4.19.15  Discretionary Programs

Manual Transmittal

December 09, 2014

Purpose

(1) This transmits revised IRM 4.19.15, Liability Determination, Discretionary Programs.

Scope

This section contains information on examination procedures and administrative matters relative to the Discretionary Programs and provides a reference for common issues and related items that might be found on tax returns. Throughout this revision, there are references to other IRMs which may contain related information needed when working cases.

Material Changes

(1) Editorial changes made throughout this IRM.

(2) IPU 14U0118 issued 01-15-2014 IRM 4.19.15.7 (1) Adoption Credit and Qualified Adoption Expenses (QAE), Added wording that was omitted in error in first sentence

(3) IPU 14U0290 issued 02-10-2014 IRM 4.19.15.42 Multiple Filers, Changed Instructions under para (5) for working more that one multiple filer

(4) IPU 14U0532 issued 03-21-2014 IRM 4.19.15.20(7) Erroneous Refunds - Added sentence regarding case documentation

(5) IPU 14U0532 issued 03-21-2014 IRM 4.19.15.32(4) Health Coverage Tax Credit - IRC 35 - Corrected link for HCTC program

(6) IPU 14U1044 issued 06-24-2014 IRM 4.19.15.18.6.1 Resolving The Q-Freeze, Adding If/Then to table under para (3) regarding Identity Theft

(7) IRM 4.19.15.4 Child and Dependent Care Credit, Updated procedures in table in para (3). Changed (b) and (c) in para (6), removed (d) and renumbered remaining list

(8) IRM 4.19.15.5 Education Tax Benefits - General Requirements and Exam Programs, Re-titled and updated entire section to three paragraphs and added table to para (3), also deleted broken links, added link to new subsection, added paragraph and link to irs.gov page.

(9) IRM 4.19.15.5.1 Lifetime Learning Credit and Hope/American Opportunity Tax Credit (AOTC), Updated entire section and added tables to para (1) and (4)

(10) IRM 4.19.15.5.1.1 Education Tax Credits - Evaluating Responses, Added entire new section

(11) IRM 4.19.15.5.2 Tuition and Fees Deduction, Updated verbiage throughout. Section down to nine paragraphs and added new NOTE in para (9)

(12) 4.19.15.13. Non-Earned Income Tax Credit Duplicate Taxpayer Identification Number (Non-EITC DUP TIN), Deleted entire 4th column in table in para (1)

(13) IRM 4.19.15.13.2 Processing Taxpayer Replies, Updated procedures in para (20 and table in para (4)

(14) IRM 4.19.15.13.3 Related Taxpayer(s), Added procedures to para (1) main body and (1)(b)

(15) IRM 4.19.15.21.3 Processing Taxpayer Replies, Changed last sentence in para (2) to a NOTE for more emphasis

(16) IRM 4.19.15.24.4.1 Acceptable Documentation for Charitable Contributions, Changed truthfulness to authenticity in para (9) to match those in (8) and (10)

(17) IRM 4.19.15.25 Casualty and Theft Losses, Added title row to table

(18) IRM 4.19.15.29 Correspondence Exam Tip Program, Added title row to table in para (5)

(19) IRM 4.19.15.30.1 Procedural Instructions, Updated Table in para (3) throughout and added Note. Added IRM reference to para (7) and verbiage changes to table. Updated procedures in para (11) and throughout Table B in para (12)

(20) IRM 4.19.15.31 Gambling Issues (Income and Losses) - General, Updated para (4) Note

(21) IRM 4.19.15.34.2 Schedule C - Travel Expenses, Added definition for temporary in para (2)

(22) IRM 4.19.15.38.1 Resident Alien, Changed Title to 'Resident Alien (RA)'

(23) IRM 4.19.15.38.2 Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC), Added New Section and renumbered remaining IRM sections

(24) IRM 4.19.15.38.3 Initiation, Re-Numbered from 4.19.15.38.2

(25) IRM 4.19.15.38.4 Earned Income Tax Credit, Re-numbered from 4.19.15.38.3 and Added new para (2)

(26) IRM 4.19.15.38.5 Acceptable Documentation, Re-numbered from 4.19.15.38.4. Added new procedure in table para (1) under 'Income', 'Child and Depd Care', and 'Education Credit'

(27) IRM 4.19.15.38.6 Employment-Related Identity Theft, Re-numbered from 4.19.15.38.5 and Updated IRM references

(28) IRM 4.19.15.39.2 Examining the Converted Form 1120S Return and Adjusting the Shareholders Return, Corrected the Rev-Proc version in para (1) and (2)

(29) IRM 4.19.15.46 Premium Tax Credit - IRC 36B, Added new section

(30) IRM 4.19.15.46.1 Premium Tax Credit Eligibility, Added new section

(31) IRM 4.19.15.46.2 PTC Project Codes, Added new section

(32) IRM 4.19.15.46.3 Case Selection, Added new section

(33) IRM 4.19.15.46.4 Research and Initial Report Writing , Added new section

(34) IRM 4.19.15.46.5 Creating the PTC Issue(s) , Added new section

(35) IRM 4.19.15.46.6 Evaluating Responses, Added new section

Effect on Other Documents

This IRM supersedes IRM 4.19.15, Liability Determination, Discretionary Programs, dated November 26, 2013 (effective January 1, 2014). The following IRM Procedural Updates have been incorporated into this IRM: 14U0118, 14U0290, 14U0532, 14U1044, 14U1218, and 14U1272.

Audience

This IRM is intended for the use of the SB/SE (Small Business/Self-Employed) and W&I (Wage and Investment) Campus Examination.

Effective Date

(01-01-2015)

Steven C. Klingel
Director, Reporting Compliance
Wage and Investment Division

4.19.15.1  (03-13-2012)
Personal Exemptions and Dependents

  1. See IRM 4.19.14.5.6. Personal Exemptions and Dependents.

4.19.15.2  (01-01-2007)
Filing Status

  1. See IRM 4.19.14.5.7, Filing Status.

4.19.15.3  (05-29-2012)
Child Tax Credit

  1. See IRM 4.19.14.5.8, Child Tax Credit.

4.19.15.4  (01-01-2015)
Child and Dependent Care Credit

  1. The following guidelines are used to determine if the taxpayer qualifies for the Child and Dependent Care Credit:

    • The limit on the amount of qualifying expenses that can be taken into account in computing the credit is $3,000 for one qualifying person or $6,000 for two or more qualifying persons. The amount of qualifying expenses after applying the limit is reduced by the aggregate amount of dependent care assistance excludable from gross income for the tax year.

    • The credit can be as much as 35 percent of qualifying expenses. Refer to Form 2441, Child and Dependent Care Expenses, for computation.

  2. A standard Exam letter will be issued requesting verification of items claimed on the return. Cases will be assigned the following project codes (PC): PC 0393 Child Care Credit and the taxpayer is filing Married Filing Separately; PC 0394 Child turned age 13 during the first half of the year; PC 0400 Child Care Credit/Dependent age greater than 12 years, and PC 0628 duplicate dependent for child tax credit, child and dependent care credit or education credit. See IRM 4.19.15.13, Non-Earned Income Tax Credit Duplicate Taxpayer Identification Number (Non-EITC DUP TIN), for additional guidance on PC 0628 duplicate dependent cases.

  3. The chart below will be helpful in determining what can be accepted to verify amounts claimed for the Child and Dependent Care Credit.

    A Qualifying Person is: Verifying Information:
    The taxpayer's dependent qualifying child who was under age 13 when the care was provided. Generally, the taxpayer must claim a dependency exemption for the child to claim the credit. However, if a noncustodial parent claims a dependency exemption for the child under the special rule regarding a child of divorced or separated parents or parents who live apart at all times during the last six months of the year, the child is treated as a qualifying person of the custodial parent, not the noncustodial parent for purposes of the credit. The custodial parent must meet the other requirements for claiming the credit. Age verification - Birth certificate, school records, or baptismal certificate. Qualifying Child Verification – See IRM 4.19.14.5.6(3), Personal Exemptions and Dependents.
    The taxpayer's spouse who was physically or mentally not able to care for himself/herself and who lived with the taxpayer for more than half of the year except for temporary absences. Marriage certificate (proof of spouse). Proof of disability: doctor's statement or state certification.
    The taxpayer’s dependent who was physically or mentally not able to care for himself/herself, who lived with the taxpayer for more than half of the year except for temporary absences, and for whom the taxpayer can claim an exemption (or for whom the taxpayer could claim an exemption except that:
    1. The person had gross income of , $3,650 or more for 2009, $3,650 or more for 2010, $3,700 or more for 2011, $3,800 or more for 2012, $3,900 for 2013,

    2. The person filed a joint return, or

    3. The taxpayer, or spouse if married filing jointly, was a dependent of another taxpayer.

    1. Proof of the person's residence: school records, official mail, or local library card.

    2. If disabled, doctor's statement or state certification to verify the individual's disability.

    The Filing Status of the taxpayer must be Single, Head of Household, Qualifying Widow(er) With Dependent Child, or Married Filing Jointly. If married, a joint return must be filed unless the taxpayer meets the rules to be considered unmarried head of household. Information is on the return and IMFOL.
    Eligibility Requirements Test: Verifying Information:
    The taxpayer and the taxpayer's spouse, if the taxpayer is married, must have earned income during the year. However, a special rule applies to a spouse who is a full-time student or who is unable to care for himself/herself. Form W-2, Wage and Tax Statement, or Form 1099. Schedule C, E, or F, if no Form 1099 income.
    The taxpayer must pay child and dependent care expenses so that the taxpayer and the taxpayer's spouse, if the taxpayer is married, can work or look for work.
    1. Proof of payment includes receipts or cancelled checks. If the expenses claimed were incurred while looking for work, examine interview sheets, job placement letters/statements, calendar/log/statements showing interview appointments and dates, or places applied to for work.

    2. If the expenses claimed were for any month in which the taxpayer or the taxpayer's spouse was a full-time student, examine letters/ transcripts from the school showing full-time course load and the specific number of months of enrollment.

