21.6.4 Tax Computation / Accounting Period Changes

Manual Transmittal

September 13, 2017

Purpose

(1) This transmits a revised IRM 21.6.4, Individual Tax Returns, Tax Computation / Accounting Period Changes.

Material Changes

(1) Various editorial updates throughout the IRM.

(2) IPU 17U0852 issued 05-15-2017 IRM 21.6.4.1 - Added internal controls information.

(3) IRM 21.6.4.3 - Added additional TAS information.

(4) IRM 21.6.4.4.1.4 - Deleted environmental tax.

(5) IRM 21.6.4.4.1.5 - Added link to Pub. 936 and added interest on indebtedness properly allocable to a trade or business.

(6) IRM 21.6.4.4.1.8 - Added 2017 mileage rate.

(7) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.1.12 - Added 2016 itemized deduction limitation.

(8) IRM 21.6.4.4.1.12 - Added 2017 itemized deduction limitation.

(9) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.2 - Added 2016 standard deduction.

(10) IRM 21.6.4.4.2 - Added 2017 standard deduction.

(11) IRM 21.6.4.4.3 - Added Command Code TXCMP and deleted information pertaining to the Jobs and Growth Tax Relief Reconciliation Act of 2003.

(12) IRM 21.6.4.4.4 - Added AMS Schedule D and Qualified Dividends Capital Gain Tax Worksheet.

(13) IRM 21.6.4.4.8 - Added tax year 2017 figures throughout this subsection.

(14) IPU 16U1663 issued 11-14-2016 IRM 21.6.4.4.8.8 - Added procedures for taxpayers reporting FUTA wages in multiple states.

(15) IRM 21.6.4.4.9 - Added 2017 base years.

(16) IPU 17U0565 issued 03-24-2017 IRM 21.6.4.4.9.3 - Added USDA CIS case routing.

(17) IRM 21.6.4.4.10 - Added tax year 2017 figures throughout this subsection.

(18) IRM 21.6.4.4.11 - Added tax year 2017 figures.

(19) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.12 - Added 2016 alternative minimum tax exemption amounts.

(20) IRM 21.6.4.4.12 - Added tax year 2017 figures.

(21) IRM 21.6.4.4.13 - Added tax year 2016 and 2017 figures.

(22) IRM 21.6.4.4.14.2 - Added tax year 2017 figures throughout this subsection, and added procedures regarding joint returns.

(23) IRM 21.6.4.4.15.5 - Added tax year 2017 figures.

(24) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.16 - Added filing a bankruptcy petition can change an accounting period.

(25) IPU 16U1523 issued 10-12-2016 IRM 21.6.4.4.18.4 - Added in (4) a loose Form 5405 can be processed without a Form 1040-X and added in (9) the required repayment is assessed with a TC 290.

(26) IRM 21.6.4.4.18.4 - Added lead-in paragraph to show how FTHBC repayment can impact multiple tax years and multiple accounts, and added procedures for when prior year dispositions are reported on a subsequent amended return.

(27) IRM 21.6.4.4.18.6 - Removed obsoleted CP 03 information.

(28) IPU 16U1663 issued 11-14-2016 IRM 21.6.4.4.19 - Added note clarifying use of RC 136.

(29) IPU 17U0311 issued 02-15-2017 IRM 21.6.4.4.19 - Added item reference number 901 for self-employment income.

(30) IPU 16U1523 issued 10-12-2016 IRM 21.6.4.4.20 - Added CAT-A criteria.

(31) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.21.2 - Updated the coverage exemption table.

(32) IPU 17U0311 issued 02-15-2017 IRM 21.6.4.4.21.2 - Added new hardship for taxpayers eligible for the Health Coverage Tax Credit.

(33) IPU 17U0565 issued 03-24-2017 IRM 21.6.4.4.21.2 - Clarified Form 8965 input data.

(34) IPU 17U0743 issued 04-26-2017 IRM 21.6.4.4.21.2 - Clarified the impact a Form 8965 can have on SRP.

(35) IPU 17U0852 issued 05-15-2017 IRM 21.6.4.4.21.2 - Corrected Form 8965 Part II indicator.

(36) IRM 21.6.4.4.21.2 - Added tax year 2017 coverage exemptions and added clarifying language to TC 971 AC 176.

(37) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.21.3 - Added the maximum shared responsibility payment for 2016.

(38) IPU 17U0565 issued 03-24-2017 IRM 21.6.4.4.21.3 - Added transcripts of the MFT 35 module can be requested using MFTRAX.

(39) IPU 17U0743 issued 04-26-2017 IRM 21.6.4.4.21.3.1 - Added an example in (3) of when additional information is needed and clarified when SRP can be adjusted based on correspondence.

(40) IPU 17U0971 issued 06-07-2017 IRM 21.6.4.4.21.3.1 - Added an exception to Form 1040-X processing.

(41) IPU 17U0084 issued 01-11-2017 IRM 21.6.4.4.21.3.2 - Added new sub-section for shared responsibility payment math errors.

(42) IPU 17U0311 issued 02-15-2017 IRM 21.6.4.4.21.3.2 - Removed SRP math error sub-section due to executive order to minimize the economic burden of ACA.

Effect on Other Documents

IRM 21.6.4, Tax Computation / Accounting Period Changes, dated Oct. 1, 2016, is superseded. This IRM also incorporates Interim Procedural Updates (IPU): 16U1523 (dated 10-12-2016), 16U1663 (dated 11-14-2016), 17U0084 (dated 01-11-2017), 17U0311 (dated 2-15-2017), 17U0565 (dated 3-24-2017), 17U0743 (dated 4-26-2017), 17U0852 (dated 5-15-2017), and 17U0971 (dated 6-7-2017).

Audience

All employees performing account/tax law work related to tax computation

Effective Date

(10-01-2017)


Kevin Morehead
Director, Accounts Management
Wage and Investment Division

Program Scope and Objectives

  1. Purpose: This IRM provides information on computing tax, inclusions in tax, and determining deductions allowed before the tax is computed. The following subjects are covered in this chapter:

    • Itemized and Standard Deductions

    • Tax Computation

    • Capital Gains

    • Sale of Home

    • Schedule H, Household Employment Taxes

    • Farmers and Fishermen

    • Tax on Children

    • Parents Election to Report Child's Income

    • Alternative Minimum Tax

    • Self-Employment Income and Tax

    • Accounting Period Changes

    • COBRA

    • First-Time Homebuyer Credit Recapture

    • Additional Medicare Tax

    • Net Investment Income Tax

    • Shared Responsibility Payment

    For other types of taxes not covered in this IRM, see the instructions for Form 1040.

  2. Audience: The primary users of this IRM are all IRS employees in Business Operating Divisions (BODs) who are in contact with taxpayers by telephone, correspondence, or in person.

  3. Policy Owner: The Director of Accounts Management.

  4. Program Owner: Process and Program Management, Accounts Management, Wage and Investment (WI).

  5. Primary Stakeholders: The primary stakeholders are organizations that Accounts Management collaborates with; for example; Return Integrity & Compliance Systems (RICS), Compliance and Submission Processing.

  6. Program Goals: Program goals for this type of work are included in the Accounts Management Program Letter as well as IRM 1.4.16, Accounts Management Guide for Managers.

Background

  1. Employees in the Accounts Management (AM) organization respond to taxpayer inquiries and phone calls as well as process claims and other internal adjustment requests.

Authority

  1. Refer to IRM 1.2.21, Servicewide Policies and Authorities, Policy Statements for Customer Account Services Activities, for information.

Responsibilities

  1. The Wage and Investment Commissioner has overall responsibility for the policy related to this IRM which is published on a yearly basis.

  2. Additional information is found in IRM 1.1.13.9.4, Accounts Management, and IRM 21.1.1, Accounts Management and Compliance Services Overview.

Program Controls

  1. Program Reports: The program reports provided in this IRM are for identification purposes for the Accounts Management Customer Service Representatives (CSRs) and Tax Examiners (TEs). For reports concerning quality, inventory, aged listing, please refer to IRM 1.4.16, Accounts Management Guide for Managers, for Accounts Management managers. Aged listings can also be viewed by accessing Control Data Analysis, Project PCD, are on the Control-D/Web Access server, which has a login program control.

  2. Program Effectiveness: Program effectiveness is determined by Accounts Management’s employees successfully using IRM guidance to perform necessary account actions and duties.

  3. Program Controls: Goals, measures and operating guidelines are listed in the yearly Program Letter. Quality data and guidelines for measurement is referenced in IRM 21.10.1, Embedded Quality (EQ) Program for Accounts Management, Campus Compliance, Field Assistance, Tax Exempt/Government Entities, Return Integrity and Compliance Services (RICS) and Electronic Products and Services Support.

Acronyms

  1. For a comprehensive listing of any IRS acronyms, please refer to the Acronym Database. Below are acronyms currently not listed in the database.

    Acronym Definition
    ACAX Affordable Care Act Amended Return
    ACA7 Affordable Care Act Shared Responsibility Payment
    ACA8 Affordable Care Act Health Coverage Exemption
    ACA9 Affordable Care Act Coverage Checkbox
    AdMT Additional Medicare Tax
    GST Generation Skipping Transfer
    PDC Posting Delay Code

Related Resources

  1. Refer to IRM 1.4.2.15, Related Resources, for information on related resources that impact internal controls.

Tax Computation Procedures

  1. Various schedules and forms are used in computing tax. The schedules and forms covered in this section are:

    • Schedule A, Itemized Deductions

    • Schedule D, Capital Gains and Losses

    • Schedule H, Household Employment Taxes

    • Schedule J, Income Averaging for Farmers and Fishermen

    • Form 8615, Tax for Certain Children Who Have Unearned Income

    • Form 8814, Parents' Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax - Individuals

    • Schedule SE, Self-Employment Tax

    • Form 4137, Social Security and Medicare Tax on Unreported Tip Income

    • Form 8919, Uncollected Social Security and Medicare Tax on Wages

    • Form 1128, Application to Adopt, Change, or Retain a Tax Year

    • Form 5405, First-Time Homebuyer Credit and Repayment of the Credit

    • Form 8959, Additional Medicare Tax

    • Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts

Tax Computation / Accounting Period Changes Research

  1. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, and each topic in this section for research requirements.

  2. Per the Taxpayer Bill of Rights (TBOR), taxpayers have the right to expect a fair and just tax system which provides taxpayers with the opportunity to have their facts and circumstances considered when it might affect their underlying liabilities, ability to pay, or ability to provide information timely.

  3. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service (TAS) if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through normal channels. For additional information visit the Taxpayer Bill of Rights.

  4. Refer taxpayers to the Taxpayer Advocate Service (TAS) when the contact meets TAS criteria (IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria) and you can't resolve the taxpayer's issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayer's issue. Do not refer these cases to TAS unless they meet TAS criteria and the taxpayer asks to be transferred to TAS. When referring cases to TAS, use Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order), and forward to TAS in accordance with your local procedures.

Working Tax Computation / Accounting Period Changes

  1. This section contains procedures for computing tax and for accounting period changes.

  2. Refer to IRM 21.5.1, General Adjustments, IRM 21.5.2, Adjustment Guidelines, and IRM 21.5.3, General Claims Procedures, for specific guidance on adjustment input and claim processing.

  3. If a fraudulent claim is identified that does not have an existing treatment stream, see Exhibit 21.5.3-7, Fraud Referral Claims.

Itemized and Standard Deductions

  1. Taxpayers may claim itemized deductions on Schedule A (subject to a limitation), or the standard deduction, whichever is larger, on Form 1040, U.S. Individual Income Tax Return.

  2. Taxpayers must file Schedule A when the filing status is married filing separately and their spouse itemizes.

  3. See the following sub-sections for information regarding itemized deductions. Standard deduction procedures can be found in IRM 21.6.4.4.2, Standard Deduction.

Procedures for Schedule A Itemized Deductions
  1. This section provides procedures for checking Schedule A, Itemized Deductions. Schedule A changes affect the taxable income amount.

    Note:

    Do not decrease taxable income below zero. This causes an unpostable 189 condition. See IRM 21.5.5, Unpostables, for additional information.

    1. Math verify Schedule A.

    2. Input the appropriate increase or decrease.

    3. Use Reason Code (RC) 076, the appropriate blocking series (BS) and source code (SC).

  2. Update the Return Processable Date (RPD) if the Schedule A is a late reply to a "U" coded return. The RPD is the received date of the Schedule A.

  3. Refer to IRM 21.5.1.4.2.10, Late Replies, for more information.

Schedule A Itemized Deductions
  1. Schedule A, Itemized Deductions, must be attached to Form 1040, U.S. Individual Income Tax Return, if the taxpayer itemizes deductions. Schedule A must also be attached to Form 1040-X, Amended U.S. Individual Income Tax Return, if the taxpayer is amending the return and a Schedule A was not previously filed with the original return.

  2. Schedule A is divided into eight sections.

    • Medical and Dental Expenses

    • Taxes You Paid

    • Interest You Paid

    • Gifts to Charity

    • Casualty and Theft Losses

    • Job Expenses and Certain Miscellaneous Deductions

    • Other Miscellaneous Deductions

    • Total Itemized Deductions

  3. When correcting a previously filed Schedule A, taxpayers are advised to attach a corrected Schedule A in the Form 1040-X instructions. Do not reject the claim for a missing Schedule A unless you are unable to verify the change.

  4. Changes to a Schedule A have different CAT-A criteria depending on the type of itemized deduction claimed. The following table provides the appropriate referral criteria.

    If Then
    Basic criteria – Applies to new or amended Schedule A changes, unless one of the separate criteria below applies. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    The only change to Schedule A involves medical expenses and the taxpayer's age is 70 or greater (either taxpayer if married filing joint) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    The only change to Schedule A involves Investment Interest Expense ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Exception:

    If the only change or deduction on Schedule A is due to mortgage interest or property tax and the deduction can be verified with CC IRPTR, do not refer to CAT-A regardless of the amount of tax change.

    See Exhibit 21.5.3-2, Examination Criteria (CAT-A) — General.

Medical and Dental Expenses
  1. An individual reports medical and dental expenses on Schedule A, Itemized Deductions. For tax years prior to 2013, an individual can deduct medical and dental expenses to the extent the expenses exceed 7.5% of the adjusted gross income (AGI).

  2. Effective tax year 2013, the threshold for a medical and dental expense deduction increased to 10% of the AGI. However, an individual is temporarily exempt from the increase through 2016 if the individual or individual's spouse is age 65 or older by the end of the year.

  3. See Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit), for deductible expenses.

Taxes and Fees-Deductible and Nondeductible
  1. The following taxes paid are deductible:

    • Income taxes—state, local, or foreign
      Taxpayers are allowed to deduct state and local sales tax in lieu of state and local income tax.

    • Real property taxes—state, local, and foreign

    • Personal property taxes—state and local

    • Taxes paid as an expense of carrying on a trade or business or an income producing activity - state, local, and foreign

    • Generation Skipping Transfer ("GST" ) tax imposed on income distributions

    • Excess profits and war profits taxes - state, local, and foreign

  2. Taxes and fees cannot be deducted unless they fall into one of the specifically allowable categories stated above. Nondeductible taxes and fees include, but are not limited to:

    • Federal income taxes

    • Social security, Medicare, and Additional Medicare taxes

    • Estate, inheritance, legacy, or succession taxes

    • Fines (e.g., parking and speeding)

    • Tax on gasoline, car inspection fees, etc.

    • Gift taxes

    • License fees for personal purposes (e.g., marriage, driver's, dog, etc.)

Deductible and Nondeductible Interest Paid
  1. The types of deductible interest are:

    • Home mortgage interest on up to two residences. Additional information and limitations can be found in Pub 936, Home Mortgage Interest Deduction.

    • Points paid for a home. Points may be reported on Form 1098, Mortgage Interest Statement, but not all points reported on Form 1098 are deductible. Additional information can be found at Tax Topic 504 - Home Mortgage Points

    • Home refinancing interest and home equity loan interest is restricted. Refer to Publication 17, Your Federal Income Tax for Individuals, and Publication 936, Home Mortgage Interest Deduction, for details.

    • Qualified mortgage insurance premiums you paid under a mortgage insurance contract issued after December 31, 2006, in connection with home acquisition debt that was secured by your first or second home. Premiums must have been paid or accrued on or before December 31, 2016.

    • Investment interest—limited to the amount of net investment income. Form 4952, Investment Interest Expense Deduction, may be required.

    • Periodic rental payments on a redeemable ground rent.

    • Interest on indebtedness properly allocable to a trade or business.

  2. The following types of interest are NOT deductible:

    • Points—if you are a seller paying points for the benefit of the buyer

    • Non-redeemable ground rent

    • Service charges

    • Annual fees for credit cards

    • Loan fees

    • Credit investigation fees

    • Interest relating to tax-exempt income

    • Interest to purchase or carry certain straddle positions

    • Finance charges on personal credit cards and interest on personal car loans

    • Interest paid to IRS

Gifts to Charity
  1. A charitable contribution is deductible only if it:

    • Is a donation or gift to, or for the use of, a qualified organization.

    • Is voluntarily made without receiving, or expecting to receive, anything of equal or greater value in return. If something of value is received in return and is of lesser value than the amount given to charity, a deduction may be allowed for the excess of the amount given over the value of what was received.

