpayer's individual tax return.

  2. Screen adjustment(s) that are worked through a computation window after analyzing all other potentially discrepant income types. When subsequent analysis changes the total AGI field, reselect the windows.

4.19.3.8.1  (09-01-2008)
Educator Expenses

  1. Educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide, may deduct up to $250 of qualified out-of-pocket expenses for books and classroom supplies.

  2. The deduction is reported on:

    1. Form 1040, line 23 or

    2. Form 1040A line 16.

  3. The deduction is available for those in public or private elementary or secondary schools (including kindergarten). Educators must reduce qualifying expenses by any non taxable earnings received from Coverdell ESAs, Qualified Tuition Programs or education savings bonds.

4.19.3.8.2  (09-01-2012)
Health Savings Account (HSA) or Archer Medical Savings Account (AMSA) Deduction

  1. Generally contributions made to an Archer Medical Savings Account (AMSA) or Health Savings Account (HSA) are deductible if they are made by the taxpayer.

  2. AMSA and HSA contributions are reported on Form 5498-SA.

  3. AMSA and HSA contributions are identified on the Case Analysis screen by the literal "5498S" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    • "SACON" - Contribution

    • "SACC" - Current Contribution

    • "SAFC" - Future Contribution

    • "SARLV" - Rollover (system deleted)

    • "SAFMV" - Fair Market Value (system deleted).

  4. The 5498S IRs display a Type Indicator on the Case Analysis screen based on the information in Form 5498-SA box 6:

    1. IND "1" - Health Savings Account (HSA)

    2. IND "2" - Archer Medical Savings Account (AMSA)

    3. IND "3" - Medicare Advantage MSA (MAMSA)

  5. The taxpayer claims the allowable AMSA contribution/deduction on the dotted portion of Form 1040, line 36, and notates "MSA" . The taxpayer must complete Form 8853, Medical Savings Accounts and Long-term Care Insurance Contracts, Part I to calculate the amount entered on Form 1040, line 36.

  6. The taxpayer claims the allowable HSA contribution/deduction on Form 1040, line 25. The taxpayer must complete Form 8889, Health Savings Accounts (HSAs), Part I to calculate the amount entered on Form 1040, line 25.

  7. AMSA deductions must be substantiated. Substantiation is a Form 5498-SA IR with an AMSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    1. If no AMSA IR(s) is present, create a AMSA IR with a dollar amount of zero (0) and enter "2" in the PGR/COD IND field of the Create Information Return Window.

    2. PARAGRAPH 185 automatically generates when the AMSA amount is reduced/disallowed because the amount of AMSA does not match the amount claimed by the taxpayer or due to no substantiation. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  8. HSA deductions on Form 1040, line 25 must be substantiated. Substantiation is a Form 5498-SA IR with a HSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    1. If no HSA IR(s) is present, create a HSA IR with a dollar amount of zero (0) and enter "1" in the PGR/COD IND field of the Create Information Return Window.

    2. PARAGRAPH 135 automatically generates when the HSA amount is reduced/disallowed because the amount of HSA does not match the amount claimed by the taxpayer or due to no substantiation. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  9. A CP 2000 is issued for the deduction ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  10. If HSA/AMSA contribution/deduction and SS/RR are issues on the same case, compute the SS/RR after screening the HSA/AMSA issue.

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

4.19.3.8.3  (09-01-2006)
Simplified Employee Pension (SEP)/Qualified Plan (KEOGH)/SIMPLE - General

  1. SEP/SIMPLE (Savings Incentive Match Plan for Employees) contributions are reported to IRS on Form 5498.

  2. SEP/SIMPLE contributions are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "SEP" - the amount the taxpayer contributed to his/her SEP account.

    2. "SIMPL" - the amount the taxpayer contributed to his/her SIMPLE account.

    3. "FMV" - the fair market value of a SEP account. Disregard the FMV literal and amount. The system automatically assigns Status Code "X" to FMV amounts on Form 5498 IRs.

    4. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the taxpayer.

    5. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the taxpayer. Life insurance is not included in the CONTR amount on Form 5498 IRs. The system automatically assigns Status Code "X" to life insurance amounts on Form 5498 IRs.

