- 4.4.6 Conversion of Returns
- 126.96.36.199 Introduction
- 188.8.131.52 Separate to Joint Return
- 184.108.40.206.1 Husband and Wife Both Filed Separate Returns
- 220.127.116.11.2 Only One Spouse Filed
- 18.104.22.168 Joint to Separate Returns
- 22.214.171.124.1 Group Procedures
- 126.96.36.199.2 Invalid Joint Return-Primary Not Required to File Separate Return,Group Procedures
- 188.8.131.52.3 Invalid Joint Return-Primary Not Required to File Separate Return,Centralized Case Processing Procedures
- 184.108.40.206 Conversion of Other Forms
- 220.127.116.11.1 Group Procedures for Converting Form 1120-S to Form 1120
- 18.104.22.168.2 Centralized Case Processing Procedures
- 22.214.171.124 Agreed Conversion Cases
- 126.96.36.199.1 Group Procedures for Agreed Conversion Cases:
- 188.8.131.52.2 Centralized Case Processing Procedures for Agreed Conversion Cases
- 184.108.40.206 Unagreed Cases
- 220.127.116.11.1 Group Procedures for Unagreed Cases
Part 4. Examining Process
Chapter 4. AIMS Procedures and Processing Instructions
Section 6. Conversion of Returns
This chapter provides instructions for the processing of the following types of conversions:
Separate return to joint return;
Joint return to separate return;
Conversion of Other Forms, Form 1120S, U.S. Income Tax Return for an S Corporation, to Form 1120, U.S. Corporation Income Tax Return; Form 1041, U.S. Income Tax Return for Estates and Trusts, converted to Form 1120; Form 1065, U.S. Return of Partnership Income, converted to Form 1120 or Form 1041; and Form 1120 DISC, Domestic International Sales Corporation Return, or Form 1120 IC DISC, Interest Charge, Domestic International Sales Corporation Return, converted to Form 1120.
For purposes of clarity, there will be instances when one taxpayer will be referred to as the"primary" taxpayer (generally the husband), and the other taxpayer will be referred to as the " secondary" taxpayer (generally the wife).
Sometimes during an examination, a husband and wife who originally filed their returns separately may request that joint tax computations be used as it will reduce their tax liabilities. Taxpayers may elect to go from separate filing status to joint filing status by filing a joint return if the following conditions apply to the taxable year:
A joint return is filed within three years of the due date of the return (without regard to extensions).
Neither spouse filed a petition in Tax Court in response to a notice of deficiency (this applies where one or both spouses have filed a return - see note below).
Neither spouse has filed a suit in any court to recover tax.
Neither spouse has entered into a closing agreement or offer in compromise.
If the return is prepared by the IRS under IRC section 6020(b), it is not a tax return filed by the taxpayer. Therefore, if the only return filed for that tax period is a return prepared under IRC section 6020(b), taxpayers may elect to file a joint return even if either taxpayer files a petition in Tax Court. In the case where a taxpayer petitions the Tax Court from a statutory notice of deficiency based on an IRC section 6020(b) return and the taxpayer seeks to change his filing status to married filing jointly, if the non-petitioning spouse has not yet filed a return, allow the non-petitioning spouse and petitioning spouse to file a joint return. This allows the Service to assess the non-petitioning spouse pursuant to IRC section 6201(a)(1), Assessment Authority, which provides that the Service is required to assess all taxes determined by the taxpayer on a valid return.
Joint return filing status is a taxpayer election. Therefore, the Service may not elect joint filing status on behalf of taxpayers. It is recommended examiners advise taxpayers of their right to file a joint return if the time period for electing joint filing status has not expired. See IRM 18.104.22.168.4.4, Joint Return After Separate Return for the allowable time periods. Rev. Rul. 2005-59, Valid Return; Election to File Joint Return, 2005-2 C.B 505 requires a joint return that is signed under penalties of perjury. If the taxpayer agrees with the adjustments but wants to make the election to file a joint return, the taxpayers MUST file a joint tax return making the married filing joint election or sign, under penalties of perjury, a joint return prepared by the Service under IRC section 6020(b). Signing Form 4549, Income Tax Examination Changes, or Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, without the appropriate return form is not sufficient for making the election because these documents to not purport to be returns and do not contain a " jurat" with the penalty of perjury clause.
The group and Centralized Case Processing (CCP) will follow the procedures outlined below when both the husband and wife filed separate returns and now they want to file a joint return.
Place the returns in separate case files. Instructions for each case will be included on their respective Form 3198, Special Handling Notice for Examination Case Processing, see IRM 22.214.171.124.1.1(7) below for instructions on preparing each Form 3198.
The statute of limitations must be verified on both the primary and secondary accounts before converting the tax returns.