    • Is properly substantiated. For any cash donation made, taxpayers must obtain and keep either a bank record showing the name of the charity, the date and amount of the contribution (including, for example, a cancelled check), or a receipt from the qualified organization showing the name of the charity, the date and amount of the contribution. For cash or non-cash gifts of $250 or more, taxpayers must obtain a written acknowledgement on or before the earlier of the date the return is filed or the due date, including extensions.

    • Does not exceed the percentage limitations specified in IRC § 170(b).

    • Meets all other charitable contribution requirements.

  2. PL 113-92 allows taxpayers who made cash contributions for relief of victims of Typhoon Haiyan in the Philippines, to claim a tax deduction for their contribution on their 2013 return instead of their 2014 return. To qualify, the contribution must have been made:

    • After March 25, 2014 and before April 15, 2014

    • For the relief of victims in areas affected by Typhoon Haiyan

    • By text message, cash, check, credit card or debit card


    Taxpayers must keep a record of any donation made.

    • For donations by text message, a telephone bill will meet the record requirement if it shows the name of the organization, the date and the amount of the contribution.

    • For cash contributions, a bank record (such as a cancelled check) or a receipt from the charity showing the name of the charity, the date and the amount of the contribution will meet this requirement.

  3. See Publication 526, Charitable Contributions, for more information on reporting, requirements for written acknowledgement, and claiming standard mileage rates for charitable contributions.

Non-Cash Charitable Contributions
  1. For non-cash charitable contributions over $500, taxpayers must complete and submit Section A of Form 8283, Noncash Charitable Contributions.

  2. For non-cash charitable contributions over $5,000, taxpayers generally must obtain a qualified appraisal and must complete Section B of Form 8283. Except for contributions of publicly traded securities and certain other readily valued property, the Declaration of Appraiser (Part III) must be signed by the appraiser, and the Donee Acknowledgement (Part IV) must be completed and signed. The appraisal date must NOT be:

    • Earlier than 60 days before the date of the contribution of the property, or

    • Later than the due date of the return, including extensions, unless the deduction is first claimed on an amended return, in which case the appraisal date must not be later then the date the amended return is filed. See Treas. Reg. § 1.170A-13(c)(3)(i)(A).

  3. For contributions over $500,000, a qualified appraisal must be attached to the return. See IRC § 170 (f)(11)(D).

  4. Taxpayer inquiries may be received regarding balances due and disallowance notices relating to a missing or incomplete Form 8283, Noncash Charitable Contributions. The following procedures should be followed:

    1. Determine the reason for issuance of the notice.

    2. Inform the taxpayer the issue will be given further consideration if the IRS receives an accurately and fully completed Form 8283, Noncash Charitable Contributions, within 90 days of the request.

      Exception:

      If a deduction over $5,000 is disallowed because the appraisal was not completed within the time frames stated in (3) above, receipt of a Form 8283 within 90 days will not be sufficient to allow the deduction.

    3. Recompute the tax if a properly completed Form 8283 is received.

Standard Mileage Rate for Charitable Services
  1. For tax years 2005 through 2017, the standard mileage rate for use of the taxpayer's car in providing services to a charitable organization is 14 cents per mile.

  2. See Publication 526, Charitable Contributions, for more information on reporting and claiming standard mileage rates for charitable services.

Casualty and Theft Losses
  1. A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual, such as a fire, shipwreck or storm, not compensated for by insurance or otherwise. Taxpayers must file Form 4684, Casualties and Thefts, to support the deduction.

  2. A theft is the unlawful taking and removing of property or money with the intent to deprive the owner of it. The loss is allowable to the extent not compensated for by insurance or otherwise; the loss must be supported by Form 4684.

  3. Taxpayers filing or amending tax returns with additional casualty and theft losses must complete Form 4684 following normal procedures.

  4. See Publication 547, Casualties, Disasters, and Thefts; and Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) for additional information.

Job Expenses and Other Miscellaneous Itemized Deductions Subject to 2% Floor
  1. Certain expenses (e.g., unreimbursed employee expenses) can be claimed as miscellaneous itemized deductions on lines 21–23 of Schedule A, Form 1040, and are deductible to the extent that such expenses exceed 2% of AGI. Attach Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses, if required.

  2. Credit card convenience fees related to the payment of tax can be deducted on Schedule A, line 23.

  3. Route claims to Examination as CAT-A if they contain added expenses from Form 2106 resulting in a decrease in total tax of ≡ ≡ ≡ or more, see Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General.

  4. Form 2106 is required for changes of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . If Line 21 of Schedule A has an entry and there is an indication it is from travel, transportation, meal, or entertainment expenses, Form 2106 is required.

  5. See Pub 529, Miscellaneous Deductions, for more information about miscellaneous deductions subject to the 2% limitation.

Other Itemized Deductions Not Subject to 2% Reduction
  1. Some other expenses that are miscellaneous deductions are not subject to the 2% limit. These expenses include, but are not limited to:

    • Gambling losses (to the extent of gambling winnings)

    • Impairment-related work expenses of a disabled individual

  2. See Pub 529, Miscellaneous Deductions, for more information about miscellaneous deductions not subject to the 2% limitation.

Limitation on Itemized Deductions
  1. There may be an overall limitation on itemized deductions which applies to individuals whose income from line 38 (AGI) of the Form 1040, U.S. Individual Income Tax Return, exceeds the amounts listed below. These taxpayers must reduce the amount of their otherwise allowable itemized deductions by the lesser of:

    • 3% of the excess of AGI over the applicable amount, or

    • 80% of the amount of otherwise allowable itemized deductions


    SCHEDULE A Phase-Out
    FILING
    STATUS
    2017 2016 2015 2014
    Married Filing Jointly or Qualifying Widow(er) $313,800 $311,300 $309,900 $305,050
    Head of Household $287,650 $285,350 $284,050 $279,650
    Single $261,500 $259,400 $258,250 $254,200
    Married Filing Separately $156,900 $155,650 $154,950 $152,525

    Note:

    When determining the overall limitation, the term itemized deduction does not include the deduction under:

    IRC Section Deduction For
    IRC § 213 Medical Expenses
    IRC § 163(d) Investment Interest
    IRC § 165(a),
    IRC § 165(c)(2) or (3)
    Casualty or Theft Losses from property held for investment or personal use
    IRC § 165(d) Gambling losses to the extent of gambling winnings

Standard Deduction

  1. The amount of standard deduction depends on the year of the return and taxpayer's filing status.

  2. A taxpayer and/or spouse who is age 65 or older (for tax year 2017, born before January 2, 1953) and/or blind is entitled to a higher standard deduction. The taxpayer checks a box on the Form 1040 to indicate the reason for the additional standard deduction(s). Refer to the table below to determine the correct standard deduction amount.

    Note:

    Certain individuals are not eligible to claim the Standard Deduction. See Form 1040 instructions for additional information.

    FILING STATUS for # of Boxes Checked The Standard Deduction for 2017 is The Standard Deduction for 2016 is The Standard Deduction for 2015 is The Standard Deduction for 2014 is
    SINGLE 0 6,350 6,300 6,300 6,200
    1 7,900 7,850 7,850 7,750
    2 9,450 9,400 9,400 9,300
    MARRIED FILING JOINTLY 0 12,700 12,600 12,600 12,400
    1 13,950 13,850 13,850 13,600
    2 15,200 15,100 15,100 14,800
    3 16,450 16,350 16,350 16,000
    4 17,700 17,600 17,600 17,200
    MARRIED FILING SEPARATE 0 6,350 6,300 6,300 6,200
    1 7,600 7,550 7,550 7,400
    2 8,850 8,800 8,800 8,600
    3 10,100 10,050 10,050 9,800
    4 11,350 11,300 11,300 11,000
    HEAD OF HOUSEHOLD 0 9,350 9,300 9,250 9,100
    1 10,900 10,850 10,800 10,650
    2 12,450 12,400 12,350 12,200

Tax Computation

  1. To compute tax, taxpayers use the following:

    1. The Tax Table when taxable income is under $100,000.

    2. The Tax Computation Worksheet when taxable income is $100,000 or more.


    Command Code (CC) TXCMP can be used to calculate tax for all taxable incomes.

  2. Consider the following when computing tax:

    • Schedule D, Capital Gains and Losses

    • Schedule D, Tax Worksheet

    • Qualified Dividends and Capital Gain Tax Worksheet

    • Form 8615, Tax for Certain Children Who Have Unearned Income

    • Form 8814, Parents' Election to Report Child's Interest and Dividends

    • Form 6251, Alternative Minimum Tax—Individuals

    • Schedule J, Income Averaging for Farmers and Fishermen

    • Foreign Earned Income Tax Worksheet

    • Tax Computation Worksheet for Certain Dependents

    • Form 4972, Tax on Lump Sum Distributions

  3. Self-employment tax rules usually apply if taxpayer had net earnings from self-employment of $400.00 or more. See Publication 17, Your Federal Income Tax, and Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ), for exceptions.

    Note:

    Use the Capital Gains worksheet from Form 1040 instructions if applicable.

Applying Capital Gains and Losses Provisions for Sales

  1. For sales:

    • The capital gain tax rates vary from 0% to 28%, depending on the year of gain, holding period, type of property sold, and the taxpayer's taxable income. See Publication 544, Sales and Other Dispositions of Assets, and Publication 550, Investment Income and Expenses, for more information.

    • Taxpayers receiving capital gain distributions from mutual funds or real estate investment trust may be able to use the Capital Gain Tax Worksheet (Form 1040 instructions).

    • Schedule D filers will use Form 8949, Sales and Other Dispositions of Capital Assets, to report sales and other dispositions of capital assets.

  2. Command Code TRDBV may not display Schedule D in its entirety. If the complete schedule is needed, use Return Request Display (RRD) located through the Employee User Portal (EUP). See IRM 21.2.2.4.4.9, Modernized e-File Return Request Display (RRD).

  3. AMS provides a Schedule D and Qualified Dividends Capital Gain Tax Worksheet to assist with computing tax on Schedule D.

  4. Use RC 013 for changes to Schedule D, investment gains/losses. Use RC 043 for changes to Schedule D tax computation from another tax computation method.

Taxes on Dividends and Capital Gains

  1. The American Taxpayer Relief Act of 2012 raised the top rate for capital gains and dividends to 20% for tax years 2013 and subsequent. The rate applies to taxpayers whose income exceeds the thresholds set for the 39.6% tax rate. The 20% rate is for tax year 2013 and subsequent. All other taxpayers will continue to be taxed at the rates below.

  2. The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the 10 and 20% rates on adjusted net capital gains to 5 and 15% respectively. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the dates of this provision. This is effective for taxable years ending on or after May 6, 2003, and beginning before January 1, 2013. For tax years 2008 and subsequent, the 5% rate is reduced to zero.

  3. For taxable years that include May 6, 2003, the lower rates apply to adjusted net capital gains properly taken into account for the portion of the year on or after that date. Generally, this has the effect of applying the lower rates to capital assets sold or exchanged on or after May 6, 2003.

  4. Reporting capital gains (including capital gain distributions) on Form 1040, U.S. Individual Income Tax Return:

    1. Taxpayers with 25% or 28% rate gain are required to use the Schedule D, Tax Worksheet in the Schedule D instructions.

    2. Taxpayers with a capital loss carryover must use the Capital Loss Carryover Worksheet in the Schedule D instructions to compute their capital loss carryover.

    3. See Schedule D instructions for more information on when the Schedule D must be attached to Form 1040. Additional information is available in Publication 544, Sales and Other Disposition of Assets, and Publication 550, Investment Income and Expenses.

  5. Under The Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends received by an individual shareholder from domestic and qualified foreign corporations are generally taxed at the same rates that apply to net capital gains. This provision applies to dividends received in taxable years beginning after 2002.

  6. Generally, for the dividends to qualify for capital gains rates, the shareholder must own the stock for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date. There is a different holding period requirement for certain preferred stock. See Publication 550, Investment Income and Expenses.

Allowing Constructive Sales

  1. Constructive Sales — Generally, taxpayers must recognize gain (but not loss) on the date the taxpayers made a constructive sale of any appreciated financial position (with respect to any stock, a partnership interest, or debt instruments, with certain exceptions) as if the position were sold, assigned, or otherwise terminated at fair market value on that date. A taxpayer is generally treated as having made a constructive sale of an appreciated financial position if the taxpayer enters into one of several specified transactions, including a short sale of property that is the same or substantially identical to property in an appreciated financial position.

Sale of Your Home

  1. The sale of a home is reported only if there is a gain, and the taxpayer either does not qualify to exclude all the gain or elects not to exclude any gain. The gain is reported on Schedule D.

    Reminder:

    Refer to Publication 17, Your Federal Income Tax, and Publication 523, Selling Your Home, for specific information.

  2. Different tax rules apply to personal residence sales:

    • All taxpayers, regardless of age, can exclude up to $250,000 ($500,000 on certain joint returns) from capital gains taxation on Schedule D

    • The provision only applies to one sale or exchange every two years:

    If And Then
    Taxpayer owned the home for two out of five years Used it as a principal residence for two out of five years Taxpayer qualifies for exclusion.
    Taxpayer sold home due to job move, health problems, or unforeseen circumstances. A reduced maximum exclusion may be available more often than every two years. Refer to Publication 523 for ratio to figure exclusion.

    Note:

    Special rules apply in cases of transfer due to divorce, joint filers not sharing a principal residence, and deceased spouse. See IRC § 121(d) for more information.

Schedule H, Household Employment Taxes

  1. Employment taxes for household employees are reported annually on Schedule H (Form 1040), Household Employment Taxes, filed with Form 1040, with exceptions noted below. For a full explanation of the rules regarding reporting on Schedule H, see IRM 4.23.10.13.5, Household Employment Taxes, and Publication 926, Household Employer's Tax Guide.

    • For tax years 2016 and 2017, if an employee receives less than $2,000 in cash wages, the wages paid by the employer are not subject to FICA taxes ($1,900 in 2014 and 2015)

    • There are no provisions for employees to make voluntary contributions to the social security system if FICA taxes do not apply

  2. Schedule H calls are considered employment tax calls and should be referred to the appropriate extension using the Telephone Transfer Guide.

  3. Household employers must file Schedule H, Household Employment Taxes, to report wages paid.

    • Schedule H may be filed by either the primary or secondary taxpayer, but must be filed with Form 1040, U.S. Individual Income Tax Return, if the taxpayer is required to file a return.

      Note:

      Schedule H may be filed with Form 1040NR, U.S. Nonresident Alien Income Tax Return, Form 1040–SS, U.S. Self-Employment Tax Return, or Form 1041, U.S. Income Tax Return for Estates and Trusts.

    • Household employers not required to file an income tax return must still file a Schedule H by itself.

    • If an employer has other employees besides household employees, the employer may report their household employment taxes on Form 941, Employer's QUARTERLY Federal Tax Return, (or Form 943, Employer's Annual Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return) and Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return.

  4. When a loose Schedule H is received, Code and Edit prepares a "dummy" Form 1040 with Return Processing Code (RPC) "Y" entered.

    • A posted "dummy" Form 1040 with RPC "Y" sets the Filing Requirements (FR) to "0" .

    • Establish the FR if the taxpayer files a subsequent return.

  5. The household employment tax is reported on the Form 1040 and included in the transaction code (TC) 150 amount.

  6. A Schedule H carries its own Assessment Statute Expiration Date (ASED) that is NOT based on the filing requirements of the taxpayer's Form 1040. See IRM 25.6.1.9.4.3, Forms Reporting More Than One Item of Tax, for additional information.

  7. If the Schedule H was not filed with the original return, Schedule H taxes can be assessed even if the original return's ASED has expired. Priority Code 1 must be entered on the TC 29X adjustment with reference numbers 003/903, 004/904, 007/907, 073/973, 074/974 and/or 993/994 to bypass Unpostable code 150, reason code 3.

Schedule H, Household Employment Taxes - Employer Identification Numbers
  1. An Employer Identification Number (EIN) is required to be present on Schedule H, Household Employment Taxes.

    If Then
    Adjusting a previously filed Schedule H (no EIN change) Input of the EIN is not required.
    Schedule H was not filed with the original return. The EIN must be input on the adjustment record.
    Caution:An EIN from Schedule C may be displayed in the "XREF—TIN" field. This does not prevent an unpostable condition.
  2. To establish, change, or correct the primary or secondary EIN, use CC ADJ54 — "XREF-TIN" field.

    • The correct Schedule H EIN must be entered in this field, when a change is needed, along with the appropriate reference code

    • For the primary taxpayer's EIN enter 993 .00

    • For the secondary taxpayer's EIN enter 994 .00

  3. If the taxpayer does not have an EIN, prepare a Form 4442 requesting an EIN be assigned, attach a copy of the Schedule H, and fax to Entity.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Schedule H, Household Employment Taxes - EIN Corrections
  1. All EIN changes on Schedule H, Household Employment Taxes, reporting social security and/or Medicare tax, must be processed manually to prevent erroneous Combined Annual Wage Reporting (CAWR) records. Individual Master File (IMF) systemically forwards a record to the Business Master File (BMF) containing the Schedule H social security and Medicare tax information.

    Note:

    A telephone employee will make changes to Schedule H only if the Schedule H was previously filed and processed.