  3. Sole Proprietors deduct SIMPLE contributions they make for common-law employees on Form 1040, Schedule C and Schedule F. Partnerships deduct them on Form 1065 and Corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation. Sole Proprietors and partners deduct SIMPLE contributions for themselves on line 28 of Form 1040. A SIMPLE is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. ALL contributions under a SIMPLE IRA plan MUST be made to SIMPLE IRAs, not to any other type of IRA.

  4. Compensation for the purpose of a SIMPLE IRA generally includes:

    • Wages, tips, and other pay from their employer that is subject to income tax withholding.

    • Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457(b)) plans, SEP plans, and SIMPLE plans

4.19.3.8.3.1  (10-30-2006)
SEP/KEOGH/SIMPLE - Analyzation

  1. SEP/Qualified (Keogh)/SIMPLE plans allow sole-proprietors and small business owners to make contributions to a retirement plan for both themselves and their employees.

    1. Taxpayers deduct SEP/Keogh/SIMPLE contributions for their employees as an expense on Schedule C or F.

    2. Taxpayers deduct SEP/Keogh/SIMPLE contributions for themselves on Form 1040, line 28.

    Note:

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

  2. Only pursue SEP/Keogh/SIMPLE U/R issues when the taxpayer deducts an amount on Form 1040, line 28 and the taxpayer does not report net earnings subject to SE Tax (i.e., Schedule C, F or SE is not present).

    Note:

    Taxpayers who report partnership income from Form 1065 Schedule K-1 are entitled to deduct SEP/Keogh provided that the partnership income is included on Schedule SE and/or the applicable SE Tax has been reported.

    1. Manually select the SEP Adjustment window.

    2. If necessary, create a 5498 SEP IR for zero (0) in order to gain access to the window.

    3. The system computes the allowable SEP/Keogh/SIMPLE deduction based on the entries in the SEP Adjustment Window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures -SEP Adjustment window.

      Reminder:

      When pursuing SEP deduction, the SEP Adjustment window must be selected in the proper case analysis sequence as described in IRM 4.19.3.3.2 (3), Case Analysis Screen. If the SEP Adjustment window is selected out of order, a message displays describing the proper sequence.

      Note:

      If the SEP/Keogh/SIMPLE deduction is not fully disallowed, ungroup the IR(s) and mark them with status code "N" or "D" .

  3. If the taxpayer does not report self employment income AND the SEP/Keogh/SIMPLE deduction corresponds to a Form 5498 CONTR IR(s), consider that the taxpayer reported their IRA deduction on the wrong line.

  4. Payers identify only SEP and SIMPLE contributions on Form 5498. If Form 5498 IR is not present and the taxpayer is self-employed (Schedule C, F or SE is present), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the filing status is 2 and only one spouse reports self-employment income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  6. PARAGRAPH 146 automatically generates when SEP/Keogh/SIMPLE deductions are disallowed (the SEP per return is reduced to zero). See Exhibit 4.19.3-7, CP PARAGRAPHS.

  7. If SEP/Keogh/SIMPLE is U/R enter the return amount in the RETURN field on the Summary screen.

4.19.3.8.4  (09-01-2004)
Self-Employed Health Insurance Deduction (SEHID)

  1. A taxpayer may be able to deduct up to 100% of the amount paid for health insurance on Form 1040, line 29.

  2. PARAGRAPH 147 automatically generates when there is an amount on Form 1040, line 29, and due to U/R processing there is a change to self-employment income or SE tax. See Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.4.1  (09-01-2004)
Self-Employed Health Insurance Deduction (SEHID) - Responses

  1. If the taxpayer responds that the self-employed health insurance deduction (SEHID) needs to be adjusted AND provides the total amount he/she paid for health insurance coverage, take the following action:

    1. Compare the amount the TP paid for his/her health insurance coverage with the revised business profit and any other earned income (including wages from S Corporation), minus deductions claimed on Form 1040, lines 27 and 28, as filed or adjusted due to U/R processing.

    2. The smaller of the two amounts is the new SEHID.

    3. Compare the new SEHID to the amount originally claimed. If the SEHID changed, use the Misc Adjust/Sch C Exp window to reflect the difference.

    4. Advise the taxpayer of the change to SEHID with an appropriate paragraph.

  2. If the taxpayer does not provide the amount he/she paid for self-employed health insurance coverage, correspond for this information.