    Payments Verifying Information
    The identity of the care provider must be reported on the tax return. The return must include the name, address, and Taxpayer Identification Number (TIN) of the care provider. If the care provider is an individual, the return must include a Social Security Number (SSN) of an ITIN. If the care provider is an organization/corporation, the return must includes an Employer Identification Number (EIN). The EIN/TIN does not have to be provided if the care provider is a tax-exempt organization (such as a church or school). If the care provider information given is incorrect or incomplete, the credit may still be allowed if the taxpayer demonstrates due diligence in trying to supply the information.

    Note:

    A taxpayer who fails to provide this information may claim the credit if the taxpayer shows that the taxpayer exercised due diligence in attempting to obtain this information.

    The taxpayer must pay child and dependent care expenses to a provider the taxpayer or spouse cannot claim as a dependent. If payments are made to a child of the taxpayer, the child cannot be the taxpayer's dependent and must be age 19 years or older by the end of the year. Name on the receipts or cancelled checks. If the taxpayer and the care provider have the same surname, determine if the taxpayer claimed the care provider as a dependent. If the taxpayer did not claim the care provider as a dependent, verify the age of the care provider using INOLE.
    Adjustment must be made for any dependent care assistance (payments or benefits) provided by the employers. Form W-2 or letter from employer.
  4. If the above conditions are met, compute the allowable credit.

  5. Expenses for a child to attend kindergarten or a higher grade, do not qualify for the Child and Dependent Care Credit. Expenses for before-school or after-school care of a child in kindergarten or a higher grade may qualify for the credit.

  6. Cases that are not initiated through ACE (Automated Correspondence Examination) must be worked as follows:

    1. Issue Letter 566-B (combo letter) with Form 4549 or Form 4549-EZ, Income Tax Examination Changes, if during initial research (DUPOL, DDBKD), it appears that a duplicate dependent was used to obtain a dependent care expense, or

    2. Issue Letter 566-B if initial research indicates: 1) The credit is for a child who is over 12 years, or 2) The Filing Status is Married Filing Separately

    3. If neither of the two conditions mentioned in (a) or (b) are met, issue Letter 566.

    4. Request applicable documentation.

    5. Follow normal procedures to work the case.

    6. If taxpayer is allowed the credit and a duplicate dependent exists, you must open the other duplicate dependent case and disallow the credit.

  7. Additional information regarding the Child and Dependent Care Credit is found in:

    • Publication 503, Child and Dependent Care Expenses

    • Publication 17, Your Federal Income Tax (For Individuals)

    • Instructions for Form 2441, Child and Dependent Care Expenses

4.19.15.5  (01-01-2015)
Education Tax Benefits - General Requirements and Exam Programs

  1. The IRS offers a number of tax incentives for taxpayers pursuing post-secondary (after high school) education:

    • The Hope Credit was a non-refundable tax credit available for the first two years of post-secondary education only. The Hope Credit was replaced in the 2009 tax year by the

    • American Opportunity Tax Credit (AOTC). The AOTC is available for the first four years of post-secondary education only. Forty percent of the AOTC is refundable. The remainder is a non-refundable credit against the taxpayer’s tax liability.

    • The Lifetime Learning Credit is a non-refundable tax credit available for any year of post-secondary education.

    • The Tuition & Fees Deduction reduces the taxpayer’s adjusted gross income (AGI). It is available for any year of post-secondary education.

  2. A taxpayer cannot claim the Lifetime Learning Credit, the Hope Credit/AOTC or the Tuition & Fees Deduction if any of the following apply:

    1. The taxpayer’s filing status is married filing separately

    2. The taxpayer is listed as a dependent on another taxpayer’s return. (The taxpayer is ineligible for the Tuition & Fees Deduction if another taxpayer can claim an exemption for them, regardless of whether the other taxpayer actually claims the exemption.)

    3. The taxpayer (or their spouse) was a nonresident alien for any part of the tax year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

      Note:

      Restrictions specific to each credit/deduction are addressed in the appropriate section.

  3. Eligible educational institution An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education. It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Certain educational institutions located outside the United States also participate in the U.S. Department of Education’s Federal Student Aid (FSA) programs. For additional information see the link to the irs.gov page, "What is an Eligible Education Institution?" under additional resources below.

  4. The following table provides an overview of the Education Credit/Deduction Programs currently worked in Exam:

    Project Code Description Initial Contact Letter Document Request Form
    0351 Hope Credit or AOTC: Taxpayer must demonstrate that they are eligible for the credit. Letter 566 Form 886 H-AOC
    0402 Duplicate Education Credit & Tuition Deduction Letter 566 Form 14803
    0405 Education Credit – Age Related: Taxpayer must demonstrate they are eligible for the credit. Letter 566 Form 886 H-AOC or Form 14807
    0406 Hope/AOTC claimed for more than 4 years Letter 566B with Form 4549 Form 886 H-AOTC-MAX

    Additional resources include:

    • Pub 970, Tax Benefits for Education

    • "What is an Eligible Educational Institution" irs.gov page which includes a link to the Department of Education's list of accredited schools.

    • Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits)

    • IRM 21.6.3.4.1.5, Form 8863 Education Credits

4.19.15.5.1  (01-01-2015)
Lifetime Learning Credit and Hope/American Opportunity Tax Credit (AOTC)

  1. Overview of the Education Tax Credits:

      AOTC Hope Credit Lifetime Learning Credit
    Maximum Credit For Tax Years 2009 through 2017: Up to $2,500 credit per eligible student (Calculated as 100% of first $2,000 of qualified expenses and 25% on next $2,000 of qualified expenses, per student). For the Tax Year 2008: Up to $1,800 credit per eligible student (Calculated as 100% of first $1,200 of expenses and 50 % of next $1,200). For Tax Years 2008-2009: (Maximum credit is $3,600 per eligible student for students in a Midwestern disaster area – calculated as 100% of first $2,400 and 50% of next $2,400 of qualified expenses.) Up to $2,000 credit per return (Calculated as 20% of qualified expenses up to $10,000) (For tax years 2008 & 2009, the maximum credit was $4,000 per return if a student in a Midwestern disaster area –calculated as 40% of qualified expenses up to $10,000).
    Refundable or nonrefundable 40% of credit is refundable (limited to $1,000 per student). The rest is nonrefundable. Nonrefundable-credit limited to the amount of tax liability. Nonrefundable-credit limited to the amount of tax liability.
    Number of years of postsecondary education Available ONLY for the first 4 years of postsecondary education. Student must not have completed first 4 years of postsecondary education before end of preceding tax year. Available ONLY for the first 2 years of postsecondary education. Student must not have completed first 2 years of postsecondary education before end of preceding tax year. Available for all years of postsecondary education and for courses to acquire or improve job skills.
    Number of years credit available Available ONLY for 4 tax years per eligible student (including an year(s) Hope Credit was claimed). Available ONLY for 2 tax years per eligible student. Available for unlimited number of years.
    Type of program required Student must be pursuing a program leading to a degree or other recognized education credential. Student must be pursuing an undergraduate degree or other recognized education credential. Student does not need to be pursuing a program leading to a degree or other recognized education credential.
    Number of courses Student must be enrolled at least half time for at least one academic period that begins during the tax year. Student must be enrolled at least half time for at least one academic period that begins during the tax year. Available for one or more courses.
    Felony drug conviction No felony drug convictions on student’s records. No felony drug convictions on student’s records. Felony drug convictions do not make the student ineligible.
    Qualified Expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials were bought at the educational institution as a condition of enrollment or attendance. Tuition and fees required for enrollment attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment). Additional expenses allowed for students in Midwestern disaster areas. Tuition and fees required for enrollment attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment). Additional expenses allowed for students in Midwestern disaster areas.

    For additional information on tax years prior to 2008, refer to Publication 970, Tax Benefits for Education, for the appropriate year.

  2. The Hope Credit was available for tax years 2003 through 2008. The American Opportunity Tax Credit (AOTC) replaced the Hope Credit for most taxpayers starting with the 2009 tax year. However, a larger Hope credit ($3,600 maximum) was available in 2009 for taxpayers meeting the special rules for the Midwestern disaster areas. In order to claim the Hope credit for 2009 a taxpayer had to:

    • Claim the Hope credit for at least one student attending an eligible institution in a Midwestern disaster area, and

    • Choose not to claim the AOTC for any student in 2009.

  3. The American Opportunity Tax Credit (AOTC) was first available during the 2009 tax year. The AOTC is set to expire after the 2017 tax year.

  4. The Hope Credit, AOTC, and the Lifetime Learning Credit are phased out (gradually reduced) if the taxpayer’s Modified Adjusted Gross Income (MAGI), refer to Pub 970, Tax Benefits for Education, is as follows:

    Tax Year MAGI
    Hope Credit and Lifetime Learning Credit
    2008 Between $48,000 and $58,000 (joint return: $96,000 and $116,000)
    2009 Between $50,000 and $60,000 (joint return: $100,000 and $120,000)
    Lifetime Learning Credit ONLY
    2010 Between $50,000 and $60,000 (joint return: $100,000 and $120,000)
    2011 Between $51,000 and $61,000 (joint return: $102,000 and $122,000)
    2012 Between $52,000 and $62,000 (joint return: $104,000 and $124,000)
    2013 Between $53,000 and $63,000 (joint return: $107,000 and $127,000)
    2014 Between $54,000 and $64,000 (joint return: $108,000 and $118,000)
    AOTC ONLY
    2009 - 2017 Between $80,000 and $90,000 (joint return: $160,000 and $180,000)

4.19.15.5.1.1  (01-01-2015)
Education Tax Credits - Evaluating Taxpayer Responses

  1. General guidelines:

    • Two different education credits (for instance, the AOTC and the lifetime learning credit) cannot be taken in the same year for the same student. Conversely, more than one credit may be taken on the same return if they are for different students. For instance, a taxpayer may claim the AOTC for an eligible student for whom they claim a dependent exemption, and also claim the Lifetime Learning credit for themselves.

    • Expenses are considered paid by the taxpayer who claims the dependency exemption for the student. If a taxpayer claims the dependency exemption for an eligible student, any expenses paid by the student or a third party are considered paid by the taxpayer. If a taxpayer does not claim a dependency exemption for an eligible student, then the student can claim the education credit on their own return.