    1. Zero out the social security/Medicare tax fields posted under the incorrect EIN.

    2. Use the appropriate reference number(s).

    3. Use hold code "4" to prevent refund of the credit.

    4. Input a subsequent adjustment, with posting delay code "1" to change the EIN and adjust the appropriate Schedule H tax and reference number fields to the correct value.

  2. The reference number 993/994 .00 is input in the item reference code field on (CC) ADJ54.

    • The EIN and reference numbers are visible as pending transactions.

    • The Taxpayer Information File (TIF) does not show the EIN, however, MF records the EIN.

Schedule H, Household Employment Taxes - Fiscal Year Filers
  1. Fiscal year filers must report wages paid to household employees on a calendar year basis.

    • Schedule H must be filed for the calendar year during which the employer's fiscal year begins.

    • The due date for Schedule H for fiscal year filers is the due date of the fiscal year return, including extensions.

Schedule H, Household Employment Taxes - Components
  1. Schedule H, Household Employment Taxes, has four parts:

    • Part I — Social Security, Medicare, and Federal Income Taxes

    • Part II — Federal Unemployment (FUTA) Tax

    • Part III — Total Household Employment Taxes

    • Part IV — Address and Signature

    Note:

    Part IV is completed only if the employer is not required to file Form 1040, U.S. Individual Income Tax Return, Form 1040NR, U.S. Nonresident Alien Income Tax Return, Form 1040–SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), or Form 1041, U.S. Income Tax Return for Estates & Trusts.

Schedule H, Household Employment Taxes - Social Security, Medicare, and Income Taxes Part 1
  1. Schedule H, Household Employment Taxes, may be filed by either the primary or secondary taxpayer. IDRS allows the input and adjustment of either or both taxpayer's employment taxes.

  2. The reference numbers for adjusting Schedule H, Part I are:

    TITLE PRIMARY taxpayer SECONDARY taxpayer
    Total Social Security Wages 004 904
    Total Medicare Wages 073 973
    Federal Income Tax Withheld (if requested by employee) 003 903
    Social Security and Medicare Tax 007 907
    Additional Medicare Tax (AdMT) 074 974

    Note:

    Refer to IRM 21.7.2.3.3, FICA Taxes (including Additional Medicare Tax), for the applicable wage limitations and tax rates.

    Note:

    Refer to the Social Security Tax Rate Table in Document 6209, IRS Processing Codes and Information, for the monetary limitations for each tax year.

  3. The employer is instructed not to report social security and Medicare wages, with respect to any single household employee, for an amount less than $2,000 for 2016 and 2017, ($1,900 for 2014 and 2015). Delete total social security and Medicare wages if less than those amounts.

    If total cash wages subject to And Then
    Social security taxes (line 1, reference number 004/904) are not present social security taxes (line 2) are entered Divide the line 2 amount by .124 (12.4%). (Divide the line 2 amount by .104 (10.4%) for 2011 and 2012.)
    Medicare taxes (line 3, reference number 073/973) are not present Medicare taxes (line 4) are entered Divide the line 4 amount by .029 (2.9%).
    Additional Medicare Tax withholding (line 5, reference number 074/974) are not present Additional Medicare Tax withholding (line 6) is entered Divide the line 6 amount by .009 (0.9%).
    Social security taxes (line 1) is greater than total cash wages subject to Medicare taxes (line 3)
    1. Attempt to determine the correct amounts.

    2. Increase the Total cash wages subject to Medicare taxes (line 3) to equal the Total cash wages subject to social security taxes, if unable to determine the correct amounts.

    3. Treat as a "math error" if the tax is more than the taxpayer reported.

Social Security and Medicare Tax Erroneously Withheld - Employee Claims for Refund — Schedule H
  1. IRC § 6402 and Reg. 31.6402(a)-2(b) provide that employees may file claims for refund of excess social security and Medicare tax collected in error when:

    • The employer has not reimbursed the employee

    • The employee has not authorized the employer to file a claim for refund

    • The employee has not taken the overcollection into account in claiming a credit against or refund of income tax

    • The claim has been rejected

    See IRM 21.6.3.4.2.4, Excess Social Security and RRTA Tier I Tax Credits. Upon receipt of a claim:

    1. Review the employer's Schedule H (Form 1040) account for the last year in which FICA wages were paid to the employee. If necessary, secure the household employee's individual Form 1040, to verify claim information.

    2. Check for a signed statement from the employer indicating household employee had not authorized employer to file a claim, nor had household employee been reimbursed for amount over withheld.

    3. Check for a signed statement from the employee with an explanation of why he or she was unable to obtain a statement from his or her employer.

  2. Continue processing the claim using the table below:

    If ... Then ...
    No statement is received Return claim to taxpayer using Letter 916C, Claim Incomplete for Processing; No Consideration, requesting they submit required statement. See (1) step (2) above. See IRM 21.5.3.4.6.3, No Consideration Procedures.
    No indication household employee has contacted employer Instruct household employee to ask for refund from employer.
    Household employee is unable to obtain statement from employer Household employee must make a statement to the best of their knowledge and belief.

    Note:

    Statement must include explanation of household employee's inability to obtain the statement from employer.

    Claim is correctly filed with statement attached
    1. Input TC 291 with a HC 2 on employer's Schedule H (Form 1040) account for amount of decrease using IRN's 004/904 for wages and 007/907 for tax.

    2. Prepare Form 5792,Request for IDRS Generated Refund, and compute interest from the Schedule H ( Form 1040) due date or payment date, whichever is later. Enter TC 770 for amount of allowable interest. See IRM 21.4.4.4.1, Preparation of Form 5792, IDRS Generated Refund, for additional information.

      Reminder:

      Form 5792 will be made out to the household employee filing the claim.

    3. Attach a copy of claim to refund document and route to Accounting Function.

    4. Attach taxpayer's claim to adjustment document.

    Claim must be disallowed
    1. Input TC 290 .00 using BS 98/99 (99 if electronically filed with an IMFOLR or TRPRT print) on household employee's IMF account which contains period for which claim is filed.

    2. Send appropriate disallowance letter. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.

    Claim must be disallowed and return has not yet posted Write claim disallowance letter. Push code document and copy of denial letter using TC 930. After return posts, the disallowance claim and original return is returned to the originator for input of the TC 290 .00, BS 98/99 (99 if electronically filed with an IMFOLR or TRPRT print).
Schedule H, Household Employment Taxes - Interest-Free Provisions - Underpayments
  1. The interest-free provisions for underpayment adjustments on BMF taxes (IRC § 6205) apply to errors discovered on IMF, Schedule H, Household Employment Taxes.

    • Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision.

  2. Household employers who discover (ascertain) they have reported and paid less FICA tax or income tax withholding than was due on an original tax return may qualify for an interest-free tax adjustment under IRC § 31.6205-1(a).

  3. To qualify for an interest-free tax adjustment, the employer must file the appropriate amended return reporting the correction by the due date of the tax return for the tax period in which the error was ascertained. An error is considered ascertained when the employer has sufficient knowledge of the error to be able to correct it.

    Example:

    On June 1, 2017, an employer discovers an error made on Schedule H filed with his 2016 Form 1040. The employer must file an amended return by April 15, 2018 in order to qualify for an interest-free tax adjustment.

  4. Although employers have until the due date of the tax return for the tax period in which the error was ascertained to file the appropriate amended return reporting an underpayment adjustment, regulations require employers to pay any underpayment of tax by the time the amended return is filed. Otherwise, the correction will not qualify for a completely interest-free tax adjustment. See the table below for more information.

    If And Then
    The employer does not file the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained. Input a TC 290 with the appropriate reference number for the amount of the increase. Interest will be due as per normal underpayment interest rules.
    The employer files the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained. Fully pays the underpayment owed when the amended return is filed. Input a TC 298 with the appropriate reference number for the amount of the increase. No interest will be due on the amount of the underpayment reported and paid with the amended return.
    The employer files the appropriate amended return by the due date of the tax return for the tax period in which the error was ascertained. Does not fully pay the underpayment owed when the amended return is filed. Input a TC 298 with the appropriate reference number for the amount of the increase. Interest will be due on the amount of the underpayment reported from the interest computation date to the date the payment is made.
  5. When inputting a TC 298, the interest computation date is the IRS received date of the amended return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  6. Income tax withholding is not required on amounts paid to household employees unless the employee asks and the employer agrees.

  7. Generally, adjustments to income tax and Additional Medicare Tax withholding errors may only be made for errors discovered during the calendar year in which wages were paid. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error or if section 3509 applies. An administrative error occurs if the amount entered on Schedule H is not the amount the employer actually withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error. See IRM 21.6.4.4.8.13, Schedule H, Household Employment Taxes, Claims Citing IRC 3509, for provisions regarding use of Section 3509 when the taxpayer misclassified the worker.

  8. When an adjustment includes a Schedule H (FICA or Income Tax Withholding; not FUTA) assessment AND another IMF issue(s), assure ONLY the FICA tax and any income tax withholding (not FUTA) of the Schedule H assessment receives the interest-free treatment.

    1. To input the Schedule H adjustment, IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part 1. Attach the Schedule H and a copy of the Form 1040-X / DUP / Correspondence noting the original signature is available by pulling the subsequent adjustment.

    2. Input the adjustment for the other IMF issue(s) following normal procedures. Attach Form 1040-X / DUP / Correspondence and a copy of the Schedule H noting the adjustment was input separately.

  9. A corrected Schedule H may be filed with a Form 1040-X or an amended Form 1041. In such case, the correction on the Schedule H should be explained in Part III of the Form 1040-X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

Schedule H, Household Employment Taxes - Overpayments
  1. The interest-free provisions for overpayment adjustments on BMF taxes (IRC § 6413) apply to errors discovered on IMF, Schedule H, Household Employment Taxes.

    • Taxes imposed under the Federal Unemployment Tax Act (FUTA) are not eligible for the interest-free adjustment provision. See IRM 20.2.10.5, Federal Unemployment Tax, for special rules for reductions in FUTA tax due to increased state credits.

  2. Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made as an administrative error) on a corrected Schedule H as an interest-free adjustment if there is any indication that the taxpayer wants the overpayment applied as a credit to the period in which the Schedule H reporting the overpayment is filed.

    Example:

    Taxpayer files a Form 1040-X with an accompanying corrected Schedule H indicating on the appropriate line on that he wants the overpayment applied to his estimated tax for the current year. In this case the overpayment on the Schedule H will be treated as an interest-free adjustment.

  3. Process an overpayment of social security and Medicare taxes (and any overpayment of income tax or Additional Medicare Tax withholding made as an administrative error) on Schedule H as a refund with interest if there is no indication that the taxpayer wants the overpayment applied as a credit.

    Note:

    Refer to IRM 20.2.10.4, Employment Taxes, for additional information on the application of interest and interest-free provisions.

  4. Interest-free adjustments to overpayments of social security and Medicare taxes may be made at any time after the error is ascertained within the applicable period of limitations for the period in which the error occurred.

  5. A corrected Schedule H may be filed with a Form 1040-X or an amended Form 1041. In such case, the correction on the Schedule H should be explained in Part III of the Form 1040-X or on the required attached statement with the amended Form 1041. If a corrected Schedule H is filed by itself, the corrected Schedule H should include the date the error was discovered in the top margin. See Publication 926, Household Employer's Tax Guide, for more information.

  6. Interest-free adjustments to overpayments for the employee share of social security and Medicare tax may only be made once the employer has repaid or reimbursed the employee in the amount of the over collection of employee tax. An employer reimburses an employee by applying the over withheld amount against taxes to be withheld on future wages. Publication 926 instructs the employer to include a statement in their explanation in Part III of Form 1040-X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee, except where taxes were not withheld from the employee or where, after reasonable efforts, the employer cannot locate the employee.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. As part of the claim process, the employer must repay or reimburse the employee in the amount of the over collection or secure the employee's consent to the allowance of the claim for refund. Publication 926 instructs the employer to include a statement in their explanation in Part III of Form 1040-X, or in the attached statement to an amended Form 1041, that it has repaid or reimbursed its employee or has secured the employee's written consent to the allowance of the filing of the claim, except to the extent that the taxes were not withheld from the employee.

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    A claim for refund of income tax and Additional Medicare Tax withholding may not be made if the income tax or Additional Medicare Tax overpaid was actually withheld from the employee.

  8. Generally, interest-free adjustments to income tax or Additional Medicare Tax withholding errors may only be made for errors discovered during the same calendar year. Since household employees' employment taxes are reported annually on Schedule H, no quarterly adjustments are necessary. Interest-free adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error. An administrative error occurs if the amount entered on Schedule H is not the amount the employer actually withheld. An example of an administrative error is an erroneous mathematical computation or a transposition error.

  9. When a Form 1040-X, Amended U.S. Individual Income Tax Return, includes an overpayment on the Schedule H (FICA or Income Tax Withholding; not FUTA) AND another IMF issue(s), and indicates that it wants the overpayment applied as a credit, assure ONLY the Schedule H overpayment receives interest-free treatment.

  10. As part of the adjustment or claim process, an employer may not receive a refund of the employer share of overpaid social security and Medicare taxes without making reasonable efforts to protect the employees’ interests - to recover for its employees the corresponding employee share. An employer has a duty to assure that its employee’s rights to recover overcollected social security and Medicare taxes are protected by repaying or reimbursing overcollected amounts. Alternatively, an employer may obtain the employee’s consent to the filing of a refund claim. However, these requirements do not apply

    1. to the extent the overpayment does not include taxes withheld from the employee

    2. if, after reasonable efforts, the employer cannot locate the employee

    3. if the employee, once contacted, will not provide the requested consent

    In cases where the employer cannot locate the employee, or if the employee will not provide the requested consent, the employer may file a claim for refund for only the employer's share of the FICA taxes.

Schedule H, Household Employment Taxes, Part II Federal Unemployment Tax Act (FUTA)
  1. The FUTA tax rate is 6% of the employee's FUTA wages. However, the employer may be able to take a credit of up to 5.4% against the FUTA tax, resulting in a net tax rate of 0.6%. The 5.4% credit is reduced for wages paid in a credit reduction state.

  2. Taxpayers are subject to FUTA tax on the first $7000 of wages paid to each household employee if wages of $1000 or more are paid to all household employees in any calendar quarter of the prior year or current year.

  3. For more information on FUTA tax and FUTA wages, see Publication 926, Household Employer's Tax Guide.

  4. FUTA State Codes must be input for adjusting both the primary and secondary taxpayer information.

  5. The FUTA State Code is a three character code comprised of a single Alpha letter followed by the two character state code used by the U.S. Postal Service.

  6. The FUTA State Code Alpha is used as follows:

    • "T" — Primary taxpayer (refers to tax)

    • "Y" — Secondary taxpayer (refers to tax)

    • "W" — Primary taxpayer (refers to wages)

    • "Z" — Secondary taxpayer (refers to wages)

  7. The three character code is systemically converted to the applicable item reference number (IRN) for MF.

    • "T" converts to IRN 997

    • "Y" converts to IRN 995

    • "W" converts to IRN 998

    • "Z" converts to IRN 996

  8. The reference number is not displayed on tax modules.

    Example:

    The primary taxpayer reports $1,000 unemployment tax paid to Ohio. State code input is "TOH" — 1,000. The computer converts to TC 997 at Master File.

  9. For taxpayers reporting wages in multiple states, see IRM 21.7.3.4.5, Multiple State Cases (FUTA).

Schedule H, Household Employment Taxes - Unpostables
  1. Following is a list of Unpostable Codes (UPC) applicable to Schedule H, Household Employment Taxes.

    UPC Code Reason Code Description
    UPC 189 RC 1 Reference codes 003, 004, 007, 073, 903, 904, 907, 973, 995, 996, 997, and 998 are valid for MFT 30. This UPC occurs if the input reference number attempts to reduce the related field below zero.
    UPC 291 RC 3-1 Input must be for a significant money amount. This unpostable occurs if the input attempts to post without a significant money amount.
    UPC 290 RC 4 j This UPC occurs if the input attempts to post to an invalid period.
    UPC 169 RC 8 This UPC occurs if reference numbers 903, 904, 907, 973, 994, 995, or 996 are input to a module not controlled by a joint name line or not containing a spousal TIN.
    UPC 169 RC 0 This UPC occurs if an adjustment is input to Schedule H and no EIN is present for the primary/secondary taxpayer.
    UPC 150 RC 3 This UPC occurs if a Schedule H tax assessment is input to a module where the ASED is expired and Priority Code 1 is not used.
Schedule H, Household Employment Taxes, Received Without Form 1040, U.S. Individual Income Tax Return
  1. Schedules H, Household Employment Taxes, received in Receipt and Control must be routed to the Code and Edit function.

  2. Schedules H received in other functions require research to determine the appropriate action.

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

    Caution:

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

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

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

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

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

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

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

    If And Then
    The "dummy" Form 1040 posted as an original (TC 150) The taxpayer's original return posted as a duplicate and by-passed Discriminant Function (DIF) scoring
    1. Math verify the taxpayer's original return.

    2. Adjust the account to reflect the income and tax shown on the taxpayer's original return.

    3. Refer to IRM 21.5.2.4.23.6, DIF SCORE or CLASSIFICATION "Send Return(s) to Examination for Review" . Route to Examination if appropriate. Use local routing procedures.