4.19.3.8.5  (09-01-2003)
Early Withdrawal Penalty (EWPEN) - General

  1. Early withdrawal penalty is a reduction of interest income due to premature withdrawal of capital on a time savings account. This penalty can exceed the amount of interest paid.

  2. Early withdrawal penalty is reported on Form 1099-INT.

  3. Early withdrawal penalty is identified on the Case Analysis screen by the literal "99INT" in the DOC TYPE field and the literal "EWPEN" in the INCOME TYPE field.

4.19.3.8.5.1  (09-01-2013)
Early Withdrawal Penalty (EWPEN) - Analyzation

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

    1. There is an EWPEN amount but no INT amount, or

    2. There are EWPEN and W/H amounts, but no INT amount.

  2. Group all EWPEN amounts and compare the total with entries on:

    1. Form 1040, line 30.

    2. Schedule A, as an interest expense deduction.

    3. Schedule C, Part II, line 16b if a deposit arrangement is entered into as part of a trade or business.

    4. Schedule B, Part I.

  3. The taxpayer may reduce the interest reported on Schedule B by the EWPEN amount and report the difference. The taxpayer might also reduce the interest income by the amount of EWPEN and report the net amount on Form 1040EZ, line 2 or Form 1040 or Form 1040A, line 8a. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. If the interest reported on the return matches the 99INT IR(s) and the taxpayer claims more early withdrawal penalty than EWPEN amounts shown on the 99INT IR(s),

    Note:

    If none of the 99INT IR(s) contain EWPEN, create a 99INT IR for zero (0) amount of EWPEN.

    1. Disallow the O/D amount.

    2. Mark the reported 99INT IR(s) with "S" .

  5. Allow any O/D EWPEN when the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. If the taxpayer has not claimed the full amount of early withdrawal penalty, based on the EWPEN amounts shown on the 99INT IR(s), allow the balance unless:

    1. It can be clearly determined that the taxpayer netted the EWPEN. See (3) above.

    2. The IR(s) show the income is jointly owned with someone other than the spouse or the filing status is 3, mark the EWPEN with status code "N" , send the IR elements and send PARAGRAPH 74 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  7. If a 99INT IR contains both INT and EWPEN, consider each income type separately.

  8. If the taxpayer incorrectly claims the 10% early distribution tax as EWPEN, disallow that portion of the deduction. Send PARAGRAPH 168, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  9. If the taxpayer reports EWPEN on Form 1040, line 30, or on Schedule B and also subtracted the EWPEN from interest reported on the return, this is a duplicate deduction.

    1. Consider the amount of EWPEN O/D.

    2. To arrive at the amount to input in the REPORTED AMOUNT field, subtract the double excluded amount from the IR amount.

    3. Send PARAGRAPH 122, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  10. Enter the return amount in the RETURN field on the Summary screen.

    1. PARAGRAPH 8 automatically generates when EWPEN is U/C. See Exhibit 4.19.3-7, CP PARAGRAPHS.

    2. PARAGRAPH 75 automatically generates when EWPEN is O/D. See Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.6  (09-01-2010)
Traditional IRA and Coverdell ESA - General

  1. IRA contributions are reported to the IRS on Form 5498 and are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "CONTR" - the amount the taxpayer contributed to his/her IRA account.

    2. "FMV" - the fair market value of an IRA account. Disregard the FMV literal and amount. The system automatically assigns Status Code "X" to FMV amounts on Form 5498 IRs.

    3. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the taxpayer.

    4. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the taxpayer. Life insurance is not included in the CONTR amount on Form 5498 IRs. The system automatically assigns Status Code "X" to life insurance amounts on Form 5498 IRs.

    5. "RCONT" - Roth IRA Contribution. This amount cannot be claimed as a deduction by the taxpayer.

    6. "RCONV" - Roth IRA conversions from a Traditional IRA. This amount cannot be claimed as a deduction by the taxpayer.

      Note:

      Contributions to a Roth IRA (RCONT) or Roth IRA Conversions from a Traditional IRA (RCONV) cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the RCONT or RCONV element with Send Indicator "S" . PARAGRAPH 30 automatically generates. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  2. Contributions to a Coverdell ESA (CESA) are reported on Form 5498-ESA and are identified on the Case Analysis screen by the literal "5498E" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    1. "ESA" - The amount contributed to the CESA.