    • Taxpayers may not take a double benefit for expenses paid. For instance, a taxpayer may not use excess expenses paid on behalf of a dependent student as the basis for an education credit or tuition and fees deduction that they claim for themselves.

  2. Acceptable documentation of qualified expenses:

    Qualified Expenses Accepted Proof
      AOTC Hope Lifetime Learning
    Tuition and fees required for enrollment or attendance at an eligible educational institution. Tuition receipts and transcripts to verify enrollment; proof of payment of expenditures via cancelled check or electronic funds payment confirmation, credit card statement, or paid receipt from the institution. Form 1098-T, Tuition Statement is also acceptable proof if the issuer completes Box 1 of that form. (Note: The educational institution is not required to complete Box 1. A different proof of payment is required if there is no amount in Box 1. See above.)
    Fees for course-related books, supplies, and equipment. Receipts and documentation to support the condition of enrollment. For instance: class outline, school program guide, and/or letter from institution. Fees do NOT have to be paid to the institution. Receipts and documentation to support the need for coursework. For instance: class outline, school program guide, and/or letter from institution -- only if the fees must be paid to the institution as a condition of enrollment or attendance.
    Prepaid expenses paid in the prior year for an academic period that begins in the first three months of the next year are calculated as a part of the prior year’s credit. Tuition receipts and receipts for qualifying expenses as listed above.
    Payments made with borrowed funds are calculated in the year that the expenses are paid, not in the year the loan is repaid. Receipts and transcripts to determine the year applied.
  3. Following are expenses that generally do not qualify for an education credit. Note that textbooks and supplies are qualifying expenses for the AOTC, even if they are not purchased from the institution as a requirement for enrollment:

    Expenses which generally do not qualify for the credit include: Accepted proof when allowable
      AOTC Hope Lifetime Learning
    Cost of insurance, medical expenses (including student health fees), room and board, transportation or similar personal, living or family expenses, even if the fee or expenses must be paid to the institution as a condition of enrollment or attendance. N/A
    Expenses related to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. However, if the instruction or other education is part of the student’s degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. School transcripts and curriculum or catalog demonstrating courses required for the degree program.
    Textbooks and supplies, even though purchased at the school bookstore, are generally not allowable, unless they are paid to the institution as a requirement for enrollment or attendance. Receipts, cancelled checks, or other proof of payment. To qualify as expenses for the AOTC, textbooks and supplies do NOT have to be purchased from the institution as a condition of enrollment or attendance. In addition to proof of payment, documentation to support that textbooks and supplies are required as a condition of enrollment or attendance.
  4. Additional qualifications and conditions for AOTC and Hope Credit (these restrictions do not apply to the Lifetime Learning credit):

    Qualifications and conditions for AOTC and Hope credit Accepted Proof
      AOTC Hope Credit
    The taxpayer did not have expenses that were used to figure a Hope Credit for more than one earlier tax year for this student or an AOTC and/or Hope Credit for more than three earlier tax years. All prior years' returns for tax years during which the first four academic years of post-secondary studies were not completed. All prior years' returns for tax years during which the first two academic years of post-secondary studies were not completed.
    The student has not completed the first two years of postsecondary education if claiming a Hope Credit or the first four years of postsecondary education if claiming the AOTC. School academic transcripts.
    The student was enrolled at least half time in a program that leads to a degree, certificate, or other recognized educational credential, for at least one academic period that begins during the taxable year. School transcripts or Form 1098-T, Tuition Statement
    The student was free of any federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year in which the credit is claimed. If any documentation indicates that this has occurred, the credit is not allowable.

4.19.15.5.2  (01-01-2015)
Tuition and Fees Deduction

  1. Taxpayers may claim a Tuition and Fees Deduction as an adjustment to income on Form 1040. The Tuition and Fees Deduction can reduce income by up to $3,000 in TY 2003 and $4,000 beginning in TY 2004.

  2. Generally, taxpayers can claim a deduction if all three of the following requirements are met:

    1. Payments were for qualified education expenses for higher education.

    2. Education expenses are for an eligible student.

    3. The eligible student is the taxpayer, the taxpayer’s spouse, or a dependent for whom the taxpayer may claim the exemption.

  3. An eligible educational institution is any college, university, vocational or other post secondary educational institution.

  4. Generally qualifying expenses are limited to tuition and fees.

  5. The taxpayer may not file married filing separately.

  6. The deduction is phased out between $65,000 and $80,000 ($130,000 - $160,000 for joint returns).

  7. No double benefit is allowed:

    • The taxpayer can not claim a Tuition and Fee expense for a student if he or anyone else claimed the Hope or Lifetime Learning Credit for that same student in the same tax year.

    • Taxpayer can not use the following expenses to claim the Tuition and Fee expense: expenses paid by tax-free portion of distribution from a Coverdell Educational Savings Account or a qualified tuition program, or expenses paid with tax-free interest on U.S. Savings Bonds, or expenses which have been paid by a tax-free scholarship, grant, or employer-provided educational assistance.

    For additional information, refer to Publication 970, Tax Benefits for Education.

  8. Acceptable Documentation:

    • Transcripts showing name and identifying information of student and period of enrollment

    • Proof of payment for tuition and fees, i.e., cancelled check and invoices from education institution

      Note:

      Form 1098-T, Tuition Statement is also acceptable as proof of payment if the issuer completes Box 1 of the form. (The educational institution is not required to complete Box 1. A different proof of payment is required if there is not an amount in Box 1. See above.)

  9. Evaluating Taxpayer Responses:

    • Review the name and SSN (Social Security Number) on transcripts and payment vouchers to ensure they are the same as those on the tax return.

    • Ensure payments were made by taxpayer.

      Note:

      In contrast to the Education Credits, expenses used for claiming the Tuition & Fees Deduction must have been paid by the person claiming the deduction. Payments made by the student or on their behalf by a third party are not considered to have been paid by the person who claims an exemption for the student. Compare to IRM 4.19.15.5.1.1(1),Education Tax Credits - Evaluating Taxpayer Responses. So, for instance, if a student pays their own expenses but can be claimed as a dependent on their parent’s tax return, then neither the student nor their parent may claim the Tuition & Fees Deduction.

    • Ensure fees are for post-secondary courses.

    • Review return to ensure the same expenses for the same student are not used to claim additional educational benefits such as the Hope/AOTC or Lifetime Learning Credit; with managerial approval to expand audit to apparent duplicated expenses if needed.

    • Disallow all other expenses other than tuition and fees.

4.19.15.6  (01-01-2008)
Mortgage Interest Credit

  1. Returns which have the Mortgage Interest Credit will flow through the exam filters, be classified and selected if they meet specific criteria.

  2. The Mortgage Interest Credit was established to help lower-income taxpayers purchase a primary residence. Before the taxpayer obtains a mortgage on a home he must obtain a certificate from a local or state government agency (Mortgage Credit Certificate).

    • Certificates issued by the Federal Housing Administration, Department of Veterans Affairs, Farmers Home Administration. Homestead Staff Exemption Certificates do not qualify for the credit.

4.19.15.6.1  (01-01-2008)
Initial Contact

  1. For the initial contact, send Letter 566 or Letter 566-B with the audit report ( Form 4549/ Form 4549-EZ, Income Tax Examination Changes) and Explanation of Items (Form 886-A) to the taxpayer.

  2. The Form 886-A should contain the following language:
    We are questioning the Mortgage Interest Credit you claimed on Line 54 of your Form 1040 for TY 20XX and Line 10 and/or Line 11 of Schedule A. To help us complete the examination of your Mortgage Interest Credit and ensure your Mortgage Interest Deduction was reduced appropriately, please furnish copies of the following information:

    • Receipts or statements from creditors showing the amount of interest paid, e.g., Form 1098, Mortgage Interest Statement, etc.

    • If paid to an individual, provide cancelled checks or receipts showing who paid the interest expense, name and address of the person to whom you paid the interest.

    • Purchase Contracts – For Mortgage Interest, please submit the Mortgage Agreement that shows you had an obligation to pay the interest expense and the Purchasing agreement for your home.

    • Copy of the Mortgage Credit Certificate issued by your state or local government showing applicable interest rate.

    • Completed Form 8396, Mortgage Interest Credit, (if not attached to the return).

4.19.15.6.2  (01-01-2014)
Conducting the Examination

  1. If the taxpayer qualifies, he may claim the credit each year for part of the home mortgage interest paid. Form 8396, Mortgage Interest Credit, is used to compute the amount of the credit. If the certified indebtedness amount (loan) shown on the Mortgage Credit Certificate (MCC) is less than the total mortgage loan, the credit is figured on only the part of the interest paid that is allocable to the MCC loan.

  2. The credit is an amount equal to the product of:

    1. The certificate credit rate (which may not be less than 10 percent or more than 50 percent), and

    2. The interest paid or accrued by the taxpayer for the year on the remaining principal of the certified indebtedness (plus a limited carry forward, if any).


    If the credit rate exceeds 20 percent, the tax credit for any year may not exceed $2,000 (IRC 25(a)(2)(A)).

  3. A three-year carry forward is provided for the unused portion of such credit caused by the limitation imposed by IRC 26 and IRC 25(a)(2)(A) as amended by Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L.107-16). In essence, the credit and carryover are limited to the tax less the following credits: Foreign Tax Credit, Credit for Child and Dependent Care, Credit for the Elderly or Disabled, Education Credits, Retirement Savings Contributions Credit, Child Tax Credit and the Adoption Credit. Form 8396, Mortgage Interest Credit, should be used to assist in the calculation of the allowable credit amount.

  4. If the taxpayer itemized on Schedule A, he must reduce his home mortgage interest deduction by the amount of the Mortgage Interest Credit shown on Line 3 of Form 8396. He must do this even if part of that amount must be carried forward.

  5. If the taxpayer sells the home during the first nine years after the closing date, he may be required to recapture all or part of the benefit received from the program. See Publication 523, Selling Your Home for more information.

4.19.15.6.3  (01-01-2014)
Evaluating Taxpayer Responses

  1. Use the following to evaluate taxpayer responses:

    1. Determine that the taxpayer owns the home and is making the payments by reviewing the Mortgage Interest Statement from the lender on Form 1098, Mortgage Interest Statement, obtained from the taxpayer or through IRPTRL.