    The taxpayer's original return posted as the TC 150 Schedule H, processed with a "dummy" Form 1040, posted as a duplicate Adjust the account, using the appropriate EIN and reference numbers.
BMF Form 941, Employer's QUARTERLY Federal Tax Return, Filed Instead of IMF Schedule H, Household Employment Taxes
  1. If the taxpayer filed Form 941, Employer's QUARTERLY Federal Tax Return, Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return, instead of Schedule H, Household Employment Taxes, (with or without Form 1040, U.S. Individual Income Tax Return), the tax must be eliminated from the BMF Form 941 (or Form 943 or Form 944) account and assessed on the IMF Form 1040 account.

    Reminder:

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

    Note:

    If an adjustment is required on both the IMF and BMF side, the individual campus will adjust the issue specific to their campus and route the case to the sister site to finish the processing. See IRM 3.13.6.9.4, Batch Cover Sheet - Outside the Scope Of The Campus Work Type.

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

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

    2. Transfer payments to the IMF account.

    3. Delete the Form 941, Form 943, or Form 944 filing requirements. (Also, delete the Form 940 filing requirement, if present.)

    4. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941, Form 943, or Form 944, if available, but DO NOT request the return from Files.

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

    1. Assess the tax originally reported on Form 941, Form 943, or Form 944.

    2. Use a copy of the taxpayer's correspondence as the adjustment source document. Attach a copy of Form 941, Form 943, or Form 944, if available, but DO NOT request the return from Files.

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

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

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

      Reminder:

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

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

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

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

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

      Note:

      Employers whose total liability was $1,000 or less may be required to file Form 944, Employers ANNUAL Federal Tax Return, if they were notified to do so and did not opt out of the Form 944 filing requirement as permitted under certain conditions. See IRM 21.7.2.4.9, Form 944, Employers ANNUAL Federal Tax Return, for additional filing information.

Schedule H, Household Employment Taxes - Claims Citing IRC § 3509
  1. IRC § 3509 provides for reduced rates for calculating employer liability for employment tax if a worker is reclassified from an independent contractor to an employee.

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

  3. IMF will handle an IRC § 3509 claim in the same way BMF handles the Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund, citing IRC Section 3509 .

  4. To process the claim, refer to and use BMF instructions in IRM 21.7.2.5.4, IRC Section 3509.

  5. Use IMF reference numbers, as shown in IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part 1.

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

Schedule J, Income Averaging for Farmers and Fishermen

  1. Farmers and fisherman may use Schedule J, Income Averaging for Farmers and Fishermen, to elect to average all or part of taxable income over the previous 3 years. Farmers may benefit from this election in a year when farm income is high and income in one or more of the previous three years was low.

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

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

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

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

    The base years are determined as follows:

    If Tax Year is... Then Base Years are...
    2017 2016, 2015, 2014
    2016 2015, 2014, 2013
    2015 2014, 2013, 2012
    2014 2013, 2012, 2011
  3. If a farmer or fisherman did not file a return for any of the three previous years, the amount entered on Schedule J for that year(s) is the amount that would have been reported if the taxpayer had filed a return.

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

  5. A farmer's or fisherman's regular tax liability for purposes of computing Alternative Minimum Tax (AMT) is determined without reduction for income averaging. Those taxpayers receive the full benefit of income averaging because it reduces the regular tax while the AMT (if any) remains unchanged.

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

Taxable Income from Farming or Fishing and Elected Farm Income
  1. Taxable income from a farming business, as defined in IRC § 263A(e)(4), or fishing includes all of the items listed below that are attributable to any farming or fishing business:

    • Income

    • Gains

    • Losses

    • Deductions

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

    • A landlord's crop share income reported on Form 4835, Farm Rental Income and Expenses, is eligible for income averaging under certain circumstances.

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

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

Adjusting Schedule J
  1. Math Verify Schedule J, Income Averaging for Farmers and Fishermen.

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

  3. Use Reason Code 046 and appropriate source code and blocking series.

USDA Discrimination Settlement Payments
  1. The United States Department of Agriculture (USDA) paid cash settlements and granted loan cancellations to various groups of farmers pursuant to settlements approved throughout the years. The settlements resulted from discrimination suits brought against the USDA by farmers.

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

    • Pigford vs. Glickman

    • Pigford vs. Veneman

    • Black Farmers Suit / Settlement cases

    • Keepseagle

    • Native Americans

    • Pigford II

    • Hispanics and Women Farmers and Ranchers Claim

    Note:

    These are NOT Group or Class-Based Reparation Claims. See IRM 21.6.6.3.1, Group or Class-Based Reparation Claims, for more information.

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

    • $50,000 cash payment

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

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

    Note:

    For Keepseagle / Native American, Hispanics / Women, and Pigford II claims, see (6) and (7).

  4. Most taxpayers received these payments over a period of two years, the cash payment and the debt forgiveness occurred in one year, and the tax payment was remitted to IRS in the following year. The cash payment and the tax payment (the 25% amount) are taxable income. The forgiveness of debt is generally taxable income, but may be excludable under certain circumstances. If the taxpayer uses the cash method of accounting, the taxpayer must report the tax payment (the 25% payment) as taxable income for the year when the payment was applied to the taxpayer's account.

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

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

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

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

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

    5. If the farmer does not claim the estimated tax payment, the tax module will show a J - Freeze. See IRM 21.5.6.4.19, J - Freeze.

    6. Must be reported as taxable income for the year the payment was applied to the taxpayer's account.

  6. Keepseagle, Hispanics / Women, and Pigford II settlements were divided into two categories:

    • Track A - claimants received an award of up to $50,000 plus an additional 25% in withholding (for a total of up to $62,500)

    • Track B - claimants received up to $250,000 with no income tax withheld

    • Track A and Track B - claimants may have also received debt forgiveness

  7. Both Track A and Track B claimants were issued a Form 1099-MISC, Miscellaneous Income, along with an instructional notice prepared by a third party (not the IRS) advising the farmer how to correctly report the settlement.

  8. Farmers who had debt forgiveness received a Form 1099–C, Cancellation of Debt.

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

  10. Refer to the table below to work settlement cases:

    If ... And Then ...
    This is a USDA Cash Settlement payment. The taxpayer reports only the settlement income (no expenses) on Schedule F, "Other Income" line, or on Form 1040, line 21.

    Note:

    If the taxpayer has excess farm losses, the taxpayer should use Schedule F.

    This amount is not subject to self-employment tax.
    The farmer is engaged in the business of farming. This amount is subject to self-employment tax, see IRM 21.6.4.4.14, Self-Employment Tax. Farmers receiving this payment may benefit from filing Schedule J, Income Averaging for Farmers and Fishermen.
    This is a loan cancellation of:
    1. debt principal for cash or accrual taxpayers, or

    2. debt interest for accrual taxpayers.

    This cancellation of debt is considered farm income. Report the amount on the "Other Income" line of Schedule F and identify as "USDA Settlement." Farmers receiving this payment may benefit from filing Schedule J (Form 1040).
    The taxpayer reports only the loan cancellation on Schedule F, "Other Income" line (no expenses). This amount is not subject to self-employment tax.
    The farmer was engaged in the business of farming. This amount is subject to self-employment tax, see IRM 21.6.4.4.14, Self-Employment Tax.
    The farmer was insolvent at the time the loan was cancelled or if the loan was qualified farm debt. Loan cancellation amounts may qualify for exclusion. Refer to Publication 908, Bankruptcy Tax Guide, and Publication 225, Farmer's Tax Guide, for exclusion criteria. File Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with the Form 1040, U.S. Individual Income Tax Return, to claim the exclusion.
    All claims
    The taxpayer's account was not properly credited with the estimated tax payment or withholding
    The payment or withholding cannot be verified
    1. Reassign the CIS case to employee number 0933878755. For phone calls, complete Form 4442, Inquiry Referral, and refer the case to Kansas City. Include a day and evening phone number for the taxpayer. Fax to Kansas City P&A, Teresa Olsen, at 816–499-7801.

    2. Input a STAUP if in a balance due status.

    3. Kansas City will open a control base, research the issue, and contact the taxpayer upon resolution.

Form 8615, Tax for Certain Children Who Have Unearned Income

  1. For Form 8615, Tax for Certain Children Who Have Unearned Income, unearned income includes all income except earned income. Earned income includes:

    • Wages

    • Salaries

    • Tips

    • Professional fees

    • Amounts received as pay for personal services

    • Distributions for qualified disability trusts

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

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

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

  3. Unearned income is the (adjusted gross income minus earned income) minus the larger of: $2,100 for 2015, 2016, and 2017 ($2,000 for 2014) or, if the child itemizes deductions, $1,050 for 2015, 2016, and 2017 ($1000 for 2014) plus the amount of itemized deductions directly connected with the production of the child's unearned income).

  4. The allocable parental tax is:

    • The tax that would be imposed if the parents' taxable income included the net unearned income of all the parents' children subject to this tax

    • Minus the tax that would otherwise be imposed on the parent

    A child's age is determined at the close of the taxable year.

    Note:

    A child is under age 18, age 18 and did not have earned income that exceeded 1/2 of the amount of the child's support, OR over 18 and under age 24, a full-time student, and did not have earned income that was more than 1/2 of the child's support.

    If ... And ... Then ...
    The parents' tax rate is higher than the child's the parent does not elect to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends The child's investment income is taxed at the parents' rate,
    Form 8615, Tax for Certain Children Who Have Unearned Income, ($2,100 for 2015, 2016, and 2017, $2,000 for 2014) must be used to figure the child's tax.
    The parent elects to report the child's income on Form 8814, Parents' Election to Report Child's Interest and Dividends. IRM 21.6.4.4.11, Form 8814, Parents' Election to Report Child's Interest and Dividends.
  5. A Form 8615 must be filed for any child who meets all of the following conditions:

    • The child had more than the unearned income shown in (3).

    • The child is required to file a tax return.

    • The child meets the age as shown in the note in (4).

    • At least one of the child's parents was alive at the end of the tax year.

    • The child does not file a joint return.

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

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

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

  7. For tax years beginning after 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax. See IRM 21.6.4.4.20, Net Investment Income Tax.

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

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

  2. Adjustment action required:

    1. Math verify the Form 8615.

    2. Update the entity to add "MINOR" to the taxpayer's (child) name if the child is still a minor.

    3. Add the parent's name(s), if available, as a second name line. Use the name(s) shown on Form 8615.

    4. Input the appropriate tax adjustment.

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

Parents' Tax Information Requested
  1. A taxpayer (child) or a legal representative may request the parents' tax return information to complete Form 8615, Tax for Certain Children Who Have Unearned Income. The Service will supply the information upon request. The request must be:

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

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

  2. The request must contain:

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

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

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

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

    • Evidence of unearned income over $2,100 for 2015, 2016, and 2017 ($2,000 for 2014 ) (e.g., copies of current Forms 1099, or prior year return accompanied by an explanation of why Forms 1099 are not available).

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

  3. Verify all information is present upon receipt of the request.

Rejecting Form 8615, Tax for Certain Children Who Have Unearned Income
  1. Reject incomplete requests using Letter 1275C, Photocopy Request Response, or Letter 135C, Power of Attorney Needed to Furnish Information. Advise the taxpayer:

    • The request is not processable

    • The specific information needed to process the request

    • To resubmit the request with the required information

  2. Reject the request if the requester did not make a sufficient attempt to obtain the parents' information. Contact the Disclosure Function for assistance at 866–591–0860, if unable to determine if the requester's attempt was sufficient.

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

    1. Close the case.

    2. Notify the requester using Letter 1275C.

    3. State the following in the letter: "We are unable to process your request since you did not establish you need the requested information for filing your return. IRC § 1(g) applies if you are under age 18 and you have unearned income of more than ." ($2,100 for 2015, 2016, and 2017, $2,000 for 2014)

Processable Form 8615, Tax for Certain Children Who Have Unearned Income
  1. Upon receipt of a processable request, take the following actions:

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

    2. Initiate research for the parents' return.

    If the request And Then
    Is processable The return is posted Request the return.
    Is received prior to the return due date or there is a posted extension The return is NOT posted
    1. Input TC 930.

    2. Notify the requester of the reason for the delay and the approximate date we can supply the information.

    Is received after the return due date The return is NOT posted and there is no posted extension Notify the requester we cannot satisfy the request and why.
  2. Upon receipt of the parents' return, prepare a response to the taxpayer. The response must include the:

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

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

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

    • Names of other dependent children claimed on the return who may affect the preparation of the requester's Form 8615, Tax for Certain Children Who Have Unearned Income

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

Form 8814, Parents' Election to Report Child's Interest and Dividends

  1. The parent of a child may elect to include the gross income of the child in the parents' gross income. The child is not required to file a return if the parents make the election. The following conditions apply:

    • A child is under age 19 OR under age 24, a full-time student, and did not have earned income that was more than 1/2 of the child's support.

    • For tax years 2015, 2016,and 2017, the child's gross income was more than $1,050 and less than $10,500 (for 2014, more than $1,000 and less than $10,000).

    • The child's only income was from interest and dividends, including capital gain distributions and Alaskan Permanent Fund dividends.

    • No estimated tax payments were made in the name or TIN of the child (including any credit elect from the previous year)

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

    • The child is required to file a return

    • The child does not file a joint return

  2. The parents' tax is the total of:

    • The income tax determined after adding the child's income in excess of $2,100 to the parent's income, plus

    • The lesser of $105 or 10% of the child's income over $1,050.

  3. Treat any interest which is a tax preference item of the child as a tax preference item of the parent.

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

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

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

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

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

Alternative Minimum Tax (AMT) Changes

  1. The exemption amounts for the alternative minimum tax are as follows:

    Filing Status Tax Year 2017 Tax Year 2016 Tax Year 2015 Tax Year 2014
    Married filing joint / Qualified widow(er) $84,500 $83,800 $83,400 $82,100
    Single / Head of household $54,300 $53,900 $53,600 $52,800
    Married filing separate $42,250 $41,900 $41,700 $41,050
  2. Taxpayers can offset the entire regular tax liability and AMT liability by personal nonrefundable credits.

Alternative Minimum Tax (AMT), Child Under Age 18

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

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

  3. See table below for details:

    If ... Then ...
    Tax year 2017 The alternative minimum tax exemption is earned income plus $7,500 for a child under 18 years of age, or a child age 18 or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
    Tax Year 2015 and 2016 The alternative minimum tax exemption is earned income plus $7,400 for a child under 18 years of age, or a child age 18 or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
    Tax Year 2014 The alternative minimum tax exemption is earned income plus $7,250 for a child under 18 years of age, or a child age 18 or a student under age 24, if the earned income did not exceed 1/2 of the child's or student's support.
  4. Follow normal adjustment procedures if an amended return is received changing the AMT computation. See Publication 929, Tax Rules for Children and Dependents, for additional information.

Self-Employment Tax

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

    • Usually taxpayers must pay self-employment (SE) tax on all net earnings of $400 or more, regardless of age, even if receiving social security or Medicare benefits (See Publication 17, Your Federal Income Tax, for exceptions).

    • The Medicare portion of the SE tax (2.9%) applies to all earnings from self-employment, even if the maximum amount to which social security tax applies is reached.

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

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

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

    2. Taxpayers filing jointly must file separate Schedules SE if they both have self-employment income. However, if one spouse qualifies to use Short Schedule SE and the other must use Long Schedule SE, then both taxpayers can use the same form.

    3. Taxpayers electing to use the qualified joint venture option must file separate Schedules SE. See Schedule SE instructions.

  3. For tax year 2013 and subsequent, taxpayers may be subject to the 0.9% Additional Medicare Tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

Who is Subject to Self-Employment Tax
  1. Taxpayers that maintain a trade or business must pay self-employment (SE) tax on net earnings of $400 or more. The SE Tax does not apply to amounts earned by:

    • Nonresident aliens, unless an international social security agreement applies

    • Members of certain religious sects who filed and had approved a Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits

    • Members of the clergy who filed and had approved Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners

    • Public officials, except for public officials compensated solely on a fee basis whose services are not covered by a Section 218 agreement

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

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

    Note:

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

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

  5. The best source of information for reporting SE tax are the instructions for Schedule SE (Form 1040), Self-Employment Tax, for the applicable year. There are a number of special rules relating to SE tax other than the above.

  6. For more details, see Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or Schedule C-EZ).

Self-Employment Tax Adjustments
  1. Taxpayers may file an amended return to correct self-employment (SE) income and SE tax originally reported. Verify the changes against the tax account information. Research the returns and records of accounts as needed.

  2. If married taxpayers combine their SE income onto one Schedule SE, or you are unable to determine which spouse the change applies to, send a Letter 324C requesting a correct Schedule SE and/or an explanation of the changes.

  3. Correct the SE income and SE tax by the following input:

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

      Caution:

      Do not decrease the posted amounts to less than zero.

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

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

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

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

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

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

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

    9. Use RC 044 when adjusting SE tax.

      Note:

      A reason code is not required for a ripple effect change. See IRM 21.6.7.4.1.3, Reason Code (RC).

  4. Generally, self-employment income cannot be adjusted after the statute of limitations. However, when income was reported under the wrong spouse, resulting in no tax change, just moving income from the primary to the secondary, or secondary to the primary, that adjustment is allowable.