    2. "EROLV" - Rollover amount. The system automatically assigns Status Code "X" to this income type.

    Note:

    Contributions to a CESA cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the CESA element with Send Indicator "S" . PARAGRAPH 30 automatically generates. See Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.6.1  (09-01-2013)
IRA Deduction - Analyzation

  1. The taxpayer(s) may claim the allowable IRA deduction on Form 1040, line 32 or Form 1040A, line 17. The maximum allowable IRA deduction is the lesser (before phaseout limit, see (2) below) of:

    Note:

    Taxable compensation for purposes of establishing an IRA include: wages, salaries, tips, professional fees, bonuses and other amounts received from providing personal services, taxable alimony, separate maintenance payments and NET earnings (profit) from self-employment income.

    Note:

    Military personnel have the option of including nontaxable combat pay, along with any taxable compensation, when calculating the allowable IRA deduction.

    1. $5,000 ($6,000 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

      Note:

      If a CONTR IR is present for more than $5,000, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected taxpayer’s age and update the field(s) accordingly.

    2. $10,000 ($11,000 if only one is 50 or older or $12,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly.

    3. When a spousal IRA is present, the IRA contributions are divided between the taxpayers, any way they choose, as long as the contributions do not exceed $5,000 ($6,000 if age 50 or over) for any one spouse.

    Caution:

    An IRA contribution can be made ONLY if the taxpayer has taxable compensation (as defined in (1) Notes above). In the case of a married couple filing a joint return, up to $5,000 ($6,000 if 50 or older) can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation.

  2. When the taxpayer is covered by a qualified pension plan, the IRA deduction begins to decrease (phaseout) when the Modified AGI (MAGI) exceeds the following amount(s):

    1. For filing status 1 or 4: $58,000 - $68,000. If the taxpayer's MAGI is $68,000 or more, he/she is not entitled to any deduction.

    2. For filing status 2 or 5: $92,000 - $112,000. If the taxpayer's MAGI is $112,000 or more, they are not entitled to a deduction.

    3. For filing status 3 or 6: $0 - $10,000. If the taxpayer's MAGI is more than $10,000, they are not entitled to a deduction.

  3. When the taxpayer is NOT covered by a qualified pension plan, but the spouse IS covered, the IRA deduction begins to decrease (phaseout) when the MAGI exceeds the following amount(s):

    1. For filing status 2 or 5: $173,000 - $183,000. If the taxpayer's MAGI is $183,000 or more then he/she is not entitled to a deduction.

    2. For filing status 3: $0 - $10,000. If the taxpayer's MAGI is $10,000 or more he/she is not entitled to any deduction. If the taxpayer did not live with his/her spouse ("D" entered next to Form 1040 line 32, or Form 1040A, line 17), the taxpayer is treated as filing status 1 (no spouse).

  4. Consider the taxpayer covered by a qualified pension plan if:

    Reminder:

    Consider the IR more accurate than the ELF payer document.

    1. The Form W-2 is attached and the retirement plan box is checked, or

    2. Form W-2, Box 12 has a code "D" , "E" ," F" , or "S" with a corresponding contribution amount. See Exhibit 4.19.3-8, Form W-2 - Box 12 Codes, or

    3. The taxpayer reports an unidentified wage amount (no Form W-2 is attached, nor corresponding WAGE IR) or,

    4. The Form W-2 is not attached to the return and the IND field on the W-2 IR is other than blank and/or contains the literal "DC" , or

    5. An attached Form W-2 or W-2 IR is from a federal, state or local government, including any political subdivision. Reservist wages are NOT covered by a pension plan.

    6. The taxpayer is FS 3 or 6 and there is no indication that the taxpayer lived apart from the spouse (also enter a "Y" in the LIVED WITH SPOUSE field on the IRA window if either spouse is covered by a pension plan).