    2. Review addresses, etc., to ensure the credit is taken on the taxpayer’s primary residence.

    3. Request and review the Mortgage Credit Certificate to ensure it was issued by the state or local government.

    4. Review the certificate credit rate on the Mortgage Credit Certificate to ensure this is the rate applied in the computation and not the rate of interest listed on the mortgage statement from the lender.

    5. Review the Schedule A and/or C to ensure the taxpayer has not duplicated the interest and that he has properly reduced the interest claimed there by the amount of mortgage interest credit.

    6. Review originating year information if the credit is a carryover.

    7. Review carryover amounts in subsequent years to ensure accuracy and requisition those returns if errors exist which are significant.

    8. Review the computation to ensure the taxpayer is taking the correct amount of credit each year and that applicable credits are not carried over for more than 3 years.

    9. If the taxpayer has actually claimed the District of Columbia First-Time Home buyer Credit as a Mortgage Interest Credit, see Form 8859, District of Columbia First-Time Homebuyer Credit, for proper application of that credit and disallow the Mortgage Interest Credit.

4.19.15.6.4  (01-01-2015)
Form 886-A Explanations and Tax Resources

  1. RGS Standard Paragraphs 6306 - 6309 should be used as applicable on Form 886-A, Explanations of Items.

  2. Tax Resources:

    Reference items (Publications, Regulations, existing training materials, existing IRM references, etc.)
    • IRC 25, Interest on Certain Home Mortgages

    • Publication 530, Tax Information for Homeowners

    • Publication 936, Home Mortgage Interest Deduction

    • Publication 17, Your Federal Income Tax (For Individuals), Instructions to the Form 8396, Mortgage Interest Credit

    • Publication 523, Selling Your Home

    • 2009 Master Tax Guide Paragraph 1308

4.19.15.7  (01-01-2015)
Adoption Credit and Qualified Adoption Expenses (QAE)

  1. The Adoption Credit is nonrefundable for most years but was refundable in 2010 and 2011. Regardless of the year involved, the rules for the Adoption Credit are generally the same. However, the income and dollar limitations change year to year based on inflation. Also, taxpayers who claim a refundable credit for 2010 or 2011 are required to file their returns on paper and to include substantiation when filing their returns.

    Note:

    For more information on the income and dollar limitations, see IRM 4.19.15.7.6, Credit Limitations, and IRM 4.19.15.7(7), Adoption Credit and Qualified Adoption Expenses (QAE). For more information on substantiation, see IRM 4.19.15.7.3, Evaluating Responses.

  2. Determine whether the Adoption Credit is being claimed for a nonrefundable or a refundable year.

  3. The Adoption Credit was nonrefundable for all taxable years which began on or after January 1, 1997, and ended before January 1, 2010. The Adoption Credit also is nonrefundable for taxable years which begin after December 31, 2011.

  4. The Adoption Credit was refundable for taxable years which began after December 31, 2009 and ended before January 1, 2012. See the Patient Protection and Affordable Care Act (PL 111-148).

  5. An Adoption Credit was refundable for the 2010 taxable year in the following circumstances:

    1. In domestic adoptions, for QAE which first became allowable in 2010, that is;

    • QAE paid in 2009 in connection with an adoption which was not final before the end of 2009; or

    • QAE paid in 2010 in connection with an adoption which became final in 2010; or

    • QAE paid in 2010 for an adoption which became final before 2010.

  6. Adoption Credit carryforwards from taxable years 2005 - 2009 were also refundable in 2010. See Notice 2010–66, 2010–42 I.R.B. 437.

  7. Adoption Credits were refundable in 2011 if:

    • QAE paid in connection with a domestic or foreign adoption first become allowable in 2011; or

    • In domestic adoptions of children determined by a State to have special needs, if the adoption was finalized in 2011.

  8. The credit is subject to an income limitation based on the taxpayer’s modified adjusted gross income (MAGI). See IRM 4.19.15.7.6, Credit Limitations, for more information.

  9. The credit is also subject to a dollar limitation. See IRM 4.19.15.7.6, Credit Limitations, for more information.

  10. the Adoption Credit and any employer-provided adoption benefits that can be excluded from income are computed on Form 8839, Qualified Adoption Expenses. The credit then is entered on Form 1040.

  11. For all nonrefundable years except 2012, taxpayers may claim the Adoption Credit by filing Form 8839 either electronically or on paper. For 2012, Form 8839 must be filed on paper. The credit for all nonrefundable years may be claimed without the taxpayer providing substantiating documentation with the return. However, substantiation may be required if the return is audited.

  12. For refundable years, the Form 8839 instructions advise the taxpayer that he or she must include documentation, attached to the return, to substantiate the Adoption Credit. Because of the documentation requirement for refundable years, taxpayers must file a paper return when claiming an Adoption Credit for 2010 or 2011.

  13. The credit will post to Master File as a Transaction Code (TC) 766 with a Credit Reference Number (CRN) 261.

  14. The following documentation indicators will display on IDRS (Integrated Data Retrieval System) Command Code (CC) RTVUE, ADOPT and TRDBV:

    • 0 or N - No documentation attached

    • 1 or Y - Valid documentation attached

    • 2 or I - Documentation attached, but not valid or insufficient to verify adoption

  15. Returns for refundable years that have no documentation, indicator 0 or N, or invalid documentation, indicators 2 or I, will be automatically selected for examination. Returns with no documentation attached will also be identified with tracking code 6390 on AIMS.

  16. A paper return will be systemically requested if the return is selected for examination and indicator “1” or “2” displays on CC RTVUE indicating adoption documentation (valid or invalid) is attached.

  17. The Adoption Credit in Discretionary Exam is worked under Project Code (PC) 0355. Adoption Credit cases with EITC will open in PC 1067, if Schedule C filter breaks, PC 0981. See IRM 4.19.14.12, EITC and Adoption Credit Procedures, for EITC procedures.

  18. For further details regarding the Adoption credit, see Publication 17, Your Federal Income Tax, (For Individuals) and the instructions for Form 8839. Additional information about the credit can also be found on www.irs.gov.

4.19.15.7.1  (01-01-2015)
Eligible Child – Claiming the Credit or Exclusion

  1. An eligible child for the purposes of claiming Adoption credit is an individual who:

    • Has not attained age 18, or

    • Is physically or mentally incapable of caring for him/herself

  2. Taxpayers may claim the credit for as many children as qualify.

  3. The proper year for claiming the adoption credit or exclusion depends on whether the eligible child is a citizen or resident of the United States (including U.S. possessions) at the time the adoption effort begins and whether the adoption is final or in process. See the following tables.

    Note:

    If the eligible child is a U.S. citizen or resident, you can take the credit or exclusion even if the adoption never becomes final as shown in the following tables.

    Child who is a U.S. Citizen or Resident
    IF the qualified expenses are paid in: THEN the credit is taken in:
    Any year before the year the adoption becomes final The year after the year of the payment
    The year the adoption becomes final The year the adoption becomes final
    Any year after the year the adoption becomes final The year of the payment
    Child who is a U.S. Citizen or Resident
    IF the employer paid for qualifying expenses under an adoption assistance program in: THEN the exclusion is taken in:
    Any year The year of the payment
  4. NOTE: If the eligible child is not a U.S. citizen or resident, you cannot take the adoption credit or exclusion unless the adoption becomes final as shown in the following tables. Generally, foreign adoptions are either non-Hague adoptions for Hague adoptions. See IRM 4.19.15.7.1(5), Eligible Child - Claiming the Credit for Exclusion, for more information.

    Foreign Child
    IF the qualified expenses are paid in: THEN the credit is taken in:
    Any year before the year the adoption becomes final The year the adoption becomes final
    The year the adoption becomes final The year the adoption becomes final
    Any year after the year the adoption becomes final The year of the payment
    Foreign Child
    IF the employer paid for qualifying expenses under an adoption assistance program in: THEN the exclusion is taken in:
    Any year before the year the adoption becomes final The year the adoption becomes final
    The year the adoption becomes final The year the adoption becomes final
    Any year after the year the adoption becomes final The year of the payment
    Children with Special Needs
    If the child has been determined by a State (including the District of Columbia or the possessions) to have special needs, the Adoption Credit can be claimed in the year the adoption becomes final even if the adoptive parents paid no qualified adoption expenses. A child may be considered special needs for purposes of the adoption credit and exclusions if the child is a citizen or resident of the U.S., the state has determined that the child cannot or should not be returned to his or her parents' home, and the State has provided the taxpayer with the documentation establishing the state determination of special needs. Ordinarily, a state determination of special needs is evidenced by a written adoption assistance agreement. Note: Taxpayers must provide the required documentation to claim the Adoption Credit. See IRM 4.19.15.7.4, Special Needs Adoptions.

4.19.15.7.1.1  (01-01-2014)
Determining the Year a Foreign Adoption Becomes Final

  1. In general, the year of finality of a foreign adoption is determined either under Rev. Proc. 2005–31, I.R.B. 2005–31, 2005–26 1374, available at www.irs.gov/irb/2005-26_IRB/ar14.html, (non-Hague adoptions) or under Rev. Proc. 2010-31, 2010-41 I.R.B. 413, available at www.irs.gov/irb/2010-40_IRB/ar10.html (Hague Adoptions).

4.19.15.7.1.2  (01-01-2014)
Non-Hague Adoptions

  1. In most non-Hague adoptions, there is an adoption proceeding in the foreign country (and the country is one that is not a party to the Hague Adoption Convention, discussed later) before the child is permitted to come to the United States. There may also be a re-adoption proceeding in the United States, either in the same year as the foreign adoption or in a later year.

  2. Rev. Proc. 2005-31 generally allows taxpayers to choose as the year of finality:

    • the year of the foreign-sending country adoption proceeding; or

    • the year of the re-adoption, if the re-adoption occurs in either the first or second year following the year of the foreign-country proceeding.

  3. The expenses of re-adoption are qualified adoption expenses in the year in which the expenses are paid, subject to the dollar limitation.