  5. Combined wages, tips and net earnings, up to the amount shown in the table below, are subject to any combination of the 12.4% social security part of SE tax, social security tax or railroad retirement (tier 1) tax.

  6. Combined wages, tips and net earnings are subject to any combination of the 2.9% Medicare part of SE tax, social security tax or railroad retirement (tier 1) tax. There is no income limit when computing Medicare tax.

  7. When self-employment income exceeds the yearly limitation, or when Medicare is less than the self-employment income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2017 Item reference number 878 or 879 cannot exceed $127,200.
    Tax Year 2015 and 2016 Item reference number 878 or 879 cannot exceed $118,500.
    Tax Year 2014 Item reference number 878 or 879 cannot exceed $117,000.
Self-Employment Tax Not Reported
  1. DO NOT assess self-employment tax unless a taxpayer reports it on an amended, superseding or supplemental return or a late reply to a Submission Processing Error Resolution request is received, such as a Schedule SE.

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

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

      Exception:

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

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General.
    The Examination function will determine if the income is subject to SE Tax and take the following action:

    If the income is Then
    not subject to SE tax The case will be returned to you.
    subject to SE tax The case will be selected by examination and not returned to originator.
Self-Employment Tax Adjustment Records Sent to Social Security Administration
  1. Data from adjustments to self-employment (SE) tax is sent to Social Security Administration (SSA) electronically. SSA notifies the Internal Revenue Service if there are discrepancies in adjustment data. Examples of possible discrepancies are:

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

    • SE tax reported on net earnings under $400.

    • Reportable tax year incorrect.

    • Money amounts incorrect.

    • Invalid, insufficient, or missing data.

  2. If a taxpayer contacts the IRS about SSA not having record of self-employment income, the taxpayer must be able to provide proof of the income and proof of filing within the time limit specified by SSA to SSA. A transcript of the year in question will provide the required information. The taxpayer must contact SSA to correct his or her records.

Form 4137, Social Security and Medicare Tax on Unreported Tip Income
  1. Taxpayers earning $20 or more in tips in a calendar month:

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

    2. Must file Form 4137, Social Security and Medicare Tax on Unreported Tip Income, if the tips are not reported to their employer or they have tips allocated to them by the employer (unless the taxpayer has adequate records to show their unreported tips are less than the amount of the allocated tips (Form W-2, box 8)).

    Note:

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

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

    If Then
    Sufficient information is provided Prepare Form 4137, Social Security and Medicare Tax on Unreported Tip Income.
    Insufficient information is provided Follow procedures in IRM 21.5.3, General Claims Procedures.
  3. If a loose Form 4137 is received and it cannot be determined if the tips and tax were included on the original return:

    1. Research Command Code (CC) RTVUE.

    2. Obtain the original return, if necessary.

  4. Math verify the Form 4137 (either received from the taxpayer or a dummy prepared by Internal Revenue Service).

  5. For tax year 2013 and subsequent, taxpayers may be subject to the 0.9% Additional Medicare Tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

Form 4137, Social Security and Medicare Tax on Unreported Tip Income, Adjustments
  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

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

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

      Note:

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

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

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

    Note:

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

  2. When tip income exceeds the yearly limitation, or when Medicare is less than the tip income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2017 Item reference number 891 or 892 cannot exceed $127,200.
    Tax Year 2015 and 2016 Item reference number 891 or 892 cannot exceed $118,500.
    Tax Year 2014 Item reference number 891 or 892 cannot exceed $117,000.

Workers Whose Employers Qualify Under the Revenue Act of 1978, Section 530

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

    Note:

    A taxpayer's qualification for Section 530 treatment is determined regardless of whether the workers are employees under common law rules.

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

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

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

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

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

  3. In addition, the worker must indicate which one of several reasons they were an employee while performing the services that applies to them. The reasons include:

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

    • The worker believes they should have been treated as an employee, and files Form SS-8 before filing their tax return.

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

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

    • The worker received a Form W-2 and a Form 1099-MISC from his employer. The amount on Form 1099-MISC should have been included as wages on the Form W-2.


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

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

  6. For tax year 2013 and subsequent, taxpayers may be subject to the 0.9% Additional Medicare Tax. See IRM 21.6.4.4.19, Additional Medicare Tax, for more information.

Processing Claims for Refund of Self-Employment Tax by Individual Claiming to Be an Employee
  1. Claims for refund of self-employment (SE) tax by an individual claiming to be an employee who was treated as an independent contractor must include either:

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

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

      Note:

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

      If And Then
      An incomplete claim is received with a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
      1. Forward the form to the appropriate function (follow local procedures).

      2. Advise taxpayer the Form SS-8 was forwarded for consideration and to resubmit the claim if a favorable determination is received.

      3. Close IDRS control base.

      An incomplete claim is received without substantiation The claim indicates taxpayer received a favorable determination or a corrected Form W-2. Correspond for the missing information.
      An incomplete claim is received without substantiation The claim does not indicate taxpayer received a favorable determination or corrected Form W-2.
      1. Do not consider the claim. Refer to IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns .

      2. Enclose a blank Form SS-8.

      3. Advise Taxpayer to file Form SS-8 and forward to the address on the form.

    3. See IRM 21.7.2.5.3, Worker Classification Determinations, for additional information.

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

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

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

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

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

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

    • Cost of goods

    • Wages

    • Office in home expenses


    See Exhibit 21.5.3-2, Examination Criteria (CAT-A) - General.

Processing Complete Claims — Revenue Act of 1978, Section 530
  1. For 2007 and subsequent, process complete claims (with the necessary substantiation) as follows:

    If Then
    Self-employment (SE) tax was previously assessed
    1. Math verify Form 8919, Uncollected Social Security and Medicare Tax On Wages.

    2. Prepare a dummy Form 8919, if not attached to the claim.

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

    4. Decrease the SE income (SE–INC and MEDICARE–INC to zero) and use item reference numbers 873 / 874, 878 / 879, 893 / 894 and 895 / 896.
      Note: Do not input item reference number 891 / 892 or 898 / 899.

    5. Use item reference number 889 to decrease SE tax to zero.

    6. Use Reason Code 024.

    SE tax was not previously assessed
    1. Follow procedures 1 and 2 above.

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

    3. Use item reference numbers 873 / 874 and 893 / 894 as appropriate.

    4. Use Reason Code 024.
      CAUTION: Do not input item reference numbers 889, 878 / 879 or 895 / 896.

Form 8919, Uncollected Social Security and Medicare Tax on Wages - Adjustments
  1. Input the following to adjust the account:

    1. TC 29X to adjust the tax.

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

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

      Note:

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

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

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

      Note:

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

  2. When social security income exceeds the yearly limitation, or when Medicare is less than the social security income, the adjustment will result in an unpostable condition 189, reason code 8.

    If ... Then ...
    Tax Year 2017 Item reference number 873 or 874 cannot exceed $127,200.
    Tax Year 2015 and 2016 Item reference number 873 or 874 cannot exceed $118,500.
    Tax Year 2014 Item reference number 873 or 874 cannot exceed $117,000.
  3. Use Reason Code 024.

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

Accounting Period Change

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

    • Calendar year — January 1 through December 31

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

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

    • It may never be longer than 12 months

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

    • Taxpayer must file Form 1128, Application to Adopt, Change, or Retain a Tax Year, to request a change, or file a bankruptcy petition under IRC 1398 (see IRM 5.9.8.13, Internal Revenue Code 1398 Issues, for more information)

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

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

    • A calendar year return posting as a fiscal year return

    • A fiscal year return posting as a calendar year return

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

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

Resolving Accounting Period Changes
  1. Take the following action:

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

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

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

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

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

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

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

      Caution:

      DO NOT zero out the tax on Statute years. Refer claims to the Statute function for clearance, if they involve adjusting accounts and reprocessing return on Statute years. See IRM 21.5.2.4.23.4, Statute Imminent Documents.

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

COBRA Premium Assistance

  1. The American Recovery and Reinvestment Act of 2009 (PL 111-5), provides certain individuals who have been involuntarily terminated a 65% reduction in the premium otherwise payable for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage for themselves and their families for up to fifteen months (as extended by PL 111-118). Eligible workers have to pay 35% of the coverage premium.

  2. To qualify, a worker must have been involuntarily terminated from employment between September 1, 2008, and May 31, 2010.

  3. The premium assistance is not included in gross income. However, the eligibility for premium assistance phases out and is recaptured as an increase in the individual's income tax liability. The phase-out impacts individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. The premium assistance is totally phased out for taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for joint filers, and the full amount must be repaid as an additional tax.

  4. For more information on the COBRA premium subsidy and recapture, see the 2013 revision of Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit).

Repayment / Recapture of COBRA Premium Assistance
  1. The American Recovery and Reinvestment Act (ARRA) of 2009 (PL 111-5) provides for the repayment / recapture of COBRA premium assistance for high income taxpayers whose modified adjusted gross income exceeds $125,000, or $250,000 for joint filers.

  2. Tax liability is increased, to achieve repayment of a portion of the premium assistance, for those taxpayers whose modified adjusted gross income is between $125,000 and $145,000, or $250,000 and $290,000 for those filing joint returns. If the modified adjusted gross income is $145,000 or more, or $290,000 or more for joint filers, the full amount of the premium assistance (the 65% reduction of the COBRA premium the employer paid under ARRA) must be repaid as an additional tax. See the 2013 revision of Publication 502, Medical and Dental Expenses, for information on how modified adjusted gross income is determined for purposes of the recapture.

  3. To determine the amount of additional tax, divide the amount of modified adjusted gross income over $125,000 by $20,000, or the amount over $250,000 by $40,000 for joint filers. The percentage calculated, multiplied by the amount of premium assistance, is the amount required to be repaid. Worksheet F in the 2013 revision of Publication 502 can also be used.

    Example:

    Single taxpayer with a modified adjusted gross income of $135,000:
    $135,000 minus $125,000 equals $10,000. $10,000 divided by $20,000 equals 50%. If the employer provided the taxpayer with premium assistance of $1500 under ARRA, the taxpayer must repay $750 (50% of the $1500).

    Example:

    Joint filer with a modified adjusted gross income of $275,000:
    $275,000 minus $250,000 equals $25,000. $25,000 divided by $40,000 equals 62.5%. If the employer paid $1200 of the taxpayer’s premiums as a subsidy under ARRA, the taxpayer must repay $750 (62.5% of the $1200).

    Note:

    Taxpayers must contact their former employers for the amount of COBRA premium assistance, if unknown.

  4. To report the increase in tax from the recapture of the COBRA premium assistance, the taxpayer must write "COBRA" on Form 1040, U.S. Individual Income Tax Return, line 62, and include the repayment in the total tax amount.

  5. To adjust an account for COBRA premium assistance, input transaction code 29X with reason code 107.

First-Time Homebuyer Credit

  1. The Housing and Economic Recovery Act of 2008 (PL 110-289), enacted on July 30, 2008, allows a taxpayer who is a first time homebuyer a refundable tax credit of the lesser of $7,500 ($3,750 for Married Filing Separate) or 10% of the purchase price. The law is effective for qualifying homes purchased on or after April 9, 2008, and on or before December 31, 2008.

  2. The American Recovery and Reinvestment Tax Act of 2009 (ARRA) (PL 111-5), enacted on February 17, 2009, allows a refundable tax credit of the lesser of $8,000 ($4,000 for Married Filing Separate) or 10% of the purchase price. The credit is available for first time homebuyers who purchased a home after December 31, 2008, and before December 1, 2009.

  3. The Worker, Homeownership and Business Assistance Act of 2009 (PL 111-92), enacted on Nov. 6, 2009, extends the eligibility period to purchases before May 1, 2010. Taxpayers who have entered into a written binding contract before May 1, 2010, must close on the home before October 1, 2010 to qualify. This bill also establishes a credit for long-time residents who purchase a new home and sets out special rules for members of the Armed Services, Foreign Service officers and the intelligence community.

  4. For homes purchased in 2008, the credit is treated as a no-interest loan. The credit is recaptured over fifteen years beginning the second year after the home is purchased.

  5. For homes purchased in 2009 and 2010, the taxpayer must repay the credit only if the home ceases to be the taxpayer’s main home within the 36 month period beginning on the purchase date.

  6. For more information about claiming the First-Time Homebuyer Credit, see IRM 21.6.3.4.2.10, First-Time Homebuyer Credit.

Recapture of First-Time Homebuyer Credit
  1. For homes purchased in 2008, the First-Time Homebuyer Credit is recaptured over a period of 15 years. The tax imposed is 6 2/3% of the credit taken. The additional tax is reported on Line 60b (depending on the year) of Form 1040, U.S. Individual Income Tax Return. The recapture began with the 2010 tax return.

    Example:

    John purchased a home in 2008 and received a $7500 First-Time Homebuyer Credit (FTHBC). John must report his first repayment of $500 on his 2010 return.

    If a taxpayer does not report the required 6 2/3% recapture amount ($500 when a $7500 credit is taken) on Form 1040, additional tax will be assessed using math error procedures. If the home is disposed of or ceases to be the taxpayer's main home at any time during the 15 years, see IRM 21.6.4.4.18.2, Acceleration of Recapture.

  2. For homes purchased in 2009, 2010 or 2011, the credit does not have to be paid back unless the home is disposed of or ceases to be the taxpayer’s main home within 36 months of the purchase date. See IRM 21.6.4.4.18.2, Acceleration of Recapture.

  3. Command Code (CC) ENMOD and CC IMFOL with definer code F will display the amount of credit taken and the amount of credit recaptured. The recapture amount field starts at zero and increases to the amount of credit taken.

    Note:

    When a joint Form 5405, Repayment of First-Time Homebuyer Credit, is filed, the credit and recapture amount will be split between the primary and secondary taxpayer.

  4. Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, if they meet either of the following conditions:

    • The taxpayer disposed of the home or ceased to use the home as the main home during the tax year.

      Note:

      This condition does not apply to home purchased in 2009 or 2010 and owned and used it as the main home for at least 36 months beginning on the purchase date.

    • The taxpayer is repaying the credit because the home was purchased after 2008, the home was destroyed or sold through condemnation or threat of condemnation, and the taxpayer did not purchase a new home within 2 years of the event.


    In all other cases, the taxpayer is not required to file Form 5405.

  5. Form 5405, Repayment of First-Time Homebuyer Credit, can be viewed using CC TRDBV or CC RTVUE with definer HC.

Acceleration of Recapture
  1. For homes purchased in 2008, if the home is disposed of or ceases to be the taxpayer's main home before the end of the recapture period, taxpayers generally must report all remaining annual installments in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

    Example:

    A taxpayer purchased a home in June 2008, and received a $7,500 credit. The home was sold in 2012 for a $10,000 gain. Since $500 was recaptured on each of the 2010 and 2011 returns, $6,500 would have to be reported on the 2012 return.

    Example:

    Fred purchased a home in September 2008 for $100,000 and received a $7500 FTHBC. He sold the home to an unrelated person in October 2009 for $95,000. The adjusted basis for the home is $92,500 ($100,000 - $7,500). Fred is required to repay $2,500 ($95,000 - $92,500). The remaining $5000 is not required to be repaid.

    Example:

    A taxpayer purchased a home in 2008 and received a $7500 credit. The taxpayer moved in 2010 and continued to own the home until 2011 when it was sold for a loss. Since the intent was to sell the home rather than convert the home to a rental property or some other use, the sale of the home is the disposition. The taxpayer must repay $500 in 2010. In 2011, the taxpayer is subject to accelerated recapture. Since the home was sold for a loss, the remaining $7000 is not required to be repaid.

  2. For homes purchased in 2009, 2010 or 2011, if the home is disposed of or ceases to be the taxpayer's main home within 36 months of the purchase date, taxpayers generally must repay the credit in the year the event occurred. If the home is sold to an unrelated person, the repayment in the year of sale is limited to the amount of gain on the sale. When figuring the gain, reduce the adjusted basis of the home by the amount of credit.

    Example:

    Sarah purchased a home in 2009 and received a FTHBC of $8,000. She sold the home in 2011 for a gain of $8,500. Sarah must report the entire $8,000 repayment on her 2011 tax return.

    Example:

    David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David is required to report the entire $6,000 repayment on his 2010 return.

  3. Dispositions referenced above include:

    • The home was sold

    • The entire home was converted to business or rental property

    • The home was abandoned

    • The lender foreclosed on the mortgage

    • The home is no longer the taxpayer's main home

      Note:

      A gift of a home to a relative or non-relative, including a part-sale / part-gift, triggers full repayment of the credit. The gain limitation does not apply to the taxpayer's repayment liability.

  4. Exceptions to the acceleration rule:

    • Death of a taxpayer - the repayment is not required for the deceased taxpayer

    • Transfers between spouses / divorce - the spouse receiving the home is responsible for any repayment

    • Qualified official extended duty for members of the Armed Services, members of the Foreign Service of the United States, or members of the intelligence community (dispositions or cessations after December 31, 2008 only)

    • Involuntary conversion - taxpayers have 2 years to purchase a new home. See the table below for repayment requirements.