    7. The taxpayer takes a deduction for a Keogh, SIMPLE Plan or SEP on Form 1040, line 28.

      Exception:

      Section 457 Plans are NOT considered as coverage for calculations of IRA contributions. If only the Deferred Compensation box is checked and only code "G" appears in Box 12 of the Form W-2, or there are other indications that the taxpayer has only Deferred Compensation in a Section 457 Plan, Do NOT consider the taxpayer covered by a pension plan. An "H" code in Box 12 of Form W-2 identifies 501(c)(18) Pension Plans. The taxpayer is instructed to report his/her allowable deduction on the dotted portion of line 36 of Form 1040. However, the entry is often misplaced and entered on line 32 of Form 1040. If there is an indication that the taxpayer has a 501(c)(18) pension plan, allow the deduction.

    8. The taxpayer is a postal worker. The U.S. Postal Service has a Thrift Savings Plan.

  5. IRA deductions must be substantiated. Substantiation is a Form 5498 IR with a CONTR amount or an attachment to the tax return (e.g., a Form 5498 or a bank statement).

    1. If no CONTR IR(s) is present, create a CONTR IR with a dollar amount of zero (0). See IRM 4.19.3.13.6, Qualified Retirement Savings Contributions Credit (QRSC), for additional information.

    2. If there is no substantiating IR(s), but a Form 5498 or statement for the same amount is attached to the return, create IR(s) for the attached Form 5498/statement amount(s) for the applicable taxpayer(s).

    3. PARAGRAPH 70 automatically generates when the CONTR U/R is due to the taxpayer claiming a deduction that is larger than the Form 5498 IR(s). See Exhibit 4.19.3-7, CP PARAGRAPHS.

  6. If the taxpayer deducts an amount equal to the Deferred Compensation shown on Form W-2, take the following action:

    1. If the taxpayer included the Deferred Compensation as income (i.e., Form 1040 or Form 1040A, line 7 or Form 1040, line 21), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the Deferred Compensation was not included as income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send PARAGRAPH 157 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

  7. If the taxpayer reports Self Employment income and the IRA deduction corresponds to a 5498 SEP/KEOGH/SIMPLE IR(s), consider that the taxpayer reported the SEP/KEOGH/SIMPLE on the wrong line.

  8. The taxpayer may make contributions to an IRA during the tax year or by the due date of the return (not including extensions).

  9. Contributions may not be made to a traditional IRA during or after the year in which the taxpayer reaches age 70 1/2. If the age for the primary and/or secondary taxpayer on the Case Analysis screen is 71 or older, enter a zero (0) in the PRIMARY and/or SECONDARY COMPENSATION field(s) as applicable. This suppresses any deduction from being computed and disallows any previously taken deduction for the applicable taxpayer.

    Note:

    A taxpayer over the age of 70 1/2 can continue to make contributions to a spousal IRA until the year the spouse reaches age 70 1/2.

  10. Screen IRA IR(s) after all other potentially discrepant income types are analyzed. Any subsequent analysis that changes the TOTAL AGI CHANGE field must always be followed by reselecting the IRA window. See (13) below when SS/RR, SLID, Tuition and Fees, and/or DPAD are also issues on the same case.

  11. The system computes the allowable IRA deduction based on the appropriate entries in the Adjusted Gross Income window and the IRA window. See IRM 4.19.7, IMF Automated Underreporter Technical System Procedures - Adjusted Gross Income (AGI) Window and IRA Contributions.

    Caution:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

  12. A net loss from self-employment income cannot be subtracted from salaries, wages, etc., when figuring total compensation. If U/R self-employment income (Income Identify Codes of "PB" , "PF" , "SB" , and "SF" )

    1. Is not present on the Case Analysis screen do not consider any net loss from self-employment income when determining the amount to enter in the PRIMARY and/or SECONDARY COMPENSATION field(s) in the IRA window.

    2. Is present on the Case Analysis screen and a net loss from self-employment income is reported on the return, input/verify the PRIMARY/SECONDARY REPORTED SE INCOME field(s) in the Self-Employment Tax window.

  13. If IRA contributions, SS/RR, SLID, Tuition and Fees and/or DPAD are issues on the same case, then:

    1. Compute the SS/RR by selecting the SSA/RRB window.

    2. Compute the IRA contribution by selecting the IRA window.

      Note:

      After the IRA is computed, the system automatically recomputes the SSA/RRB window.

    3. Recompute the SLID.

    4. Recompute Tuition and Fees.

    5. Recompute DPAD LAST.

      Note:

      See IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence when these issues are present on the same case.