4.19.15.7.1.3  (01-01-2014)
Hague Adoptions

  1. In Hague adoptions, there is usually an adoption proceeding in the sending country (and the country is one that is a party to the Hague Adoption Convention, discussed later) before the child is permitted to come to the United States. Rev. Proc. 2010-31 generally allows taxpayers to choose as the year of finality:

    • the year in which the sending country enters a final decree of adoption; or

    • the year in which the U.S. Secretary of State issues a certificate under section 301(a) of the Intercountry Adoption Act of 2000, 42 U.S.C sections 14901-14954.

4.19.15.7.1.4  (01-01-2014)
Custodial Agreements Followed by Adoption in the United States

  1. In a few cases, the sending country may permit the child to come to the United States under a custodial agreement. If so, the child will be adopted later in a state court in the United States. Both Rev. Proc. 2005-31 allow the adoptive parent(s) to treat the year of the state-court adoption as the year of finality.

4.19.15.7.1.5  (01-01-2014)
Hague Adoption Convention

  1. The Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption (Hague Adoption Convention) entered into force for the United States on April 1, 2008. The Hague Adoption Convention applies to a taxpayer who adopted a child from a country that is party to the Hague Adoption Convention and who filed his or her application and petition (Forms I-800A and I-800) with the U.S. Citizenship and Immigration Service after March 31, 2008.

  2. See www.adoption.state.gov, for more information on the Hague Adoption Convention, the application and petition, and a complete list of countries that are parties to the Convention.

4.19.15.7.2  (11-29-2011)
Research and Initial Contact

  1. IDRS command code (CC) “ADOPT” using the primary SSN, will provide information from Form 8839 and identify the filters “fired” through Dependent Database (DDb). Examiners should research CC ADOPT to assist in identifying the selection criteria that must be considered as part of the examination.

  2. Send Letter 566 as the initial contact letter (ICL) with a fill-in issue box for Adoption Credit.

  3. If the taxpayer submitted valid documentation as indicated on CC RTVUE, ADOPT or TRDBV with indicator “1” or "Y" , send Form 886-H-Adopt-1 with the ICL to request documentation to verify the adoption expenses.

  4. If the taxpayer did not submit documentation, as indicated on CC RTVUE, ADOPT or TRDBV with an indicator "0" or "N" , or the documentation submitted is invalid or incomplete, as indicated on CC RTVUE, ADOPT or TRDBV with indicator "2" or "I" , send Letter 886-H-Adopt-0 with the ICL to request documentation to verify the adoption and the expenses claimed.

4.19.15.7.3  (01-01-2015)
Evaluating Responses

  1. For refundable years, and for taxpayers being audited for nonrefundable years, taxpayers must verify that a legal adoption has either been finalized or is in process. In addition, taxpayers must provide verification either of their expenses or of any special needs determination. Generally, if part of the credit claimed is a carryforward from a prior year, the taxpayer should provide a worksheet explaining how the carryforward was computed. However, for tax years beginning in 2011, there are no adoption credit carryforwards. Therefore, the taxpayer should not be asked for a credit carry forward worksheet for the 2011 tax year.

    Note:

    See IRM 4.19.15.7.5, Carry Forwards, for additional carry forward information.

  2. Proper documentation must be provided for each child claimed.

    Follow the guidelines below for acceptable documentation:

    Final Adoption
    IF THEN acceptable documentation is:
    Domestic or Foreign adoption finalized in the United States
    • Adoption certificate, report or final decree signed by a representative of the State Court , showing the names of the adoptive child and parent, or

    • Hague Adoption Certificate (Immigrating Child), or

    • IH 3 Visa

    Foreign adoption from a country that is not party to the Hague Convention
    • Translated decree of adoption from a foreign court or other document, issued by the competent authority establishing that a parent-child relationship has been created, or

    • IR 2 or IR 3 Visa

    Special Needs Adoption See IRM 4.19.15.7.4, Special Needs Adoptions.
    In-Process Adoption
    IF THEN
    In-Process Adoption Taxpayers will provide one or more of the following:
    • A copy of, or a receipt from, a home study completed by an authorized placement agency

    • A placement agreement with an authorized placement agency

    • A document signed by a hospital official authorizing the release of a newborn child from the hospital for legal adoption

    • A court document ordering or approving the placement of the child with the taxpayer for legal adoption

    • An affidavit or notarized statement signed under penalties of perjury from an adoption attorney, government official, or other authorized person. The documents must state that the signor either placed or is placing a child with you for legal adoption, or is facilitating the adoption process in an official capacity, with a description of the actions taken to facilitate the process.

  3. When the required documentation verifying the adoption is attached to the return (indicator Y or 1), examiners will only review proof of the claimed expenses if the expenses are substantiated.

  4. Tax law requires the taxpayer to claim QAE that they pay for an In-Process adoption for the year after the expense is paid. Examiners need to be aware of the timing of the expense and that the documentation the taxpayer provides may be for a prior year.

  5. Qualifying adoption expenses include:

    • Adoption fees

    • Court costs

    • Attorney fees

    • Travel expenses (including amounts spent for meals and lodging) while away from home

    • Other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child

  6. Acceptable proof of expenses include checks and receipts showing proof of payment.

  7. The following expenses are not allowable and do not qualify for the Adoption Credit:

    • That violate state or federal law

    • For the purpose of carrying out any surrogate parenting arrangement

    • For the adoption of a spouse’s child

    • Paid using funds received from any federal, state, or local program

    • Allowed as a credit or deduction under any other provision of federal income tax law

    • Reimbursed by an employer or otherwise

    • Any other expense that is not directly related to, and whose principal purpose is not for, the legal adoption of an eligible child

4.19.15.7.4  (01-01-2015)
Special Needs Adoptions

  1. If the adoption is domestic and final, and is of a special needs child (as determined by the state where the adoption occurs), the taxpayer is entitled to claim the maximum amount of the credit (minus any amounts claimed for that child in a previous year) even if the taxpayer paid no qualified adoption expenses.

  2. A child meets the definition of special needs if all of the following statements are true:

    • The child was a citizen or resident of the United States or its possessions at the time the adoption process began and

    • A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home and

    • The state has determined that the child is unlikely to be adopted unless assistance is provided to the adoptive parents

  3. The taxpayer must provide both of the following documents when substantiating the credit for a special needs child. Do not request verification of any expenses:

    1. Adoption certificate, report or final decree signed by a representative of the State Court showing the names of the adoptive child and parent and,

    2. The state’s determination of special need designation. See (4) for acceptable documentation of the state's determination of special needs.

  4. The following are acceptable documentation of the state's determination of special needs (this list not all inclusive)

    • A signed adoption assistance or subsidy agreement issued by the state or county

    • Certification from the state or county welfare agency verifying that the child is approved to receive adoption assistance

    • Certification from the state or county welfare agency verifying that the child has special needs

    Caution:

    For these purposes, an order or decree must include information establishing that the taxpayer’s adoption of the eligible child has been finalized and the date it was finalized. A special needs determination must include information establishing that the state has made a determination of special needs for the eligible child.

4.19.15.7.5  (01-01-2014)
Carry Forwards

  1. The nonrefundable adoption credit allows any unused adoption credit to be carried forward for up to five years.

    • For taxable year 2010, a refund was allowed for all QAE properly carried forward from 2005 through 2009. However, no QAE carried forward from 2010 into 2011.

    • QAE properly allowable for the first time in taxable year 2011 was refundable for that year. However, no QAE carried forward from 2011 to 2012.

    • In 2012, the adoption credit reverted to being nonrefundable. QAE properly allowable for the first time in 2012 will be allowed if the taxpayer has enough tax liability to use the credit. Any remaining allowable QAE will be carried forward to 2013 (the first year of the five-year carryforward period). Similarly, QAE first allowable in 2013 will be carried forward into 2014 if the taxpayer does not have enough tax liability to use all the allowable QAE in 2013.

  2. The year in which adoption expenses are first eligible to be claimed is the determining year for the maximum credit amount as well as the income limitation restriction. If the taxpayer qualifies for the full credit one year, they cannot increase that amount by carrying it forward to another year. Likewise, if they are limited or disqualified from taking the credit based on their MAGI, they cannot change that restriction, by moving the credit into another year. However, if the taxpayer pays additional QAE in a subsequent year, the allowable credit for those expenses is subject to the limitations for the year in which they are eligible to be claimed. Any allowable credit must always be reduced by prior credits taken for the same child.

  3. A Form 8839 is not required to be filed for years prior to 2010 in order to claim a carry forward of the credit. If the examiner has the necessary information to establish that a taxpayer was entitled to the credit in a prior year, and the amount of the allowable credit, the examiner would have the authority to allow the remaining balance of that credit in 2010. However, regardless of the year involved, the documentation requirements are the same. The taxpayer must still provide valid proof of the adoption process and QAE paid or special needs designation.

    Note:

    Most individuals use the cash method of accounting. Therefore, the relevant date for determining whether QAE is allowable is the date the QAE is paid, rather than the date the QAE is incurred. The date QAE is incurred is relevant only if the taxpayer uses the accrual method of accounting.

  4. QAE is allowable only if paid in connection with the adoption of an eligible child. Generally, an eligible child is an individual under the age of 18. The relevant date for determining a child's eligibility is when the QAE is paid. For example, suppose that QAE is paid in year 1, when the child is 16, and the QAE becomes allowable in year 2, when the child is 17. Suppose further that the adoptive parent has too little tax liability to use the credit in year 2 and that the credit carries forward into years 3 and 4. In year 5, the adoptive parent has enough tax liability to use the full carried-forward credit. The entire carried-forward credit will be allowable in year 5, even though the child who was adopted is now 20 years old.

  5. In order to claim QAE in the year it is first allowable, individuals must file as single, married filing jointly, head of household, or as qualifying widow(er). If the individual's filing status is married filing separately in the year that particular QAE first become allowable, the individual will never be eligible to claim a credit or exclusion for that QAE unless he or she files an amended return, using married filing jointly status, within the period of the statute of limitations. However, an individual who is married filing separately may claim an adoption credit carryforward from a prior year or years, provided that, if the individual was married in the year in which the QAE first became allowable, the individual filed a joint return for that year. For more information, see Topic 607, Adoption Credit and Adoption Assistance Programs, available at www.irs.gov/taxtopics/tc607.html.