You will need to prepare two Form 4549, Income Tax Examination Changes. The first Form 4549 is based on the secondary taxpayer's tax return information and will reflect adjustments to zero out the account.
The accuracy penalty may not be assessed on the account being zeroed out.
When the secondary account includes EITC, Earned Income Tax Credit, and/or ACTC, Additional Child Tax Credit , the entire refund must be transferred to the joint account. Transfer any available credit or payments to the primary account. Net out (subtract) any refunds or offset previously issued.
If a refund was previously issued or an offset occurred, and the earned income tax credit (EIC), additional child tax credit or the refundable credit for prior year minimum tax was involved, then those credits must be reversed and the refund/offset must be moved/reversed. In addition, if a refund was previously issued or an offset occurred, and TETR was involved, then the TETR must be reversed and the refund/offset must be moved/reversed when backing out the account.
The second Form 4549 will be based on the new joint tax return and will reflect any items zeroed out on the secondary taxpayer's account that need to be moved to the joint account. Include any unrefunded prepayment credits (generally estimated tax payments) from the secondary taxpayer's account since they are now being moved to the new joint account. In addition any tax and/or penalty adjustments as a result of the audit will be included on this joint Form 4549.
A Form 5344, Examination Closing Record, will be prepared for each account. The Form 5344 for the secondary taxpayer will contain the secondary entity information as well as the appropriate entries to zero out the account. Item 15 of Form 5344 should contain reference code 999 for zero to indicate that the account has been changed to file with another SSN.
Add the secondary taxpayer's name to the name section of Form 5344 of the primary taxpayer's SSN on the new joint return account. In addition, the Form 5344 will contain all tax and/or penalty adjustments as a result of the audit and all income/expense items moved from the secondary taxpayer's separate account.
Prepare Form 2363, Master File Entity Change, to add the secondary taxpayer's name to the primary taxpayer's account and to correct the marital status code. Form 2363 should be faxed to CCP as soon as possible after determining the taxpayer's eligibility for joint filing status. The fax numbers for CCP can be found at the following website, http://sbse.web.irs.gov/CCP/Exam/Exam.htm.
Prepare two Forms 3198.
In the "Special Features" section of both the primary and secondary Forms 3198 check the box entitled "Separate to Joint" .
Also in the "Special Features" section under "Other Instructions (explain)" include a statement, "Keep these two cases together" .
In the "Related Taxpayers or Key Cases" section of each Form 3198, cross-reference each taxpayer with the other by annotating the primary taxpayer's name, TIN, MFT and Tax Period information on the secondary taxpayer's Form 3198.
On the secondary Form 3198, if appropriate, instruct CCP to move any unrefunded estimated tax payments to the joint account. If the secondary taxpayer has made a subsequent payment to repay erroneous EITC, ACTC, etc. instruct CCP to transfer that payment to the joint account.
Make the following entries on the Form 5344 containing the secondary taxpayer's SSN.
Enter Hold Code 4 in Item 07 to prevent incorrect refunds or notices.
Enter $1 amount in Item 35.
When inputting the joint Form 5344, enter a posting delay code in Item 43 of Form 5344.
Additional actions required on the secondary taxpayer's account:
If not done previously, process Form 2363 adding the secondary taxpayer's name to the primary taxpayer's account and change the marital status code.
Input a TC 971, Action Code 001, via Form 3177, Notice of Action for Entry on Master File,on the secondary account.
To prevent a future Collection IRP activity, input TC 594, Closing Code 84 on both taxpayers' accounts.
Move the unrefunded payments from the secondary account to the primary account.
Prepare Form 12857, Refund Transfer Posting Voucher when the secondary taxpayer received EITC or ACTC and the entire refund must be transferred to the joint account to be collected.
These forms are mailed to:
Cincinnati Service Center
CSC Accounting - Stop 2107
201 W. Rivercenter Blvd.
Covington, KY 41011
The group and CCP will follow procedures below when only one spouse filed a separate return.
The group will complete the following steps:
Add the name of the spouse who has not filed to the name line of Form 5344.
If applicable, add any income and credits attributable to the spouse that did not file to the new joint return and prepare a Form 4549 accordingly. Consider any appropriate penalties.
Prepare Form 2363 to add the name of the spouse who has not filed to the new joint return and to correct the marital status code. Form 2363 should be faxed to CCP as soon as possible after determining the taxpayer's eligibility for joint filing status.
Prepare Form 5344 in accordance with the Form 4549 adjustments.
Prepare Form 3198 accordingly. In addition, in the "Special Features" section, check the box "Change Filing Status to:" and write "Separate Return Converted to Joint" .