4.19.3.8.6.2  (09-01-2012)
IRA Deduction Miscellaneous

  1. An IRA AUR issue exists when:

    1. The taxpayer claims a larger IRA deduction amount than is substantiated.

    2. The taxpayer claims an IRA deduction amount larger than the allowable amount.

      Note:

      PARAGRAPH 53 automatically generates when the taxpayer is claiming more deduction than allowed based on age/filing status or taxable compensation (including non-taxable combat pay). See Exhibit 4.19.3-7, CP PARAGRAPHS. See IRM 4.19.3.8.6.1 (1) Notes, IRA Deduction - Analyzation, for additional information regarding taxable compensation.

    3. The taxpayer is covered by a pension plan and changes to AGI cause a change to the allowable IRA deduction amount (decreased or reduced to zero). PARAGRAPH 95 automatically generates. See Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If a Form 5498 ROLVR IR is asterisked as a part of the computer identified discrepancy, the IRA deduction the taxpayer claimed MUST be screened before closing the case PC 2X. When there is an asterisked Form 5498 ROLVR IR, it indicates an IRA contribution discrepancy and the system will not give the message to check the Income Comparison screen.

  2. There may be a rollover amount present on the IRA IR(s). This amount cannot be claimed as a deduction by the taxpayer. PARAGRAPH 81 automatically generates when the U/R amount equals the IR(s) rollover amount(s). See Exhibit 4.19.3-7, CP PARAGRAPHS.

  3. A CP 2000 is issued for the deduction ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. When the IRA deduction is an issue, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate

  5. If there is U/R income above tolerance, the IRA deduction needs to be recomputed if the following conditions apply:

    1. The taxpayer takes an IRA deduction on Form 1040, line 32 or on Form 1040A, line 17, and

    2. The taxpayer is covered by a qualified pension plan. See IRM 4.19.3.8.6.1 (4), IRA Deduction - Analyzation, for further instructions.

  6. If the IRA is O/D, enter the return amount in the RETURN field on the Summary screen.

4.19.3.8.7  (09-01-2003)
Student Loan Interest Deduction (SLID) - General

  1. Student Loan Interest Deduction (SLID) is reported to the IRS on Form 1098-E, Student Loan Interest Statement.

  2. SLID is identified on the Case Analysis screen by the literal "1098E" in the DOC TYPE field and "SLID" in the INCOME TYPE field.

4.19.3.8.7.1  (09-01-2013)
Student Loan Interest Deduction (SLID) - Analyzation

  1. The taxpayer can claim SLID except for married filing separately (FS 3 or FS 6) or if he/she can be claimed as a dependent on someone else's tax return. The amount of SLID the taxpayer may claim cannot exceed $2,500, and begins to decrease (phase-out) when the MAGI exceeds the following amounts:

    1. For filing status 1, 4 or 5 - $60,000.

    2. For filing status 2 - $125,000.

    3. For filing status 3 or 6 - taxpayer cannot claim a SLID deduction.

    Reminder:

    Always disallow claimed SLID amounts for filing status 3 or 6. If necessary, create an IR for zero (0).

  2. The taxpayer is not entitled to any SLID deduction when the MAGI exceeds the following amounts:

    1. For filing status 1, 4 or 5 - $75,000 or more.

    2. For filing status 2 - $155,000 or more.

  3. SLID amounts reported on the return are substantiated when Form 1098-E IRs (or similar payer statement attached to the return) amounts are equal to or exceed the deduction claimed.

    Note:

    Payers are not required to file Form 1098-E for amounts less than ≡ ≡ ≡ .

    SLID amounts of ≡ ≡ or more must be substantiated with either a:

    • Form 1098-E IR with a SLID amount, or

    • Similar payer statement attached to the return

  4. Use the following chart to determine O/D SLID amounts:

    If the total of all 1098E IR(s) (or attached payer statements are...) AND Then
    Equal to or greater than the amount of SLID claimed on the tax return.   ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) Window and the Student Loan Interest Deduction Window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Note:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

    Less than the amount of SLID claimed on the tax return. The SLID claimed on the tax return is less than $600 Allow the deduction. mark the IR(s) with "R" , "N" , or "D" .