4.19.15.7.6  (01-01-2015)
Credit Limitations

  1. Adoption credit current and prior year limitations:

    Current and Prior Year Credit Limitations
    Year Range Maximum Tax Credit (Dollar Limitation) MAGI Phaseout
    2014 $13,190 $197,880 - $237,880
    2013 $12,970 $194,580 - $234,580
    2012 $12,650 $189,710 - $229,710
    2011 $13,360 $185,210 - $225,210
    2010 $13,170 $182,520 - $222,520
    2009 $12,150 $182,180 - $222,180
    2008 $11,650 $174,730 - $214,730
    2007 $11,390 $170,820 - $214,820
    2006 $10,960 $164,410 - $204,410
    2005 $10,630 $159,450 - $199,450

4.19.15.8  (01-01-2015)
Tax Benefits for Kidnapped Children

  1. Following are guidelines to determine the allowance of tax benefits for kidnapped children for tax years ending after December 21, 2000.

    Guidelines for Determining Allowance of Kidnapped Children Tax Benefits
    If And Then, for all tax years during which the kidnapped child is missing and the treatment has not terminated
    The child is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of the family of the taxpayer or the child
    1. The child was the taxpayer’s qualifying relative for the part of the year before the kidnapping or

    2. The child had the same principal place of abode as the taxpayer for more than one half of the part of the year before the date of kidnapping

    1. Treat the child as the taxpayer's qualifying relative or

    2. Treat the child as meeting the residency test in the definition of qualifying child.

      Note:

      The treatment in (a) or (b) applies for purposes of (1) the Dependency Exemption, (2) the Child Tax Credit, (3) Head of Household filing status, (4) Qualifying Widow(er) with Dependent Child filing status, and (5) the Earned Income Tax Credit.


4.19.15.9  (01-01-2010)
Questionable Refund Cases

  1. See IRM 4.19.14.8, Questionable Refund Program (QRP) - for program procedures on Questionable Refund cases.

4.19.15.10  (01-01-2010)
Alternative Minimum Tax

  1. The Alternative Minimum Tax (AMT) program cases are identified by Submission Processing as taxpayers who are liable for the AMT but have not completed or attached Form 6251, Alternative Minimum Tax - Individuals.

  2. Submission Processing will notify the taxpayers that they appear to be liable for the AMT by issuing Letter 12C. The case is suspended for a response. If the taxpayer does not respond timely, the return is coded as an Audit Code P, generating the AIMS (Audit Information Management System) opening in Source Code 26.

  3. AIMS will open in the Andover Campus (W&I) or Philadelphia Campus (SB/SE) based on the Master File Business Operating Division (BOD) Code for the return.

  4. For W&I, the AMT cases are worked under Project Code 0631.

4.19.15.10.1  (01-01-2014)
Alternative Minimum Tax Procedures

  1. Prepare Letter 2194, Alternative Minimum Tax Proposal Letter, and Form 4549/Form 4549-EZ (Examination Report), and issue to the taxpayer for the initial contact.

  2. Based on the information reported on the return, the Examination Report (Form 4549/Form 4549-EZ) should include the largest determinable amount(s) as adjustments and tax preference items when computing the AMT on Form 6251.

    If Then
    Taxpayer responds agreeing to the AMT by signing exam report Process assessment and close case agreed.
    Taxpayer responds with tax preference items within 30 days from the issuance of Letter 2194 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    No response
    • 30 day letter - after the suspense time has expired, issue Letter 3219, Notice of Deficiency.

    • 90 day letter - after the suspense time has expired, process assessment and close case as a default.

    See IRM 4.19.10.1.6.1, Standard Suspense Periods for Correspondence Examination, for suspension periods for the various letters and time frames to issue letters/notices.

4.19.15.11  (10-01-2001)
Estate and Gift Tax

  1. Refer to IRM 4.25, Estate and Gift Tax, for information on estate and gift tax audits and procedures.

4.19.15.12  (01-01-2014)
Math/Clerical Error

  1. General procedures for the establishment and processing of unsubstantiated math/clerical error cases are presented in IRM 4.19.14.9, Math/Clerical Error Program.

  2. Unsubstantiated math/clerical error protest cases for which the original adjustment did not include a TC 764 will set up on AIMS under Project Code 0125. Campuses must review the cases to determine whether or not the math/clerical error protest involves the First-Time Homebuyer Credit (FTHBC) or the Long Time Resident Credit (LTR). If the protest involves one of these credits, assign a tracking code as indicated below:

    If Then
    The protest relates to the Long-Time Resident Credit (LTR) Assign Tracking Code 6215.
    The protest relates to the First-Time Homebuyer Credit (FTHBC) Assign Tracking Code 9216.
  3. Taxpayer Notice Codes (TPNC) for the disallowance of the FTHBC are enumerated in IRM 21.6.3.4.2.11.6.1, First-Time Homebuyer Math Error Responses.

  4. When initiating math/clerical error cases involving the FTHBC or the LTR credit, follow the procedures set forth in Paragraphs (6) through (9) of IRM 4.19.15.41.3, Research and Initial Contact, to initiate Letter 566. All other non-EITC math/clerical error cases should be started using Letter 566B ICL/30 Day Combo Letter.

4.19.15.13  (01-01-2015)
Non-Earned Income Tax Credit Duplicate Taxpayer Identification Number (Non-EITC DUP TIN)

  1. The Non-EITC DUP TIN program includes a population of taxpayers who have claimed a dependent who has been claimed on another taxpayer’s tax return. Generally these cases involve two or more uses of a TIN to claim a dependent.

    Program Duplication of TIN Tracking Code
    Duplicate TIN 2 - 3 times None
    Multi-Duplicate TIN 4 - 10 times 7669
    Ten-plus Duplicate TIN > 10 times 6450
    Duplicate Dependent Used for CTC, CCC, Education Credit 1 or more times 6545
  2. There are two types of the Non-EITC DUP TIN cases, the Dependent/Dependent and Dependent/Primary. For the Dependent/Dependent cases, the same individual is claimed as a dependent by two or more taxpayers. Dependent/ Primary cases involve an individual who claimed a personal exemption for himself or herself and another person who also claimed a dependency exemption for that same individual.

  3. Definitions for the DUPTIN Program are as follows:

    1. Non-entitled taxpayer - the taxpayer who is not entitled to claim the dependent or the personal exemption.

    2. Entitled taxpayer - the taxpayer who is entitled to claim the dependent or the personal exemption.

    3. Abused SSN - the SSN of the person who has been claimed as a dependent by more than one taxpayer in the same tax year or who has claimed a personal expemption and has been claimed as a dependent.

  4. The Dependent/Dependent cases are assigned Project Code 0097 or 0628 and the Dependent/Primary cases are assigned Project Code 0098 on AIMS.

  5. Whipsaw cases are established on AIMS under Project Code 0059.

4.19.15.13.1  (01-01-2014)
Initial Contact

  1. Cases in Project Code 0097 and Project Code 0098 are systemically processed using Automated Correspondence Exam (ACE) processing. For the initial contact, Letter 566 is issued to the taxpayers and the cases are updated to Status 10 on AIMS. For guidance on initiating PC 0628 cases that are not initiated using ACE, refer to IRM 4.19.15.4(6), Child and Dependent Care Credit.

  2. Whipsaw cases in Project Code 0059 are manually processed by preparing Letter 566-B , Form 4549 / Form 4549 EZ (Examination Report) and Form 886-H-DEP. The package is issued to taxpayers and the cases are updated to Status 22 on AIMS. The adjustments in the Examination Report include the disallowance of all dependents claimed on the returns and any other tax benefits claimed attributable to the dependency exemption such as Child Care Credit, Child Tax Credit, Education Credit or Filing Status.

  3. Refer to IRM 4.19.14.5.6, Personal Exemptions and Dependents, for rules on claiming a personal exemption or dependency exemption and for recommended supporting documentation.

4.19.15.13.2  (01-01-2015)
Processing Taxpayer Replies

  1. Refer to IRM 4.19.13.9, Taxpayer Replies, for procedures for working replies from the taxpayer

  2. For a child of divorced or separated parents or parents who live apart at all times during the last 6 months of the calendar year, a noncustodial parent claiming a child as a dependent must file a Form 8332, Release/Revocation of Release of Claim to Exemption for child by Custodial Parent, or substantially similar statement with his or her return, if the special rule for divorced or separated parents or parents who live apart applies. See Residency Test - Children of divorced or separated parents (or parents who live apart), in Pub 501, Standard Deduction and Filing Information.

  3. Form 8332 is a written declaration signed by the custodial parent releasing his/her claim to an exemption for the child to the noncustodial parent for a single year, a specified number of years, or all future years. The noncustodial parent must attach a copy of the signed Form 8332 or similar statement to his/her return for each year that the noncustodial parent is claiming an exemption for the child.

    Note:

    A copy of this form or similar statement must be requested during the audit since the return is not included in the examination case file. A Form 8332 executed after the return has been filed should be considered in the overall context of the examination when determining which parent is entitled to the exemption.

  4. The filing requirements for attaching Form 8332 or similar statement to the noncustodial parent's return are based upon the year in which the divorce decree or separation agreement went into effect:

    DECREE or AGREEMENT YEAR IF THEN
    Post-1984 but pre-2009 decree or agreement. The decree/agreement:
    1. States that the noncustodial parent can claim the child as a dependent without regard to any condition, such as the payment of support, and

    2. Specifies the year or years in which the noncustodial parent can claim the child as a dependent, and

    3. Is otherwise substantially similar to Form 8332 (including that the decree/agreement was signed by the custodial parent).

    1. If submitted in lieu of Form 8332,the noncustodial parent must attach certain pages of the decree or agreement to the tax return.

    2. For additional information, see Custodial parent and noncustodial parent in the chapter on Personal Exemptions and Dependents in Pub 17.

    Post-2008 decree or agreement.  
    1. The noncustodial parent cannot attach pages from decree/agreement, in lieu of Form 8332.

    2. The noncustodial parent must attach a Form 8332 or similar statement to his or her return.

    3. The custodial parent must sign either Form 8332 or a similar statement whose only purpose is to release the custodial parent's claim to the dependency exemption for the child without any conditions.