      Transaction Gain on sale No gain on sale
      2008 purchase Year of conversion - installment payment of 1/15 of the lesser of the gain or allowed credit

      1st year after conversion - installment payments (1/15 of the lesser of the gain or allowed credit) continue

      2nd year after conversion -
      1. Replacement home - installment payments (1/15 of the lesser of gain or allowed credit) continue through end of 15 year term

      2. No replacement home - acceleration of lesser of remaining gain or remaining credit amount

      No repayment is required.
      2009, 2010 or 2011 purchase Year of conversion and 1st year after - no repayment requirement

      2nd year after conversion -
      1. Replacement home - no repayment required at this time (must still meet the remainder of the 36 month own and use period)

      2. No replacement home - recapture the lesser of the gain or allowed credit

      No repayment is required
  5. Taxpayers must file Form 5405, Repayment of First-Time Homebuyer Credit, with the appropriate box checked in Part I with their Form 1040, U.S. Individual Income Tax Return.

Systemic Adjustments to the Recapture Amount
  1. When a Form 5405, Repayment of First-Time Homebuyer Credit, is filed with a Form 1040, U.S. Individual Income Tax Return, the taxpayer's account is adjusted during processing. Transaction Code (TC) 971 Action Codes (AC) are systemically generated when the First-Time Homebuyer Credit (FTHBC) and total recapture amounts are moved or eliminated.

    • AC 511 - used to transfer the FTHBC entity and total recapture amount from one account to another

    • AC 512 - used to zero out the FTHBC entity and total recapture amount

  2. The TC 971 action codes generate with indicators, shown on CC TXMOD as "XREF MFT" , which provide descriptions of the systemic actions taken. See the table below.

    TC 971 Action Code XREF MFT Indicator
    511 00 - Used to transfer the FTHBC and total recapture amount from an account to the primary SSN of another account.
    01 - Used to transfer the FTHBC and total recapture amount from the primary SSN to the spouse's SSN in the same amount and make the spouse responsible for the entire credit.
    02 - Used to transfer the FTHBC and total recapture amount from the spouse's SSN to the primary SSN in the same account. 02 will also be used to zero out the spouse FTHBC and total recapture amount and make the primary responsible for the entire credit.
    03 - Used to add the recapture amount to the primary total recapture amount.
    04 - Used to add the recapture amount to the spouse's total recapture amount.
    05 - Used to indicate the recapture amount was credited to the original account and should generate and post in the same cycle as the return.
    512 00 - Used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.
    01 - Used to generate a TC 290 for zero with reference numbers 875 / 876 for the primary credit amount posted in the entity.
    02 - Used to generate a TC 290 for zero with reference numbers 975 / 976 for the secondary credit amount.
    03 - Used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.
    04 - Used to generate a TC 290 for zero with reference numbers 875 / 876 / 975 / 976 for the credit amount posted in the entity.

    Note:

    See IRM 21.6.4.4.18.4, Manually Adjusting the Recapture Amount, for a description of the reference numbers listed above.

  3. When the FTHBC is systemically moved from one spouse to another, a TC 290 will be generated containing all 8s in the blocking series and serial number of the Document Locator Number (DLN).

    Example:

    Brian and Pam, both single taxpayers, purchased a home together in 2009 and split the $8000 FTHBC 50/50 on their individual returns. In 2010, they marry and file a joint return with Brian as the primary taxpayer. The FTHBC entity under Pam's SSN will be systemically moved to Brian's SSN. A TC 290 with all 8s in the blocking series and serial number will be found on Pam's SSN.

  4. When taxpayers claim the FTHBC on a joint return and then file separate returns in later years, the FTHBC entity will not be moved to the spouse. The appropriate tax will be captured on the spouse's account but the update to the FTHBC entity will be reflected on the xref account.

    Exception:

    When a Form 5405 with box 13e checked (transferred the home to my spouse or ex-spouse as part of a divorce settlement) is filed, the entity is moved to the receiving spouse.

Manually Adjusting the Recapture Amount
  1. Issues regarding FTHBC repayment can impact multiple years and multiple accounts. When reviewing a taxpayer’s issue / account, be sure to address all repayment issues. In addition, since the FTHBC entity (IMFOLF) can move from one account to another, depending on how taxpayers file, always check CC IMFOLF before adjusting any account. If IMFOLF is blank, the FTHBC entity has been moved to the spouse's SSN, which may not be the current spouse. If separate returns are later filed to repay the credit, or the joint return was filed under the spouse's SSN, multiple adjustments may need to be input.

  2. When manually adjusting the FTHBC recapture amount, specific reference numbers must be used with each adjustment. The table below lists the reference numbers associated with the recapture and the reason codes (which are shown in (3)) associated with them.

    Note:

    These reference numbers are valid for MFT 30 only.

    Caution:

    Failure to use these reference numbers when adjusting the account will result in IMFOLF being incorrect and could cause possible harm to the taxpayer in the future.

    Reference Number Description
    875 Adjusts the primary credit amount field. Indicates the primary FTHBC in the entity field was transferred to the spouse or used to correct the primary credit amount. You must use one credit RC (109, 110, 125 or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).

    Note:

    Adjustments to the FTHBC (CRN 258) will update the credit amount field.

    876 Adjusts the primary total recapture amount field in the entity. RC 112 - 119 and 127. Use this when a disposition has occurred and all or part of the recapture amount is not required.
    877 Adjusts the repayment amount in the posted return section (TXMOD / IMFOLR) and the total repayment field in the entity (IMFOLF). Used to update the recapture amount when a repayment has been made. RC 119, 120, 123, 132 and 133

    Note:

    RC 132 can be input with reference number 877 but does not update the recapture amount field on CC IMFOLF. RC 133 requires the input of RC 119, 120 or 123.

    Caution:

    When decreasing the recapture amount, do not exceed the amount reported on the original return or previously adjusted.

    880 Adjusts the year indicator in the entity. Input as .08, .09, .10 or .11 to indicate the year the home was purchased. RC 121 and 122
    975 Adjusts the secondary credit amount field. Indicates the secondary's FTHBC in the entity field was transferred to the primary or used to correct the secondary credit amount. You must use one credit RC (109, 110, 125 or 126). The system will allow the input of one additional disposition RC (112 - 118 and 127).

    Note:

    Adjustments to the FTHBC (CRN 258) will update the credit amount field.

    976 Adjusts the spouse's total recapture amount field in the entity. RC 112 - 118, 120 and 127. Use this when a disposition has occurred and all or part of the recapture amount is being waived.

    Reminder:

    When considering a recapture issue, in addition to reviewing the entity on IMFOLF, ensure the recapture field on TXMOD is correct.


    Example:

    Taxpayer A and Taxpayer B file a joint return in 2008 claiming a $7500 FTHBC. In 2010, they file as Married Filing Separate. Since the FTHBC entity is under Taxpayer A's SSN, if a recapture needs to be input on Taxpayer B's account, two adjustments will be required. A TC 29X with reference number 877 and RC 132 would be used on Taxpayer B's account. A TC 290 .00 with reference number 976 and RC 120 will be input on Taxpayer A's account.

    Note:

    The above example should be followed any time tax is being adjusted on an account where IMFOLF is blank. RC 132 does not update IMFOLF. Be sure to adjust the xref account to update the IMFOLF data.

  3. The table below lists the reason codes associated with the recapture.

    Reason Code Description
    109 First-Time Homebuyer Credit (2008)

    Note:

    RC 109 can be used when adjusting tax if no other FTHBC reason codes apply or can be used due to systemic limitations.

    110 First-Time Homebuyer Credit (2009 / 2010)
    112 Repayment of the FTHBC is not required. This is forgiveness for taxpayers who had a loss when the house was sold, foreclosed, repossessed or abandoned, or who are only required to pay back part of the credit.

    Note:

    In situations where the primary recapture amount field needs to be updated but no other reason code will work, use RC 112 (example: transferring the secondary's entity from the primary account to the secondary account, the secondary taxpayer has paid the required installment and the entity field on TXMOD already reflects repayment.

    113 Repayment of the FTHBC is not required. This is forgiveness for taxpayers whose home was destroyed, condemned, or disposed of under threat of condemnation, and had a loss.
    114 Repayment of FTHBC. Systemic use only. This is for taxpayers who converted their home to rental or business use.
    115 FTHBC transferred to spouse. Transfer to spouse requested on Form 5405, Repayment of First-Time Homebuyer Credit.
    116 Repayment of the FTHBC not required. This is forgiveness if the primary taxpayer is deceased.
    117 Repayment of the FTHBC not required. This is forgiveness if the secondary taxpayer is deceased.
    118 Requirement to repay the FTHBC not required. This is forgiveness when both taxpayers are deceased.
    119 Repayment of FTHBC. Used when updating the primary entity section.
    120 Repayment of FTHBC. Used when updating the spouse's entity section.

    Note:

    When updating CC IMFOLF, if the current return is other than married filing jointly, use reference number 976 to update the spouse's recapture amount.

    121 Internal use only. Used to adjust the primary FTHBC year.

    Note:

    When adjusting both the primary and secondary year, use RC 000. When the adjustment posts to Masterfile, RC 000 drops off.

    122 Internal use only. Used to adjust the spouse's FTHBC year. See the note in RC 121 above.
    123 Repayment of FTHBC. This updates the joint entity section.
    125 First-Time Homebuyer Credit - This is for the repeat home owners.
    126 First-Time Homebuyer Credit - This is for the military / foreign service / intelligence community.
    127 Requirement to repay the FTHBC not required. This is for members of the military, foreign service or intelligence community.
    132 Updates the FTHBC Recapture field on TXMOD when:
    • Joint First-Time Homebuyer Credit repaid via separate returns

    • Separate credits repaid via joint return

    • Updating TXMOD only (IMFOLF Recapture field is correct)

    Example:

    John and Mary file joint in 2008 and claim the FTHBC. In 2010, they file separate. CC IMFOLF is under John's SSN. To assess Mary a $250 recapture, input RC 132 to adjust Mary's 2010 account. A second adjustment is required under John's SSN to update CC IMFOLF (IRN 976 RC 120).

    133 Repayment of the FTHBC. This is for taxpayers whose home was destroyed, condemned, or disposed of under threat of condemnation, and had a gain. See IRM 21.6.4.4.18.2(4), Acceleration of Recapture.

    Caution:

    If the reason code used on the adjustment will not provide the taxpayer with a clear understanding of the action taken on their account, suppress the adjustment notice and send a correspondex letter.

  4. When adjusting the recapture amount, the adjustment is generally input on the year the recapture or disposition should have been reported, not the year the credit was claimed. The recapture amount starts at zero and builds up to the amount of credit taken. Annual installments and dispositions are captured in the recapture amount field.

    Example:

    Noah, a single taxpayer, purchased a home in 2008 and received a $7500 FTHBC. He sold the home in 2009 to an unrelated person for a $4000 gain. Noah files an amended return in 2010 to report the sale. CC IMFOLF shows $7500 in the primary credit amount field. When processing the amended return, the adjustment is input on the 2009 tax year using a TC 290 for $4000, RC 112 and 119, reference numbers 877 for $4000 and 876 for $3500.

    Example:

    Joe and Marie purchased a home in 2008 and received a $7500 FTHBC. They sold the home to an unrelated person for a $6000 gain in 2009. CC IMFOLF shows $3750 in the primary credit amount and secondary credit amount fields. When adjusting the account, input the adjustment on 2009 as follows: TC 290 $6000, RC 112 and 123, 877 $6000, 876 $750 and 976 $750.

    Example:

    Jennifer purchased a home in 2008 and received a $7500 FTHBC. She was unable to pay her mortgage and her home was foreclosed on in September, 2009. Jennifer files an amended return in 2010 to report the loss due to foreclosure. When adjusting the account, input the adjustment on 2009 as follows: TC 290 .00, RC 112 and 876 $7500.

    Example:

    David purchased a home in 2009 and received a $6,000 FTHBC. He converted the home to a rental property in 2010. David did not report the disposition on his 2010 return. He later files an amended return to report the disposition. To adjust the account, input a TC 290 $6,000, RC 119 and reference number 877 $6,000 on the 2010 tax year.

  5. When reporting a disposition, taxpayers are instructed to file Form 5405 with their original Form 1040 or Form 1040-X, no other documentation is required. Amended returns impacting multiple years do not require an amended return for each tax year.

    Example:

    A taxpayer has been reporting a $500 repayment since 2010. He later files an amended 2015 return reporting he converted his home to a rental and assesses the remaining repayment. The $500 repayment on 2016 and 2017 can be refunded without an amended return being filed for those years.


    If an amended return is received and the Form 5405 (or documentation instead of Form 5405) is not attached, see IRM 21.5.1.5.6, Incomplete CIS Claims. A loose Form 5405 can be processed without a Form 1040-X.

  6. When transferring the FTHBC from one account to another, the primary account must be zeroed out before the entity field can be established on the cross reference (xref) account. When creating the xref entity field, use the appropriate reason code and reference number 880 to indicate the year the home was purchased. When creating the FTHBC entity, if the recapture amount field needs to be updated, the entity must post first. Use a posting delay code (PDC) 1 with the reference number 877 adjustment.

    When a disposition E (divorce) is reported, transfer the entire credit and repayment amount shown on CC IMFOLF to the gaining spouse.

    Example:

    John and Mary file Married Filing Jointly in 2008 and claim a $7500 First-Time Homebuyer Credit. The couple gets divorced in 2016 and Mary gets the house as part of the divorce settlement. Neither John nor Mary reported the transfer or the recapture on their 2016 return. Mary is now filing an amended return reporting a tax increase of $500. The recapture started with the 2010 tax return so John and Mary have made six payments totaling $3000. The entity field currently reflects a primary and secondary credit amount of $3750 and primary and secondary total recapture amount of $1500. To remove the credit from John’s account, input a TC 290 .00 with reference number 875 and 975 for $3750-, reference number 876 and 976 for $1500-, RC 115. To create the entity on Mary’s account, input a TC 290 $.00, reference numbers 875 (since she is now the primary) for $7500, and 880 for .08 (to show the home was purchased in 2008), RCs 109 and 121. Input a second adjustment consisting of a TC 290 $500, 876 for $3000 (the total amount repaid from the joint account), 877 for $500 (to show a $500 payment has been reported), RC 115 and 119, PDC 1.

  7. When a taxpayer files an amended return reporting a divorce (Form 5405, line 3, box e) on Form 5405 which conflicts with the cross-referenced spouse's reported divorce (disposition e), disallow the claim. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. If the taxpayer responds to the disallowance with divorce papers, see the table below. Math error authority can be used to update the accounts.

    Note:

    For divorces, the disposition does not occur until the divorce is finalized. Until that time, each spouse is liable for their share of the 1/15 repayment.

    If Then
    One individual was awarded sole ownership Each individual is liable for 1/2 of the 1/15 repayment until the divorce was finalized. At that point, the individual awarded ownership is liable for any remaining repayment.
    Both individuals continue to have joint ownership after the divorce Each individual is liable for 1/2 of the 1/15 repayment until the divorce was finalized. At that point:
    • the spouse who no longer resides in the home is liable for full repayment of his/her remaining liability

      Example:

      If the original credit was $7500 and the divorce was finalized in 2012, the taxpayer would be liable for $250 in 2010 and 2011. In 2012, the taxpayer would be liable for $3,250.

    • the spouse who resides in the home continues to pay 1/2 of the 1/15 repayment

    One individual was awarded sole ownership but the divorce decree states the other individual must repay X amount Follow procedures in the 1st If / Then. The dollar amount stated in the divorce decree is a civil matter.
  8. For amended returns claiming the original First-Time Homebuyer Credit after the first installment was due, follow procedures in IRM 21.6.3.4.2.10, First-Time Homebuyer Credit, to allow the credit. After allowing the credit, math error procedures must be used to assess a recapture on any return the taxpayer would have been liable for had the credit been claimed on a timely filed return, unless amended returns were filed to do so.

  9. When the FTHBC entity has been moved to a cross reference account and needs to be updated but no returns have been filed since at least 2008, a TC 290 with the above reference numbers cannot be input. To update these accounts, the entity has to be systemically updated. To trigger the systemic update:

    1. Input CC MFREQD to create a TXMOD for the current processing year.

    2. Input CC REQ77.

    3. Input "971" in the "TC" field.

    4. Input "512" in the "TC971/151-CD" field.

    5. Input the spouse's SSN in the "XREF-TIN" field.

    6. Input the appropriate 2 digit MFT indicator in the "MISC" field. See IRM 21.6.4.4.18.3, Systemic Adjustments to the Recapture Amount. Use MFT 00, 01 or 02 only.


    Once the TC 971 is input, manually move the entity back to the originating SSN and post it as the secondary's entity. When the cross reference taxpayer does file a return, the entity will again be systemically moved.

    Example:

    John and Mary have filed joint since 2008. In 2011 John died so Mary's portion of the entity was transferred to her SSN. Unfortunately the recapture amount on Mary's account is incorrect. To correct her account, input the TC 971 action 512 on Mary's SSN, then update the entity on John's SSN to show the correct amount in the secondary entity field.

  10. Taxpayers can elect to pay the entire recapture amount all at once rather than pay it over the 15 year period. Taxpayers should report this on line 60b of their Form 1040, U.S. Individual Income Tax Return. Form 5405 is not required. However, taxpayers may send in a payment rather than reporting the recapture on a return. If this happens, taxpayers must file an amended return for the last return filed. When the amended return is received, assess tax for the amount of repayment using a TC 298, reference number 877 for the same amount and RC 119, 120 or 123.