    Exception:

    If, due to additional U/R income, the proposed new MAGI is equal to or greater than $75,000 (FS 1, 4, or 5) or $155,000 (FS 2), disallow the deduction. If no SLID IRs are present, create an IR for zero (0), mark the SLID IR with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) Window and the Student Loan Interest Deduction Window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Less than the amount of SLID claimed on the tax return The SLID claimed on the tax return is $600 or more. ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) Window and the Student Loan Interest Deduction Window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction. If no SLID IRs are present, create a SLID IR for zero (0)

    Exception:

    If the O/D SLID amount is less than ≡ ≡ ≡ ≡ AND the new proposed MAGI (including other U/R income) is less than $75,000 (FS 1, 4, or 5) or less than $155,000 for (FS 2), do not pursue the issue.

    Note:

    If SLID, Tuition and Fees and/or DPAD are issues on the same case, see IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence.

4.19.3.8.7.2  (11-09-2004)
SLID Miscellaneous

  1. A SLID AUR issue exists when:

    1. The taxpayer claims a larger SLID amount than is substantiated. Send PARAGRAPH 22 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    2. PARAGRAPH 23 automatically generates when an increase to the MAGI causes a decrease in the allowable SLID amount. See Exhibit 4.19.3-7, CP PARAGRAPHS.

    3. PARAGRAPH 23 automatically generates when SLID is disallowed because the taxpayer is filing status 3 or 6, or can be claimed as a dependent on someone else's return. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  2. A CP 2000 is issued for the discrepant SLID ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. If SLID is O/D, enter the return amount in the RETURN field on the Summary Screen.

4.19.3.8.7.3  (09-01-2013)
Student Loan Interest Deduction (SLID) - Responses

  1. The TP explanation is acceptable when he/she provides Form 1098-E or similar payer statement, for the amount claimed on the return.

  2. If Form 1098-E, or similar payer statement, is for somebody other than the primary or secondary taxpayer, accept the explanation when taxpayer states the student was enrolled at least half-time in a degree program and all of the following apply:

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

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

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

4.19.3.8.8  (09-01-2013)
Tuition and Fees Deduction (TUTFE)

  1. Taxpayers who paid tuition and fees expenses to an accredited educational institution (college, university or vocational school) for an eligible student may be eligible to deduct up to $4,000.

  2. Tuition and Fees Deduction is reported on Form 1098-T with the literal "TUTFE" on the 1098-T IR.

  3. The Tuition and Fees Deduction is claimed on:

    1. Form 1040, line 34 or

    2. Form 1040A, line 19.

  4. Taxpayers can claim Tuition and Fees deduction if they meet the following conditions:

    1. They paid qualified tuition and fees for themselves, their spouses or dependents.

    2. Their filing status is any status except Married Filing Separately (FS 3 or 6).

    3. They cannot be claimed as a dependent on someone else's tax return.

    4. Their MAGI is $65,000 or less if filing Single, Head of Household or Qualified Widow(er); $130,000 or less if filing Married Filing Joint (the deduction is up to $4,000).

      Note:

      When MAGI for filing Single, Head of Household or Qualified widow(er) is between $65,000.01 and $80,000; Married Filing Joint between $130,000.01 and $160,000, the deduction is reduced to up to $2,000. When MAGI exceeds the upper limit for all filing statuses the deduction is zero (0),

    5. They are not claiming Education Credits for the same student. See (5) below.

  5. If, due to U/R income, the taxpayer's MAGI now exceeds $65,000 (or $130,000 for FS2), use the TUITION AND FEES DEDUCTION window to adjust/disallow the amount of Tuition and Fees deduction claimed. Send PARAGRAPH 110. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  6. The instructions in (7) - (11) below apply only if there are other issues being pursued. DO NOT issue a notice solely for unsubstantiated Tuition and Fees deduction unless the case is in Category 68 or 69.

  7. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and there is no Form 1098-T IR present, take the following action:

    1. Create an IR for zero (0).

    2. Enter status code “U”, the AGI Window will appear.

    3. Input/Verify the entries in the AGI Window.

    4. <F12>, the Tuition and Fees Deduction window will appear.

    5. Input/Verify the entries in the Tuition and Fees deduction window.

    6. <F12>.