Centralized Case Processing will complete the following steps:
If not previously done, process Form 2363 adding the name of the spouse who has not filed to the new joint return and to correct the marital status code.
Verify and complete Form 5344 as applicable.
The group will follow the procedures below when a delinquency penalty must be applied against a non-filing spouse:
You may need to compute the penalty manually if you are unsure of how to input the information into RGS, Report Generation Software, used in preparing Form 4549. Be careful that any delinquency penalty imposed on the spouse who has previously filed is not duplicated in the computation.
If the delinquency penalty is computed manually, the amount of the penalty will need to be manually added to the Form 4549 and included in item 12 of Form 5344.
On page 2 Form 4549, in the "Other Information" section, you must include the computation of the delinquency penalty.
Complete Form 3198 accordingly.
When it is determined during an examination that the taxpayers are not entitled to file a joint return, the case will be handled as shown below.
The group will take the following actions:
Prepare Form 2363 to change the filing status on the joint account by checking the box to the right of Transaction Codes 013, 016 and 017, and update the FSC box to the applicable filing status. This action will initiate a filing status change to non-joint. Form 2363 should be faxed to CCP as soon as possible.
Prepare a Form 4549 to remove the secondary income/expenses/credits from the primary taxpayer's account. This will adjust the account to reflect primary taxpayer data only.
Prepare Form 5344 to agree with the Form 4549. Enter only one name on Form 5344.
Complete Form 3198 accordingly and make the following annotations: In the "Special Features" section check the box " Change Filing Status to:" and enter the appropriate filing status.
If the secondary taxpayer who is removed from the joint account is required to file a return, follow Delinquent/Substitute for Return procedures in IRM 4.4.9.
When taxpayers file a joint return, an account is created for the secondary SSN. This account consists of the secondary SSN's entity and tax period information, no TC 150 is present on this account. There will be a posting of a TC 594 CC 84 with a cross-reference TIN pointing back to the primary taxpayer's account. Therefore, you do not have to create an account for the secondary SSN via a Form 2363 when changing from married filing joint status to separate/single/head of household filing statuses. In addition, be sure AIMS controls are full record on the delinquent or substitute for return before closing the case file to either Technical Services or CCP
If the primary taxpayer under which the joint return posted is not required to file a separate return, see IRM 126.96.36.199.2 for procedures.
Prepare Form 2363 to correct the name line to reflect the primary taxpayer only and correct the filing status on the account. Check the following boxes on Form 2363: 013 and 016 and input the appropriate filing status code in the FSC box. Form 2363 should be faxed to CCP as soon as possible.
Prepare a Form 4549 for the primary taxpayer using the primary TIN and remove the secondary taxpayer's income/expenses/credits from the invalid joint return.
Complete Form 5344 to agree with the Form 4549. The 5344 should have the appropriate transaction codes and amounts in Item 12 to zero out the tax and penalties (if there are penalties) on the primary account. Item 15 on Form 5344 should contain entries to reduce the unrefunded prepayment credits by the amount allowed as a credit on the secondary taxpayer's separate account.
Close the AIMS controls on the primary TIN using Disposal Code 08. Include Form 5344 and complete Form 3198 accordingly.
Set up the secondary taxpayer's account in accordance with Substitute for Return procedures contained in IRM 4.4.9. The received date for the substitute return will be the same as that of the invalid joint return filed under the primary TIN. Thus the statute date for the secondary's substitute return should reflect the same statute as the invalid joint return. The secondary taxpayer will now be a primary taxpayer on their own TIN.
Prepare a Form 4549 for the secondary taxpayer to include all of the appropriate income/expenses/credits. Include Form 5344 and complete form 3198 accordingly.
A copy of the invalid joint return should remain in the case file of the secondary taxpayer's SFR package. Ensure the SFR under the secondary TIN is full record on AIMS before closing the case to CCP.
If not done previously, process Form 2363 that should have been prepared by the group.
Process Form 5344 on the primary TIN and the secondary TIN accordingly.
Prepare Form 2424, Account Adjustment Voucher,to transfer any unrefunded prepayment credits on the invalid joint return to the secondary TIN.
Sometimes it is necessary to convert the tax return the taxpayer originally prepared to another form of tax return. This section contains procedures for converting certain filed returns to a different type of tax return.
It is not necessary to prepare Form 1120.
Complete Form 2363 with a check mark next to TC 091 and enter" 01" , in the Filing Requirement 1120 box. Form 2363 should be faxed to CCP as soon as possible and prior to closing the case.
Prepare a Form 4549 showing:
An adjustment for the net income or loss per return as originally filed plus any additional adjustments to income and deductions where a non-taxable Form 1120-S is converted to Form 1120 and,
Any additional items of income and deductions in instances where a taxable Form 1120-S is converted to Form 1120.