    Note:

    The required repayment amount should always be assessed with a TC 290. Any additional repayment is assessed with a TC 298.


    Use the received date as the interest computation date. To reverse a TC 298, input a TC 299 for the tax change and IRN 877 for the appropriate amount. A TC 299 requires an interest computation date (as shown on the TC 298) and a credit interest date (received date).

    Example:

    John filed his 2008 tax return and received a $7,500 FTHBC. He reported $500 recapture on his 2010 and 2011 tax returns. In Oct. 2012, John decides to repay the remainder of his credit. He needs to file an amended 2011 tax return, with Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, to report an additional $6,500 in tax.

    Note:

    Taxpayers have the right to have pre-paid installments refunded to them. In the example above, if John later decides he wants the $6,500 he pre-paid refunded, he can file an amended return to do so. Any required installment that may have been skipped because of the pre-payment, will have to be assessed using math error authority.

  11. Dispositions reported after the statute expired for the tax year are allowable if the disposition was one for a loss or no change in tax. Follow normal statute procedures found in IRM 25.6.1.5, Basic Guide for Processing Cases with Statute of Limitations Issues, when considering tax adjustments and refunds.

    Example:

    A disposition reported in July 2017 showing the home was sold for a loss in 2012 - the taxpayer is not liable for any annual installments beginning in 2012. Tax year 2012 can be updated to reflect the disposition, however, since the statute for 2013 is expired, no tax adjustments or refunds are allowed on those years. Repayments on tax years 2014, 2015, and 2016 can be refunded.

    Note:

    Ensure CC IMFOLF is updated to reflect the total credit amount as recaptured. However, if the taxpayer has unfiled returns that require a 1/15 repayment, no consider the claim following procedures found in IRM 21.5.3.4.6.3, No Consideration Procedures, and advise the taxpayer to file the required return(s).

    Exception:

    If the taxpayer is reporting a prior year disposition that results in a tax increase on a subsequent year amended return, and assessing the additional tax owed, the adjustment can be allowed. Ensure the total credit amount is repaid, as applicable.

    Example:

    A taxpayer files a 2016 amended return showing the home was sold for a gain in 2011 and assesses $4000 additional tax. With the annual installments and the additional $4000 assessment a total of $7500 has been repaid, no additional action is required on prior years (no refunds are due).


    If the disposition resulted in a tax increase that cannot be assessed due to the expired statute, if received after the ASED expired, the disposition is not allowable and the taxpayer remains liable for the 1/15 repayment.

    Example:

    A disposition reported in 2015 showing the home was converted to a rental in 2009 - since the statute for 2009 has expired, the disposition is not allowable and the taxpayer remains liable for the 1/15 repayment.

    Exception:

    Since homes purchased after 2008 do not have a 1/15 repayment requirement, no action can be taken on these accounts, the repayment is lost.


    If received prior to the ASED expiring but the additional tax cannot be assessed because the statute has expired, the disposition is allowable but the tax cannot be assessed. Update CC IMFOLF to reflect the total credit amount as recaptured. If a payment was made with the claim, send the payment to Excess Collection following established procedures.

First-Time Homebuyer Credit Recapture Math Errors
  1. When a taxpayer fails to report a recapture, or reports an incorrect amount, a math error notice will be issued during original processing. One of the following taxpayer notice codes are assigned:

    • 648 - Issued to taxpayers who received the FTHBC in 2008 but did not report a repayment installment on their current tax return.

    • 649 - Issued to taxpayers who reported a repayment but we changed the payment amount for various reasons.

  2. The Service has math error authority to assess or abate the 1/15 recapture amount, see IRM 21.5.4.4, Math Error Procedures Processing, for the appropriate actions. If the taxpayer's reported recapture amount is systemically refunded in error, assess up to the amount that was required to be reported. Erroneous refund procedures should not be followed.

  3. When a 1/15 recapture amount is assessed as a math error due to the taxpayer not attaching Form 5405 reporting a disposition, the math error can be corrected upon receipt of the Form 5405. An amended return is not required.

  4. The Service also has math error authority to assess or abate a repayment when a disposition has occurred.

    Example:

    A taxpayer reported the home was sold for a $5000 gain but during processing only $1000 was assessed. Math error authority can be used to assess the additional $4000.

    Example:

    A taxpayer was assessed a math error for not reporting the $500 repayment on their 2017 return. The taxpayer responds with a Form 5405 showing the home was sold for a loss in 2015. Based on the information provided, tax years 2016 and 2017 can be updated.

  5. If a taxpayer reports a repayment and the original FTHBC claimed on their previous return is later disallowed or reversed, the same math error procedures can be used to correct the repayment.

  6. Math errors may impact more than one tax year. Be sure to perform thorough account research and if needed, address all account issues, not just the taxpayer's issue.

    Example:

    A taxpayer reported a military disposition on his 2011 return. A $500 math error was assessed on his 2012 return. CC IMFOLF currently reflects a $7,500 credit and $1,000 recaptured. To correctly update this account, the recapture math error on 2012 should be reversed and then the disposition on 2011 should be recorded.
    To illustrate, on tax year 2012, input a TC 291 $500-, 877 $500- RC 119. On tax year 2011, input a TC 290 .00, 876 $7,000, RC 127, PDC 1.

  7. Taxpayers may submit divorce papers in response to a math error notice. If so, follow procedures in IRM 21.6.4.4.18.4 (7), Manually Adjusting the Recapture Amount, to determine liability.

Original Returns Claiming the First-Time Homebuyer Credit Filed After the RSED Expired
  1. These procedures are designed to be used by Statute unit employees processing STEX transcripts.

  2. When processing an STEX transcript, review the module to determine if the taxpayer claimed the First-Time Homebuyer Credit (FTHBC).

  3. Since the FTHBC is subject to repayment or recapture, depending on when the home was purchased, the account must be reviewed in order to determine if the taxpayer benefited from the credit, and if so, how much. Any portion of the credit that did not benefit the taxpayer must be disallowed.

  4. To determine if the taxpayer benefited from the FTHBC, take the following steps:

    1. Review CC TXMOD or CC IMFOLT to see how much credit the taxpayer was allowed. The credit can be identified by a TC 766, reference number 258.

    2. Determine the total tax shown on the module. Combine the TC 150 with any TC 290 or TC 291.

    3. Subtract any refundable credit from the total tax.

      Note:

      Refundable credits are applied in the order shown on the Form 1040.

      Example:

      For tax year 2008, the order of credits is withholding, ES payments / credit elect, EIC, excess social security, ACTC, extension payment, credits from Form 2439 / 4136 / 8801 / 8885, FTHBC and RRC.

  5. If the tax is paid prior to applying the FTHBC, the taxpayer did not benefit from the credit and the entire credit is disallowed.

  6. If the tax is not paid prior to applying the FTHBC, the taxpayer did benefit from the credit and a portion of the credit may be disallowed.

    Example:

    The total tax on the module is $5000, withholding $2000 and FTHBC $7500. After subtracting the withholding from the tax, $3000 of the FTHBC is applied to the tax. The taxpayer has a $3000 benefit. $4500 would be disallowed.

  7. To disallow the credit:

    • Input a TC 290 .00

    • Input a RC 109 (for a 2008 purchase) or RC 110 (for a 2009 or later purchase)

    • Input reference number 258 (negative) for the amount of the credit being disallowed

    • Input blocking series 05, source code 2, hold code 2 and posting delay code 1

    • Include language in the 105c letter regarding the amount of credit disallowed.

      Example:

      Partial disallowance- Since $2,500 of the $7,500 First-Time Homebuyer Credit claimed was applied to the tax reported on your return, we have disallowed the $5,000 that could not be refunded you. Your annual repayment is 1/15 of the $2,500.

First-Time Homebuyer Credit Web Tool
  1. A web tool called the First-Time Homebuyer Credit Account Look-up is available on the IRS web site. The web application provides account information that will assist taxpayers to accurately self report their FTHBC repayment obligations on their tax returns.

  2. Taxpayers are required to self authenticate to access their account information. Self authentication consists of inputting their SSN, date of birth and complete address.

  3. The account information screen will display the last 4 digits of the taxpayer's SSN, original credit amount, annual repayment amount, total amount paid and the total balance left to be paid.

  4. Taxpayers are directed to contact the Service by calling 800-919-0352 if the following occurs:

    If Then
    Authentication Failure Research the account(s) and provide the requested data.
    No Data / Duplicate Record Research the primary and secondary SSN and provide the requested data. If a duplicate condition exists on CC IMFOLF, correct the duplicate condition. See IRM 21.6.4.4.18.4, Manually Adjusting the Recapture Amount, for the appropriate RC and reference numbers to use.

    Example:

    The FTHBC was originally claimed on a joint return. The primary taxpayer is deceased. CC IMFOLF on the primary SSN shows a $7500 credit split 50/50 between the husband and wife. The primary recapture amount is $3750, the secondary recapture amount is $250. On the wife's SSN, CC IMFOLF shows a primary credit of $3750 and a $250 recapture. The secondary credit and recapture amount on the primary account (the deceased taxpayer's SSN) should be zeroed out to correct the duplicate condition.

    Technical Difficulties / System Unavailable Research the account(s) and provide the requested data.

Additional Medicare Tax

  1. The Affordable Care Act added an Additional Medicare Tax (AdMT) for tax years 2013 and subsequent. The 0.9% tax applies to income subject to the Federal Insurance Contributions Act (FICA), the Railroad Retirement Tax Act (RRTA) and/or the Self-Employment Contributions Act (SECA).

  2. The 0.9% tax applies to individuals' wages (which includes Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and Form 8919, Uncollected Social Security and Medicare Tax on Wages), RRTA compensation and self-employment income above a threshold based on their filing status. Unlike traditional Medicare tax, AdMT is only imposed on earnings that exceed a certain threshold and employers only withhold AdMT on wages or RRTA compensation that exceed $200,000.

  3. A taxpayer is subject to AdMT on any wages, self-employment income and RRTA compensation above the following thresholds:

    • Married Filing Jointly - $250,000

    • Married Filing Separately - $125,000

    • All other filing statuses - $200,000

  4. AdMT is calculated on Form 8959, Additional Medicare Tax, and is carried over to the "Other Taxes" section of Form 1040.

  5. Form 8959, Additional Medicare Tax, is broken down into 5 parts:

    • Part I - Additional Medicare Tax on Medicare Wages

    • Part II - Additional Medicare Tax on Self-Employment Income

    • Part III - Additional Medicare Tax on Railroad Retirement Tax Act (RRTA) Compensation

    • Part IV - Total Additional Medicare Tax

    • Part V - Withholding Reconciliation

  6. Although AdMT is figured separately for each type of income, the threshold amount for self-employment income in Part II is reduced by the total wages in Part I (but not below zero). In this way, wages and self-employment income are combined to determine the amount (if any) that exceeds the applicable AdMT threshold and is subject to the 0.9% AdMT. However, the threshold for railroad retirement compensation is not reduced by other income, which can result in a taxpayer (or jointly filing taxpayers) with total earnings that are over the threshold amount but not subject to the 0.9% tax.

    Example:

    J and K are married and file jointly. J has $190,000 in wages subject to Medicare tax and K has $150,000 in compensation subject to RRTA taxes. J and K do not combine their wages and RRTA compensation to determine whether they are in excess of the $250,000 threshold for a joint return. J and K are not liable to pay AdMT because J's wages are not in excess of the $250,000 threshold and K's RRTA compensation is not in excess of the $250,000 threshold.

  7. Additional Medicare Tax withheld from wages are reported with Medicare tax withheld as a combined amount on Form W-2, box 6. Additional Medicare Tax withheld from RRTA compensation are reported in box 14. These amounts are carried to Part V of Form 8959 to compute Total Additional Medicare Tax Withholding. The total AdMT withholding are included with the federal income tax withholding on Form 1040.

  8. Before adjusting AdMT, verify the Additional Medicare Tax posted in the "SSA AdMT" and "RRB AdMT" fields on Command Code (CC) TXMOD or IMFOLR.

    Note:

    The "SSA AdMT" field combines lines 7 and 13 of Form 8959, the "RRB AdMT" field is line 17 only.

  9. To adjust AdMT:

    • Input a Transaction Code 29X for the tax amount

    • Input Item Reference Number 863 to update the SSA AdMT amount field for the Medicare wages reported in Part I of Form 8959

    • Input Item Reference Number 901 to update the SSA AdMT amount field for the self-employment income reported in Part II of Form 8959

    • Input Item Reference Number 864 to update the RRB AdMT amount field

    • Input Credit Reference Number 806 / 807 for the Additional Medicare Tax withholding (RC 051), if appropriate

    • Input Reason Code (RC) 136.

      Note:

      RC 136 requires a corresponding Item Reference Number, such as 863 or 864. If the only issue is withholding, use RC 051.




    Reference: PL 111-148

Net Investment Income Tax

  1. The Health Care and Education Reconciliation Act of 2010 (PL 111-152) added a Net Investment Income Tax (NIIT) under section 1411 of the Internal Revenue Code for tax years 2013 and subsequent. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts. Although section 1411 falls within Chapter 2A of the Code, entitled "Unearned Income Medicare Contribution" , the tax is not a payroll tax.

  2. In general, net investment income includes interest, dividends, capital gains, rental and royalty income, certain annuities and income from businesses in which the taxpayer is not an active participant. Investment expenses, such as brokerage fees and rental property expenses, related to the net investment income are allowed. IRA distributions and employer pension annuities are not net investment income, and therefore, not subject to the tax.

  3. Some common types of income that are not net investment income include wages, unemployment compensation, self-employment income, Social Security Benefits, alimony, tax-exempt interest, operating income from a non-passive business, IRAs and distributions from certain Qualified Plans.

  4. The 3.8% tax applies when taxpayers have net investment income and modified adjusted gross income (MAGI) above the following thresholds:

    • Single / Head of Household - $200,000

    • Married Filing Jointly / Qualifying Widow(er) - $250,000

    • Married Filing Separately - $125,000

  5. Non-resident aliens (NRA) are not subject to the Net Investment Income Tax. A nonresident alien who is married to a U.S. citizen or resident are subject to NIIT if such NRA makes an election to file a joint return for purposes of NIIT. If spouses elect to file a joint return under IRC § 6013(g) (where a nonresident alien is married to a U.S. citizen or resident at the end of the tax year), or under IRC § 6013(h) (where at least one spouse was an NRA at the beginning of the tax year, but is a U.S. citizen or resident married to a U.S. citizen or resident at the end of the tax year), they can also elect to apply the joint return election for NIIT purposes.

  6. The 3.8% tax is assessed on the lesser of the net investment income or the excess amount (if any) of MAGI over the threshold amount.

    Example:

    A single taxpayer has wages of $180,000 and $15,000 of interest and dividends. The taxpayer’s MAGI of $195,000 is less than the $200,000 threshold, thus no NIIT is due.

    Example:

    A single taxpayer has wages of $180,000 and received $90,000 from a passive partnership interest, which is considered net investment income. The taxpayer’s total income is $270,000. The taxpayer’s total income exceeds the threshold of $200,000 by $70,000. Since the Net Investment Income Tax is based on the lesser of $70,000 or $90,000, the taxpayer owes NIIT of $2,660 ($70,000 X 3.8%).

  7. Net investment income and net investment income tax are reported on Form 8960, Net Investment Income Tax – Individuals, Estates and Trusts. Tax from Form 8960 is carried over to the “Other Taxes” section of Form 1040.

  8. Before adjusting NIIT, verify the net investment income and the net investment income tax posted in the “NI Income” and “NI Income Tax” fields on Command Code (CC) TXMOD or IMFOLR.

    Note:

    The “NI Income” field is the lesser of the net investment income or the excess of MAGI over the applicable filing status threshold amount.

  9. The amount of income which is subject to the Net Investment Income Tax is captured on line 16 and net investment income tax is captured on line 17 of Form 8960.

    Note:

    If the income amount cannot be determined, divide the NIIT tax amount by .038.

  10. If NIIT is decreased by ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , route to CAT-A.

  11. To adjust NIIT:

    • Input a Transaction Code 29X for the tax amount

    • Input Item Reference Number 861 to update the NIIT income amount

    • Input Item Reference Number 862 to update the NIIT tax amount

    • Input Reason Code 137

Individual Shared Responsibility Provision

  1. Beginning in 2014, individuals must either have minimum essential coverage, have a coverage exemption, or report a shared responsibility payment (SRP), the penalty imposed if an applicable individual in a tax household lacks minimum essential coverage for any month. On their returns, taxpayers may either:

    • Check a coverage checkbox on Form 1040 / Form 1040A / Form 1040EZ, which indicates all members of the tax household had minimum essential coverage for the entire year

    • Attach Form 8965, Health Coverage Exemptions, indicating an approved coverage exemption from the Marketplace or to request a coverage exemption from the IRS, and / or

    • Make a shared responsibility payment


    Minimum essential coverage includes, but is not limited to:

    • Government sponsored programs such as Medicare, Medicaid, CHIP, and TRICARE

    • Employer-sponsored plans

    • Plans in the individual market, including a qualified health plan offered by the Health Insurance Marketplace

    • Grandfathered health plans

    • Other coverage such as State health benefits


    A tax household generally includes the taxpayer, their spouse (if filing a joint return), and any individual they claim as a dependent on their tax return. It also generally includes each individual the taxpayer can, but does not, claim as a dependent on their tax return.