    7. PARAGRAPH 112 automatically generates (see Exhibit 4.19.3-7, CP PARAGRAPHS).

  8. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098-T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code “U”, the AGI Window will appear.

    2. Input/Verify the entries in the AGI Window.

    3. <F12>, the Tuition and Fees Deduction window will appear.

    4. Input/Verify the entries in the Tuition and Fees deduction window using the 1098-T amount in the TUITION AND FEES DEDUCTION field.

    5. <F12>.

    6. PARAGRAPH 112 automatically generates (see Exhibit 4.19.3-7, CP PARAGRAPHS.)

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the taxpayer has attached an explanation of the additional expenses.

  9. If the Tuition and Fees claimed on the Form 8917 is for a dependent, determine if the child has been claimed for Child Tax Credit, Child Care Credit, Earned Income Credit and/or Additional Child Tax Credit. If the child has NOT been claimed for one of these credits, see (10) - (12) below for additional instructions. If child has been claimed for any of these credits, take the following actions:

    Note:

    If the dependent is claimed for EIC purposes, look at the child's year of birth to determine if the child is eligible (old enough to be attending a post secondary education institute) before disallowing the deduction.

    1. Create an IR for zero (0).

    2. Enter status code "U" , the AGI window will appear.

    3. Input/verify the entries in the AGI window.

    4. <F12>, the Tuition and Fees Deduction window will appear.

    5. Input/verify the entries in the Tuition and fees deduction window.

    6. <F12>.

    7. Send a Special Paragraph using the following verbiage as an example: "The Tuition and Fees deduction can only be claimed for qualified education expenses paid to a post-secondary educational institution. Based on the information provided on your return we have disallowed the Tuition and Fees deduction claimed for your dependent."

  10. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ adjust only if there is a change to AGI that would cause the credit to be phased out or eliminated. Create an IR for the amount of the Tuition and Fees claimed and work through the applicable windows.

  11. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and NO 1098-T is present take the following actions:

    Note:

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

    1. Create an IR for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Enter status code “U”, the AGI Window will appear.

    3. Input/Verify the entries in the AGI Window.

    4. <F12>, the Tuition and Fees Deduction window will appear.

    5. Input/Verify the entries in the Tuition and Fees deduction window.

    6. <F12>.

  12. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098-T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code “U”, the AGI Window will appear.

    2. Input/Verify the entries in the AGI Window.

    3. <F12>, the Tuition and Fees Deduction window will appear.

    4. Input/Verify the entries in the Tuition and Fees deduction window.

    5. <F12>.

    6. PARAGRAPH 112 automatically generates (see Exhibit 4.19.3-7), CP PARAGRAPHS.

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the taxpayer has attached an explanation of the additional expenses.

  13. If the taxpayer erroneously claims both the Education Credit and the Tuition and Fees deduction AND the Form 8917, Tuition and Fees Deduction, indicates that the credits were for the same student, disallow Tuition and Fees. Send PARAGRAPH 111 (See Exhibit 4.19.3-7, CP PARAGRAPHS).

    Caution:

    If Form 8917 is not attached to the return, disallow the Tuition and Fees deduction and send PARAGRAPH 111. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  14. If Tuition and Fees and/or DPAD are issues on the same case, recompute Tuition and Fees BEFORE DPAD. See IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence.

4.19.3.8.8.1  (09-01-2013)
Tuition and Fees Deduction (TUTFE) - Responses

  1. If the taxpayer responds with a completed Form 8917 claiming Tuition and Fees deduction for the first time, take the following action:

    IF THEN
    1098-T IR is present Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the 1098-T IR amount, unless the taxpayer has attached an explanation of the additional expenses.

    The taxpayer provides a copy of Form 1098-T or similar documentation Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the amount in Box 1 of Form 1098-T, unless the taxpayer has attached an explanation of the additional expenses.

    1098-T IR is NOT present or the taxpayer does not provide a copy of Form 1098-T or similar documentation Do not allow the deduction. Correspond with the taxpayer for a copy of the Form 1098-T.

    Note:

    Attempt to call the taxpayer for the requested documentation. See IRM 4.19.3.20.2.4.1, Out Calls – Calling the Taxpayer, for additional information on Out Calls.

    Note:

    Request verification for the amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .


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