4.19.15.13.3  (01-01-2015)
Related Taxpayer(s)

  1. The scope of the examination must be expanded to include returns for taxpayers who, from previous audits, have been determined not to be entitled to the dependency deduction. Consideration must also be given to expanding the examination to returns of taxpayers who, based on analysis of internal information, may not be entitled to the dependency exemption. These cases must ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and be established on the Audit Information Management System (AIMS) under Project Code 0059 and started within 30 days from the closure of the previous audit. For related returns claiming EITC, refer to IRM 4.19.14.7.1.2 , DUPTIN Related Taxpayers

    1. The workpapers on the initial audit must be document the reasons the examination was expanded or why it was not expanded.

    2. If opening the custodial TIN per FCR of the TIN of one of the child's parents per Kidlink. The initial audit must be closed as a “No Change” to tax.

4.19.15.14  (01-01-2014)
Self-Employment Tax (SET)

  1. IRC 1401 establishes the legal authority for assessing Self-Employment Tax (SET), as defined in IRC 1402.
    Refer to IRM 4.4.29, AIMS Procedures and Processing Instructions, Social Security Administration (SSA) Adjustments. Also see IRM 25.6.1.5, Statute of Limitations Processes and Procedures, for special case situations.

  2. The Self-Employment Tax program identifies income that may be subject to self-employment tax. The income may be reported on Schedules C, C-EZ, or F. Compliance Services Examination Operations (CSEO) will have self-employment inventory identified by Discretionary Examination Business Rules, referrals from CAS, or Audit Code N cases.

  3. Self-employment tax is required when

    1. Net earnings from self-employment (excluding church employee income) is $400 or more, or

    2. Church employee income is $108.28 or more.

  4. The self-employment tax rate on net earnings is 15.3 percent (12.4 percent Social Security Tax plus 2.9 percent Medicare Tax).

    Note:

    For 2011 and 2012, the self-employment tax rate was reduced to 13.3% (10.4 % Soc. Security Tax plus 2.9% Medicare Tax).

  5. Taxpayers may deduct half of the self-employment tax amount when determining their adjusted gross income.

    Note:

    For 2011 and 2012, taxpayers may deduct the employer-equivalent portion of the self-employment tax amount when determining their adjusted gross income. The amount that may be deducted varies based upon the amount of self-employment tax the individual paid. See Form 1040 (Schedule SE) for tax year 2012. For tax years beginning after 2012, the deduction for one-half of self-employment tax will be computed without regard to the 0.9% Additional Medicare Tax on self-employment income.

4.19.15.14.1  (01-01-2014)
Self-Employment Tax Procedures

  1. Pull IRPTR (Information Returns Processing Transcript Requests) if available.

  2. These are batch cases and all cases will start in AIMS Status 10.

  3. The Letter 718 (SC) will be the initial contact letter.

  4. The second letter will be the Letter 525 (SC).

  5. If the case needs to be pulled from batch due to a reject/filtering condition, prepare Form 3198Special Handling Notice for Examination Case Processing for the case file, along with the examination report. Show the applicable Reference Codes to adjust the self-employment income and tax.

    Reminder:

    This information is required for closing so that SSA records are updated accordingly.

  6. Case processing:

    1. If Then
      No response is received in 45 days to Letter 718 (SC) Prepare letter 525 (SC) and report Form 4549.
      No response is received to letter 525 (SC) Prepare Notice of Deficiency from the information available.
      Taxpayer responds to initial contact and income is determined to be self-employment income Prepare Letter 525 (SC), Exam report and propose correct self-employment tax.
      Taxpayer responds to initial contact letter with a Form 1040X agreeing that the income is from Self Employment Close Case agreed. See IRM 4.19.13.9, Taxpayer Replies
      Taxpayer substantiates the income is not from self-employment or the taxpayer is not liable for the employee share of FICA (Federal Insurance Contributions Act) tax Close the case no change and issue Letter 590 (SC)
      Taxpayer claims an employee-employer relationship existed but the employer did not withhold FICA tax Request further information to show employee status. Consider referral to SB/SE Compliance Area Office if warranted. IRM 4.19.15.15, SS-8 Determination of Employee Worker Status.
      Taxpayer claims to be exempt from self-employment tax due to a previous filing of Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits Research Master File to verify if indicator is on file. If no indicator, request approved copy of Form 4361, or Form 4029 from taxpayer.
      Taxpayer has not retained approved copy of Form 4361 or Form 4029 and there is
      • No indicator on Master File

      • No verification of approval is available

      Determine tax year form was filed. Research Master File entity information to verify indicator is on file.
      • Pull return from files to see if exemption form is attached

      • Continue with the proposed self-employment tax and issue appropriate letter per IRM 4.19.13.9.1, Taxpayer Responses – Additional Information Needed.

      Reply is a copy of an approved Form 4361 or Form 4029 Route Form 4361 to Philadelphia Campus S-849. For general guidelines in the processing of Form 4361 see IRM 4.19.6.3.3, General Guidelines for Form 4361.
      Route Form 4029 to Philadelphia Campus, 4-G08, 151. For general guidelines in the processing of Form 4029 see IRM 4.19.6.4.1, Form 4029-Procedures
      No response to Notice of Deficiency. After the suspension period has expired, process the assessment and close case as a default.

4.19.15.15  (01-01-2014)
SS-8 Determination of Worker Status

  1. The Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is used to request a determination or ruling letter regarding a worker’s federal employment tax status. If a letter is received requesting a worker status determination, a Form SS-8 is sent to the taxpayer advising them to resubmit their request for determination to the appropriate office.

  2. The SS-8 Program has been centralized at Brookhaven Campus, except for Form SS-8 requests involving agencies and instrumentalities of the Federal government. While processing of Form SS-8 will be done at the Brookhaven Campus, taxpayers are required to forward their request to the location identified in the instructions for Form SS-8. See IRM 7.50.1, Form SS-8 Processing Handbook. Form SS-8 requests involving agencies and instrumentalities of the Federal government are handled by the Division Counsel/Associate Chief Counsel (TEGE) (Headquarters Office) at the address provided in the instructions for Form SS-8.

  3. Procedures for issuing rulings, determination letters, and information letters are found in the first revenue procedure of the calendar year. The procedure is updated each year.

  4. If a determination is made that the worker involved is an employee, correct returns may be solicited from the business. If the business does not respond, an employment tax examination may be initiated depending on the criteria of the applicable Area Office where the business is located.

  5. Any information related to other areas of employment tax noncompliance can be provided by Area Office management.

4.19.15.16  (01-01-2014)
Tax Exempt/Government Entities (TE/GE)

  1. Associate Form 5666, TE/GE Referral Information Report, with the case file in Examination, if a return for the taxpayer and class of tax is open. Forward the Form 5666, to that office by use of Form 3210, Document Transmittal. If Form 5666 is for multiple years and one return is open in an Area Office, forward all returns for that taxpayer to that office.

  2. The Form 5666 is not to be accepted and should be returned to Returns Program Manager (RPM), TE/GE Division, if there are less than 180 days remaining on the statute of limitations of the individual participant's Form 1040, U.S. Individual Income Tax Return and/or the employers return (Form 1120, U.S. Corporation Income Tax Return, Form 1120-S, U.S. Income Tax Return for an S Corporation, Form 1065, U.S. Return of Partnership Income or Form 1040) at the time the form is received in the Examination function.

  3. If Form 5666 is for multiple years returns, and any of those returns has less than 180 days remaining on the statute of limitations, do not correct that return. In such an instance, photocopy the Form 5666 and attach to the photocopy a Form 41, Routing and Transmittal Slip, with the explanation: The tax return for the period ending (Fill in) will not be corrected by Examination because there are less than 180 days remaining on the statute on limitations. Forward the photocopy of Form 5666 and Form 41 to the Returns Program Manager (RPM), TE/GE Division. Retain a copy of Form 41 in the case file.

  4. In cases where there is no open case file in Examination, determine whether the information report or other issues indicate that the return warrants examination. If so, associate the return with the Form 5666 and forward to an examiner, or place in priority files. The requisition should reflect the appropriate Source Code and Project Code (if applicable). Analyze data from Command Code (CC) RTVUE to determine if it is necessary to requisition the original return. If the examination can be completed without the return, annotate CC RTVUE to use a copy of the return.

  5. Screen TE/GE referrals within 30 days of receipt. After screening, return a copy of the Form 5666 to TE/GE advising of the selection or rejection of the referral.

  6. For selected referrals, state on the returned copy whether the referral has been assigned to an examiner or placed in a priority file.

  7. The Classification Section follows the procedures in the IRM section of Identification and Selection of Returns, for the screening of Form 1040 for other examination issues.

  8. If an individual participant's return (Form 1040) has previously been examined, reopening criteria or procedures do not apply for this issue only.

  9. Contacts with an employer to adjust a deduction claimed on the employer's return resulting from the examination of the employer, with respect to a Form 5500 series return (as reflected on Form 5666), is a continuation of the examination and reopening procedures do not apply.

  10. A separate Form 5666, reflecting the adjustments for each Form 1120-S or Form 1065 and the distributive amount for each respective shareholder or partner, is received from the TE/GE Division by the campus Classification Section servicing the mailing address of each shareholder or partner.

4.19.15.17  (10-01-2001)
TEFRA (Tax Equity and Fiscal Responsibility Act)

  1. Refer to IRM 4.29, Partnership Control System (PCS), and IRM 4.31, Pass-Through Entity Handbook, for additional information.

4.19.15.17.1  (01-01-2014)
Form 8082, Notice of Inconsistent Filers

  1. TEFRA Partners, under IRC 6222, and S Corporation shareholders, under IRC 6037(c), are generally required to file their returns consistently with the partnership/S Corporation return. However, there may be reasons why a member wishes to report items differently. Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), is used for this purpose. (Note that a partner in an electing large partnership must report all partnership items in a manner consistent with the partnership. IRC 6241.)

    Note:

    The TEFRA rules do not apply to any S Corporation tax year beginning after December 31, 1996. The Small Business Job Protection Act of 1996, Pub. L. No. 104–188, repealed the unified audit procedures for S Corporations, prior IRC 6241 – IRC 6245, effective for S Corporation taxable years beginning after December 31, 1996. IRC 6037(c) is applicable to shareholder’s returns for taxable years beginning after December 31, 1996.