    Note:

    A dependent filing a return not claiming their own exemption may not address either of the above since it will be addressed on the parent(s) return.

  2. For information regarding the coverage checkbox, see IRM 21.6.4.4.21.1, Coverage Checkbox. For information regarding coverage exemptions, see IRM 21.6.4.4.21.2, Form 8965, Health Coverage Exemptions. For information regarding shared responsibility payments, see IRM 21.6.4.4.21.3, Shared Responsibility Payment Overview.

  3. Control amended returns (Form 1040-X) impacting this provision using category code ACAX, program 710-40321.

Coverage Checkbox
  1. At filing, a taxpayer can indicate he/she and everyone in the tax household had minimum essential coverage for the entire year by checking the coverage checkbox. The checkbox is found on Form 1040 line 61, Form 1040A line 38, Form 1040EZ line 11, and Form 1040-X full-year coverage, and is recorded on MFT 30, on CC TXMOD as "Coverage-IND" . The values are:

    • blank - no coverage or coverage does not comprise the entire year

    • 1 - coverage for the entire year

    Caution:

    Do not confuse the coverage indicator checkbox with the 3rd party designee checkbox.


    CC IMFOLR will display "Coverage" in the indicator field if the checkbox is present, otherwise the field will be blank.

  2. If a taxpayer later updates the checkbox, by filing an amended return, correspondence, or a phone call, input item reference number (IRN) 869 with a .00 to turn it off, .01 to turn it on. No supporting documentation is required.

    Note:

    Adjustments to the checkbox can be performed using the xClaim tool, line 9, Healthcare.

    Caution:

    For paper processing, if the taxpayer demonstrates everyone in the tax household had coverage for the entire year, ensure any SRP assessed is waived, see IRM 21.6.4.4.21.3.1, Shared Responsibility Payment Adjustments.

  3. A reason code is not required to be used with IRN 869.

  4. Oral statement can be accepted to update the coverage checkbox. However, if a taxpayer had previously reported an SRP which now needs to be removed, advise the taxpayer to file an amended return, check the coverage checkbox, and remove SRP. The account will be updated when the amended return is processed. Follow normal procedures if there is Compliance involvement.

  5. If a taxpayer requests to update the checkbox prior to the return posting, advise the taxpayer no action is required at this time.

  6. Control correspondence using category code ACA9, program 710-40315.

Form 8965, Health Coverage Exemptions
  1. A coverage exemption from the shared responsibility payment is reported on Form 8965, Health Coverage Exemptions. Part I of Form 8965 is used to report a Marketplace-granted coverage exemption and its Exemption Certificate Number (ECN). Part II and Part III are used to request an exemption transcribed by IRS.

  2. Marketplace-granted coverage exemptions are not transcribed from the original return, nor are they input in post processing (e.g. amended returns, etc.). ECNs are transmitted to the IRS and can be found in the Coverage Data Repository (CDR).

  3. Exemptions reported in Part II and Part III are transcribed from the original return and can be viewed using CC RTVUE, definer CE. Exemptions reported in Part II and Part III are input post processing (e.g. amended returns, etc.).

  4. Upon receipt of a Form 8965, verify the box in Part II is checked, or Part III is complete, and if Part III is completed, the exemption type is one recorded by IRS.

    Note:

    If Form 8965 is received with only Part I completed, notate in CIS. No other action is required for Part I.

    Note:

    If the taxpayer checked the box in Part II and partially completes Part III, disregard Part III.

  5. No supporting documentation is required for Form 8965, nor is an amended return. If the form is incomplete or contains an exemption type other than one listed above, return the request. Oral statement authority does not apply, the Form 8965 must be provided.

    Note:

    Taxpayers can report an exemption for an individual not claimed on the return. In addition, when reporting an exemption, taxpayers are not required to provide a TIN. If a TIN is not provided, do not record the exemption on IDRS and do not correspond for the missing TIN.

    Note:

    If a return has not posted, see IRM 21.5.1.4.4.2, TC 930 Push Codes.

  6. The following table provides the tax year 2017 exemption types, the exemption code associated with it, and who can grant the exemption. Only exemptions allowed on the tax return have a corresponding exemption code. For coverage exemptions prior to tax year 2017, see the Instructions for Form 8965.

    Exemption Type Exemption Code Marketplace Granted Claimed on Tax Return
    Income below the filing threshold - individuals whose gross income or household income is less than filing requirements
    Coverage is considered unaffordable - individuals who cannot afford coverage because the minimum amount he/she must pay for premiums is more than 8.16% of their household income (HHI) A
    Short coverage gap - Individuals who went without coverage for less than 3 consecutive months during the year

    Note:

    An individual is treated as having coverage for any month in which he or she has coverage for at least 1 day of the month.

    Note:

    If multiple gaps exist, only the first gap is allowed.

    B
    Citizens living abroad and certain noncitizens
    • a U.S. citizen or resident who spent at least 330 full days outside of the U.S. during a 12-month period

    • a U.S. citizen who is a bona fide resident of a foreign country or U.S. territory

    • a resident alien who was a citizen or national of a foreign country with which the U.S. has an income tax treaty with a nondiscrimination clause, and a bona fide resident of a foreign country for the entire year

    • not lawfully present in the U.S. and not a U.S. citizen or U.S. national

    • a nonresident alien, including a dual-status alien in the first year of U.S. residency, or a nonresident alien or dual-status alien who elects to file a joint return with a U.S. spouse.

    C
    Member of Health Care Sharing Ministry D
    Member of Federally-recognized Indian Tribe - individuals who were either a member of an American Indian tribe, including an Alaska native, or those otherwise eligible for services through an Indian health care provider or Indian Health Service E
    Connecticut only
    Incarcerated -individuals who were in a jail, prison, or similar penal institution or correctional facility after the disposition of charges F
    • two or more family members whose aggregate cost of self-only employer-sponsored coverage is more than 8.16% of HHI, as is the cost of any available employer-sponsored coverage for the entire family

    • individuals who would have been eligible for Medicaid had their state expanded coverage to 138% of the FPL.

    G
    Member of tax household born, adopted, or died - For 2016 a child was added to the household by birth or adoption, or a member of the household died during the year H
    Member of certain religious sects
    General hardship for individuals experiencing circumstances that prevent them from obtaining coverage under a qualified health plan
    Hardship for individuals without access to affordable coverage based on projected household income
    Hardship for individuals ineligible for Medicaid solely because the state in which they live does not participate in the Medicaid expansion under ACA
    Enrolled in Medicaid coverage provided to a pregnant woman that is not recognized as MEC, enrolled in Medicaid coverage provided to a medically needy individual that is not recognized as MEC, or enrolled in Medicaid and received MEC for one or more months but not in other months
  7. When a taxpayer reports an exemption post-processing, the exemption is recorded on MFT 30, on CC TXMOD with a TC 971. Action Code (AC) 175 adds the exemption, AC 176 signifies the exemption is no longer valid. Since the exemption can be for the entire family, individual members of the family, different reasons, for the entire year, or just part of the year, multiple TC 971 action codes may be needed.

    Note:

    Coverage exemptions allowed at-filing will not have a corresponding TC 971 AC 175, they can be viewed using the "8965 Tool" or CC RTVUE/TRDBV.

  8. Use the "8965 Tool" in Accounts Management Service (AMS) to process a Form 8965.

    Note:

    The "8965 Tool" will pre-populate the at-filing coverage exemption data. If a taxpayer is adjusting an existing exemption type (such as changing from specific months to all year) which is pre-populated on the "8965 Tool" , both a TC 971 AC 176 and AC 175 are required. Check the "reverse" box on the pre-populated line to remove the existing exemption and add a new line with the new exemption information (with the "add" box checked) to allow the new exemption.

    Caution:

    Exemptions input to Masterfile post-processing will not be pre-populated on the "8965 Tool" . If a taxpayer adjusts or removes a post-processing exemption, you must research CC TXMOD or IMFOLT for the corresponding TC 971 AC 175 for the information shown in (9) below and add that data to the "8965 Tool" to issue a TC 971 AC 176 (do not assume a previous exemption no longer applies if a new Form 8965 is received).

  9. When viewing the TC 971s on CC TXMOD / IMFOLT, the TIN populated in the XREF-TIN field indicates the person entitled to the exemption. The MISC field identifies the exemption type and the months the exemption applies. The following format is used in the MISC field:
    Part II

    • a "4" indicates the box was checked

    • for tax years 2014 and 2015 forms, a "1" indicates line 7a was checked, a "2" indicates line 7b was checked, and a "3" indicates both boxes were checked)

    Note:

    If the exemption is for the household, as shown on Form 8965, Part II, the XREF-TIN will be the primary SSN.


    Part III

    • # = exemption code (from the table above)

    • 01-12 = months the exemption applies, January - December (01 = January, 02 = February, etc.)

    • Y = exemption applies to the entire year

    • - (dash) = through

      Example:

      If a Form 8965 was filed requesting an exemption for being incarcerated for January - June, the MISC field would show F01-06

      Example:

      A short coverage gap for January and February would be shown as B0102.

  10. The reporting of an exemption may impact SRP. If Form 8965 is received reporting an exemption and the taxpayer addresses SRP, or if the exemption(s) reported covers the tax family for the entire year, see IRM 21.6.4.4.21.3.1, Shared Responsibility Payment Adjustments.

  11. Control correspondence related to reporting an exemption or a loose Form 8965 on IDRS/CIS using category code ACA8, program 710-40314.

Shared Responsibility Payment Overview
  1. Generally, a taxpayer is liable for a SRP if the taxpayer, spouse, or the taxpayer's dependent(s) does not have either minimum essential coverage for every month of the year or an exemption. The taxpayer's SRP is the sum of the monthly payment amounts for all months when any member of the taxpayer's tax household is neither exempt nor has minimum essential coverage. The monthly payment amount is 1/12 of the annual payment amount.
    The annual payment amount is the greater of:

    • the flat dollar amount, or

    • a percentage of the excess income amount


    The shared responsibility payment is capped at the annual national average premium for a bronze-level qualified health plan for the applicable family size involved available through the Marketplace. Those amounts are as follows:

    Tax Year Amount
    2016 $13,380
    2015 $12,420
    2014 $12,240
  2. The flat dollar amount is the sum of the applicable dollar amounts (ADAs) for all members of the household who are not exempt and do not have minimum essential coverage in a particular month. The ADA is $695 per individual for 2016 and 2017, $325 per individual for 2015, and $95 per individual for 2014, and is subject to indexing for subsequent years. For a child who is not yet 18 years old as of the beginning of the month when the child is neither exempt nor has minimum essential coverage, the ADA is one-half of the amounts listed earlier. The flat dollar amount for a tax household is capped at 300 percent of the ADA for adults.

  3. See Instructions for Form 8965 for detailed information about computing the SRP. Additionally, see IRM 21.1.1.6.1, Out of Scope and Limited Service, for information regarding the SRP worksheet.

  4. SRP is reported on Form 1040, line 61, Health care: individual responsibility (Form 1040EZ line 11, Form 1040A line 38). The amount reported is carried to MFT 35 and assessed as a TC 240 with penalty reference number (PRN) 692. MFT 35 will post one cycle after MFT 30.

    Note:

    Since the SRP amount is carried to MFT 35, the total tax shown on Form 1040, line 63 (Form 1040EZ line 12, Form 1040A line 39), will not be the total tax amount (TC 150) shown on MFT 30. A TC 971 action code 530 will post to MFT 30 with the SRP amount in the memo field.

    Reminder:

    Balance due returns will not settle (23C date) until cycle 20, which will delay MFT 35 from posting until the following cycle.

  5. SRP notices can be identified by an "H" after the CP number (i.e., CP 14H, CP 501H, etc.). SRP notices identify the form as "SRP" instead of "1040" .

  6. Overpayments shown on the original Form 1040 are applied to MFT 35 prior to offsetting to any other balance due. The overpayments are applied with a TC 896. Any subsequent overpayment from MFT 30 is offset with a TC 826 following normal offset rules.

  7. SRP is subject to interest, but not penalty (Failure to File / Failure to Pay).

  8. A transcript of the MFT 35 module can be requested using MFTRA type X.

  9. Control correspondence related to SRP on IDRS/CIS using category code ACA7, and use program 710-40313.

Shared Responsibility Payment Adjustments
  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. If a taxpayer corresponds or files an amended return requesting adjustment, review the MFT 35 module to determine if a Compliance function assessed / adjusted the SRP (which can be identified by a TC 240, PRN 692, RC 154 on MFT 35), or is in the process of reviewing the taxpayer's account (which can be identified with a -L freeze on MFT 30).

    Note:

    Oral statement authority does not apply to SRP unless there is a decimal point/transcription error when posting SRP.

  3. If no Compliance involvement:

    • If Form 1040-X filed, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Exception:

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

      Note:

      When requesting an exemption from SRP, Form 8965 must be on file or provided by the taxpayer.


      Suggested verbiage for the executive order: On January 20, 2017, the President signed Executive Order 13765, Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal. However, the Affordable Care Act legislation has not been repealed and you are still required to have full year healthcare coverage, have an exemption from healthcare coverage, or make a Shared Responsibility Payment.

    • If correspondence is sent and the taxpayer provides the corrected SRP amount or demonstrates that everyone in the tax household had coverage for each month of the year, or an exemption for those months without coverage, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . The taxpayer doesn't have to specifically state remove SRP, it can be implied.

      Example:

      Taxpayer responds to CP 501H with a copy of an insurance card. Since an insurance card doesn’t show everyone in the household had coverage for every month of the year, additional information is needed.

      Example:

      Taxpayer responds to CP 14H indicating they forgot to check the box showing everyone in their tax household had minimum essential coverage for the entire year, SRP can be removed.

      Example:

      Taxpayer responds to CP 14H with Form 8965. The taxpayer states he computed SRP incorrectly because he forgot the exemption. In this example, if the taxpayer is single claiming only himself and the exemption is for the entire year, SRP can be removed. However, if the exemption is for part of the year, SRP cannot be adjusted without the taxpayer providing the appropriate amount.

      Example:

      Form 1095-B, Health Coverage, sent showing everyone in the tax household had coverage for the year, SRP can be removed.

    • Input a PRN 692 on MFT 35, for the appropriate amount, RC 153. SRP can be adjusted using the xClaim tool, line 9, Healthcare. Do not use the SRP Calculator found in AMS. The usual source codes and blocking series apply.

    Reminder:

    Do not assess more than the national average bronze-level plan shown in IRM 21.6.4.4.21.3, Shared Responsibility Payment Overview.

    Reminder:

    If a Letter 5600C is attached or mentioned, input a priority code 3 if the adjustment will result in an overpayment. Do not input an amended claims date. See IRM 20.2.4.7.5.5, 45-Day Rule and IRS Initiated Adjustments.

    Note:

    If an MFT 35 module has not been established, create a dummy MFT 35 module using CC MFREQD, and then input the assessment. Do not use a hold code 3 or 4 on the initial assessment unless transferring a payment / offsetting an overpayment to the MFT 35 module at the time of assessment to satisfy the SRP liability. A hold code interferes with subsequent notice routine. After the initial assessment, a hold code can be used on subsequent adjustments.

    Note:

    When adjusting both MFT 30 and MFT 35, the system will post all transactions, including any offsets, in the same cycle.

    • If SRP is being removed because the taxpayer demonstrated everyone in the tax household had coverage for the entire year, see IRM 21.6.4.4.21.1, Coverage Checkbox.

  4. If Compliance adjusted the account (MFT 30 or MFT 35), route to the assessing function. If a -L freeze or TC 922 is on MFT 30, see IRM 21.5.6.4.24, -L Freeze, or IRM 21.3.1.5.56, Status of IMF Underreporter Cases.

  5. MFT 35 modules can be mirrored. If the MFT 35 module is mirrored to MFT 65, two adjustments will be necessary, see IRM 21.6.8, Split Spousal Assessments (MFT 31 / MFT 65).

  6. Take the following action if a payment was made with the 1040-X:

    If And Then
    TC 670 payment posted to MFT 30 The amount matches the change to the SRP Transfer the payment to MFT 35 using the IAT credit transfer tool
    TC 670 payment posted to MFT 30 does NOT match the change to SRP The payment amount matches the total adjustment to MFT 30 and MFT 35 Transfer the amount attributable to SRP using the IAT credit transfer tool
    The payment amount is more than the total adjustment to MFT 30 and MFT 35 Transfer the amount attributable to SRP using the IAT credit transfer tool
    The payment amount is less than the total adjustment to MFT 30 and MFT 35 Do not transfer the payment unless there is an indication the taxpayer wanted the SRP paid / partially paid

    Note:

    If the TC 670 payment posted to MFT 35, follow the same logic above to transfer the payment to MFT 30.

    Note:

    If both an adjustment and a credit transfer using ADD34 are needed for the same MFT 35 module, input a posting delay code 1 on the adjustment. A PDC isn’t needed if using ADD24/48. See IRM 21.5.8.3.1, IDRS Guidelines for Credit Transfers.