Prepare Form 5344 to agree with the Form 4549.
Prepare Form 5349, Examination Correction Request, to change the Form 1120-S activity code to the appropriate activity code for Form 1120. The group secretary will input this change.
Form 3198 should be attached to the front of the case file indicating, "Form 1120-S converted to Form 1120" and note the Form 1120 activity code in the "Special Features" section of the form. Also include the effective date of the termination and a brief explanation.
If not done previously, process Form 2363 that should have been completed by the group.
Process the Form 5344 accordingly.
Prepare Form 1725, Routing Slip, addressed to the Campus Entity Control function. Form 1725 must include the statement, "Form 1120-S converted to Form 1120 by Examination; update Form 2553, Election by a Small Business Corporation." The following information must be furnished:
The taxpayer's name, address and EIN.
Effective date of the termination.
Reason for the termination.
The Area Office code.
A statement indicating that Form 2363 has been input.
Form 2553 should be faxed to the appropriate Campus either Ogden or Cincinnati. The fax number for Ogden is 801-620-7116. The fax number for Cincinnati is 859-669-5748.
The Group and CCP will follow the procedures below for agreed conversion cases.
Form 1041 converted to Form 1120: On the top margin of the Form 1120 and on Form 3198, enter "Form 1041 converted to Form 1120 by Examination" . On Form 3198 in the "Special Features" section, check the box "Tax Return Conversion " and add the activity code of the new Form 1120 in the " Other Instructions" section of the Form 3198. See steps (4) through (7) below for additional instructions.
Form 1065 converted to Form 1120 or Form 1041: On the top margin of the Form 1120 (or 1041) and on the Form 3198, enter "Form 1065 Converted to Form 1120 (or Form 1041) by Examination" . On Form 3198 in the "Special Features" section, check the box "Tax Return Conversion" and add the activity code of the new Form 1120 (or Form 1041) in the "Other Instructions " section of the 3198. See steps (4) through (7) below for additional instructions.
Form 1120 DISC/IC DISC converted to Form 1120: On the top margin of the Form 1120 and on Form 3198, enter "Form 1120 DISC/IC-DISC converted to Form 1120 by Examination" . On Form 3198 in the "Special Features" section, check the box "Tax Return Conversion" and add the activity code of the new Form 1120 in the "Other Instructions" section of the Form 3198. See steps (4) through (7) below for additional instructions.
In all of the above tax return conversions, complete Form 2363 with a check mark next to TC 016 and enter "01" for Form 1120 or "1" for Form 1041, in the appropriate Filing Requirement box. Form 2363 should be faxed to CCP as soon as possible before the case is closed.
When converting the above tax returns, forward the converted tax return to the appropriate Campus in accordance with instructions in IRM 188.8.131.52.13. Do not send the converted tax returns to CCP. On the new return, write the correct received date of the new return based upon the received date of the converted return. Retain a copy of the converted return in the case file to be used when the case is ready to be closed.
After the new converted return has posted to Masterfile, input Form 5345-D, Examination Request-ERCS (Examination Returns Control System) Users, to establish AIMS controls. After AIMS becomes full record and the examination is complete, prepare Form 4549, Form 5344 and Form 3198 accordingly. The Form 4549 must include any tax credits from the old tax return account that need to be moved to the new tax return account. Also be sure to indicate on Form 3198 in the "Other Instructions " section if there are credits to be moved. Forward the case to CCP for closing.
AIMS controls need to be closed on the old tax return that was converted using Form 10904 with Disposal Code 33. Form 10904 is forwarded to your local AIMS/ERCS staff for input.
Conversion cases will be identified on Form 3198 attached to the file. Agreed cases will include the newly converted Form 1120 or Form 1041 (or a photocopy) marked as instructed in IRM 184.108.40.206.1
Process agreed cases as directed by the group. The newly converted Form 1120 or Form 1041 will have been previously forwarded to Masterfile, posted to the account and now full record on AIMS.
Process Form 2363 to eliminate Form 1041/1065 filing requirements, if not previously done.
The group will follow the procedures below for unagreed conversion cases.
If the taxpayer does not agree to converting the Form 1041 to a Form 1120, a substitute for return for Form 1120 will be prepared. However, do not forward the substitute for return to CCP for processing or establishing on AIMS. The SFR will be left in the case file of the Form 1041 case.
Prepare Form 5344 for the Form 1041 in the normal manner as a closing to Appeals. The case will be closed to Technical Services and updated to status 21 for forwarding to Appeals.
Do not change the filing requirements of the Form 1041. If necessary, Appeals will take action to process the Form 1120 to Masterfile, establish the case on AIMS and request a change to the filing requirements.