  2. Refer to IRM 4.29, Partnership Control System (PCS), and IRM 4.31, Pass-Through Entity Handbook, for additional information.

4.19.15.18  (11-29-2011)
Unallowable Code (UA) Program

  1. The Unallowable Code (UA) Program is a Compliance initiative used to identify potential audit inventory during initial tax return pipeline processing. It is a pre-refund program. It is a Compliance process to prevent erroneous tax refunds on both IMF (Individual Master File) and BMF (Business Master File) tax returns. The program requires coordination between W&I, SBSE (Campus Reporting Compliance and Examination), Large Business & International (LB&I) and Submission Processing Headquarters to ensure the correct types of Unallowable Conditions are being identified and to provide guidance to employees who are impacted.

  2. W&I Campus Examination Operations review paper returns at the campuses where they are originally processed and MeF (Modernized e-file) returns at designated campuses. Returns selected for UA processing are then sent to the appropriate campus based upon back-end state mapping.

  3. If a portion of the taxpayer’s refund is being held, a CP 18 generates and is systemically mailed out to the taxpayer. The CP 18 informs the taxpayer that a portion of their refund is being held due to a potential unallowable item on their return. The CP 18 is informational only and does not request any documentation to be submitted.

4.19.15.18.1  (11-29-2011)
Unallowable and Action Codes

  1. Submission Processing HQ analysts are the primary owners of any work request that sets the Unallowable Audit Code, or Action Code conditions that are active during return processing.

  2. Examination HQ analysts notify Submission Processing of the Unallowable Conditions and Codes to be identified based on tax law.

  3. Unallowable coding results in Freeze Code –Q, Unallowable tax hold or partial refund hold (TC 576). This freezes the tax module from refund and offset out.

  4. The Unallowable Condition Code will generate a CP 19 or CP 20.

    1. There is a Transaction Code 971 Action Code 804 on CC TXMOD to indicate that the notice generated.

    2. The CP notice will not be mailed without review by Examination.

    3. When a CP 20 generates, a CP 18 generates systemically to notify the taxpayer that a portion of their refund is being held. The CP 18 generation and systemic mailing does not show on IDRS.

    Note:

    Unallowable coding causes AIMS creation and generation of CP 18, 19, and 20 series of notices.

  5. Unallowable coding:

    1. Causes the return to have the portion of the refund associated with the unallowable condition frozen while the return continues processing.

    2. Creates AIMS with Source Code 03, PBC (Primary Business Code) based on back-end mapping, Status Code 06, EGC (Employee Group Code) 5000 and Project Code 0000.

      Note:

      There are certain unallowable codes that open in their own Project Code. These codes are directly related to American Recovery and Reinvestment Act, First Time Homebuyer Credit and Rebate Recovery Credit.

  6. If the UA issue is visually identified, Code and Edit and Error Correction employees edit the return using Form 3471, Edit Sheet, with the unallowable code(s). For specific processing information used by Submission Processing to code Unallowable and Action Codes, refer to Submission Processing IRMs:

    • IRM 3.11.3.3.9, Unallowable Code, and Exhibit 3.11.3-6, Unallowable Codes.

    • IRM 3.11.3.15.1, Schedule A, General Editing Procedures.

    • IRM 3.12.3.5.8, Unallowables, and Exhibit 3.12.3-7, Audit Codes.

    • IRM 3.21.3, Individual Income Tax Returns and IRM 3.22.3International Returns.

  7. Unallowable Code tolerances are as follows:

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

4.19.15.18.2  (01-01-2014)
Inventory Delivery Information Unallowable Codes and Audit Codes

  1. CP notices are sent to Exam when Unallowable filings are identified; however, they should not be relied upon as notification that a new case is received.

    Note:

    CP notices may be printed at any site and routed to the appropriate campus for back-end processing.

  2. In an effort to protect taxpayer privacy, the Service has begun masking SSNs on certain CP notices. Refer to IRM 4.19.21.2(5), Processing Incoming Correspondence.

  3. Correspondence Exam workload inventory procedures such as SSIVL (Statistical Sampling Inventory Validation) reports should be used to identify and start new UA or Audit Code inventory.

  4. Unallowable case will create in SC 03 PC 0000.

  5. Audit Code cases will create in SC 02 PC 0000. The return will be routed through the clerical function. The majority of these cases will be classified to see if the return should be selected.

  6. CP 19/20 reports may be accessed via Control D by the query NRP66*.

  7. Most UA accounts have frozen refunds and should be worked within 30 days of full AIMS creation.

4.19.15.18.3  (11-29-2011)
Classifying Unallowable, Audit Codes, and Action Coded Returns

  1. When new Unallowable, Audit Code, or Action Coded returns are opened into campus examination inventory, ensure BOD and PBC are correct for your campus. If the BOD or PBC is incorrect, re-route the case to the appropriate area.

  2. Unallowable Condition - Exam classifiers or tax examiners experienced in the unallowable process will review the entire return via Command Codes RTVUE, BRTVU, or TRDBV .

  3. Audit Code or Action Coded case - Exam classifiers or tax examiners will review the entire physical return and Command Codes RTVUE, BRTVU, or TRDBV; as well as any other command code needed to classify the case correctly.

  4. Keep in mind that Submission Processing employees are not trained on all tax law issues.

    • There may not be an Unallowable Condition on the return. The opposite could be true; more Unallowable Conditions exist on the return than were coded.

    • An Audit Code Case or Action Coded Case may have been coded or input in error. The return needs to be checked to see if any exam issues exist.

    Note:

    Referrals should be made to the appropriate area when potentially-abusive preparers and/or fraud are identified.

  5. The last page of RTVUE will show the Unallowable Code and amount. It may also show if there is a change to adjusted gross income, itemized deductions, or a tax adjustment. If RTVUE shows “Per Return” side and “Per Computer” side are different, a math error notice should have been sent. If the math error resolved the unallowable issue, close the case per local procedures.

  6. Process cases as follows:

    If Then
    Unable to determine audit issues via Command Codes Secure the original return and suspend case for 30 days. If unable to secure return, survey the case with Disposal Code (DC) 20 and release the refund.
    Additional issues are identified for the filing Use Form 6754, Examination Classification Checksheet, to classify and set up as Source Code 20, Project Code 0000. Note this information in the upper right-hand corner of the Form 5546, Examination Return Charge-out Sheet.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Survey case with Disposal Code 20 and release refund.
    If the taxpayer is in an active combat zone Refer to IRM 4.19.13.20, Combat Zone, for instructions.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.15.18.4  (11-29-2011)
Notifying Taxpayer of Unallowable Issue

  1. Issue initial contact letter (ICL) to notify taxpayer of unallowable issue(s) as follows:

    1. CP 19/CP 20 may be used if all issues are included and amounts and dates are correct.

    2. If you determine a computational error was made on the CP, you can recompute the tax and retype the notice.

  2. If your Operation chooses not to use CP 19/CP 20:

    1. Issue Letter 525, 30 Day Letter, and

    2. Completed Form 4549/Form 4549-EZ, Income Tax Examination Changes, with the following paragraph added to the Form 4549"My original return shows an overpayment, however, based on the adjustments listed above, the IRS has reduced or eliminated the overpayment and is disallowing part or all of my claim for credit or refund. I waive the requirements that a notice of claim disallowance be sent to me (by certified mail) for the disallowance of part or all of any claim made on my original return. I will still receive notice for any claim filed on an amended return or otherwise filed apart from the original return that is disallowed." and

    3. Form 886-A, Explanation of Items.

  3. Release any refund frozen in error.

  4. Update AIMS to appropriate EGC and Status 22.

  5. Suspend case for 45 days.

4.19.15.18.5  (01-01-2014)
Response/No Response to Unallowable Notices/Letters

  1. Process responses/no responses to Unallowable notices or letters as follows:

    Note:

    When making or receiving phone calls, an IRS employee must follow IRM 21.1.3.2.3, Required Taxpayer Authentication, to ensure they are speaking to the appropriate taxpayer and to prevent unauthorized disclosure of tax information.

    If Then
    Taxpayer agrees with the proposed tax adjustment and signs the CP 19/CP 20 or Form 4549/Form 4549-EZ. Close as "Agreed" .
    Taxpayer agrees but does not sign the Form 2297 or Form 4549. Attempt to call the taxpayer and solicit a signed Form 4549. If you fail to reach the taxpayer continue to the next stage of the examination.
    Taxpayer submits an explanation that partially resolves the unallowable issue. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    Taxpayer submits documentation which substantiates an amount less than what was claimed on the return, but the unallowable condition is resolved. If the amount on the return appears to be incorrect due to a taxpayer or processing error, attempt to contact taxpayer to explain by phone if available. If unable to contact or no response is received, send Letter 692 (SC/CG) , Revised Report/Additional Information Letter, with Form 4549 and Form 886-A. Explain that the amount substantiated is less than the amount on the return. If they agree with the proposed changes, they should sign the Form 4549 and we will release the appropriate amount of refund.
    Taxpayer does not submit sufficient documentation to determine case. Attempt to contact taxpayer by phone if available. Allow 15 days if taxpayer states they will send additional information. If unable to contact or no response is received, send Letter 692 (SC/CG), Revised Report/Additional Information Letter, with Form 4549 and Form 886-A.
    The taxpayer requests a transfer to an Area Office. Release the frozen refund prior to the transfer.
    No response is received after the suspense period has expired. Prepare case for the issuance of a SNOD. Include Form 2297 or a copy of the Form 4549 containing the statutory language shown above in 4.19.15.18.4 (2)b), Notifying Taxpayer of Unallowable Issue.
    No response is received to the SNOD and the 105 (165 days if the letter was mailed out of the country) days has expired. Close as "Default" and issue 105C.

4.19.15.18.6  (02-06-2012)
Transcripts

  1. Transcripts titled, – QFRZALERT, will be sent to the responsible campus when an unreleased TC 576 remains on a module longer than 6 months without open AIMS or 18 months for a module with open AIMS.

  2. The transcript should be resolved within 15 days of receipt.


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