4.19.3 IMF Automated Underreporter Program

Manual Transmittal

August 22, 2017

Purpose

(1) This transmits revised IRM 4.19.3, Liability Determination, IMF Automated Underreporter Program.

Material Changes

(1) Editorial changes were made throughout this section to clarify language and/or to update references, telephone numbers, and website addresses.

(2) Other changes were made throughout the IRM, as follows:

  • Updated money amounts to include TY 2016 amounts and remove TY 2013 amounts

  • Updated form line/column numbers to include TY 2016 line numbers and remove TY 2013 line numbers

  • Updated dates to include TY 2016 and remove TY 2013 dates

(3) Added internal controls information and Exhibit references where terms and acronyms used in IRM 4.19.3 can be found, as required by The Heightened Awareness, Sensitivity, and Understanding of Internal Controls Memo dated September 14, 2016, and renumbered all subsequent subsections

(4) IRM 4.19.3.3.5(1) and (2) - (1) corrected tax year information which can be accessed on AUR and (2) corrected tax year when information will have to be ordered from files

(5) IRM 4.19.3.4.3.2(5) Caution - revised to remove instructions regarding IDT documents other than Form 14039/a police report or law enforcement incident report

(6) IRM 4.19.3.4.3.2(9) b and c - added status code "08" to b and revised the status code in c to "10"

(7) IRM 4.19.3.4.3.2(13) table, 2nd row and Caution - added AC 123 and AC 129 to the If column and in the Then column, provided specific instructions for closure in screening, when a notice was issued and there is a credit on the account and when a notice was issued and there is no credit on the account; deleted Caution

(8) IRM 4.19.3.4.3.2(13) table, 3rd row - deleted and moved information to (15)

(9) IRM 4.19.3.4.3.2(15) - revised to add a table with specific instructions for closure in screening, when a notice was issued and there is a credit on the account and when a notice was issued and there is no credit on the account

(10) IRM 4.19.3.4.3.3(7) - new f for accounts with TC 290-0 and a corresponding TC 271 which fully reverses the amount of the previous TC 270 failure to pay penalty

(11) IRM 4.19.3.4.3.4(15) table If column, 6th and 7th rows - deleted Notes; also deleted description and IRM reference in 6th row for AC 523 and in 7th row for AC 524

(12) IRM 4.19.3.5.1(9) k - added rollover indication is on the 1099R IR

(13) IRM 4.19.3.5.2(7) b Exception - added to the Exception instruction not to give credit for SSTAX claimed on an ELF payer document for which there is no corresponding IR

(14) IRM 4.19.3.5.8.1(1) - added false/overstated Form 1099 MISC to lists of indicators of fraud

(15) IRM 4.19.3.5.8.1.1- -new sub-section to provide instructions for handling reported fraudulent AUR notices/letters

(16) IRM 4.19.3.5.8.2(4) table, Then column, 1st row – clarified that case should be closed PC 28, per FFC instruction

(17) IRM 4.19.3.5.8.2(4) table, Then column, 2nd row, step 3 – revised instruction to request Form 14039/a police report

(18) IRM 4.19.3.5.11.1.1(1) - clarified this is IRS error

(19) IRM 4.19.3.5.11.1.1(2) - revised to remove "within the assessment statute period"

(20) IRM 4.19.3.5.11.1.2(2) - revised to remove "within the assessment statute period"

(21) IRM 4.19.3..5.11.4 (6), step 1 Exception and (9), step 1 Exception - removed instructions specific to the Philadelphia Call Site

(22) IRM 4.19.3.5.11.2(1) - clarified when interest should not be charged on an erroneous refund

(23) IRM 4.19.3.8.1.1(2) c Note - added Section 131 information

(24) IRM 4.19.3.8.3.2(1) - clarified, 99OID may show qualified stated interest

(25) IRM 4.19.3.8.6.1(2) d, 2nd Note - added clarification

(26) IRM 4.19.3.8.6.1(4) - clarified, instruction is when excess reimbursement is not reported

(27) IRM 4.19.3.8.6.1(10) Exception - added clarification

(28) IRM 4.19.3.8.7(3) - added Note to address NOCRD literal

(29) IRM 4.19.3.8.7.1(5) d - new instruction for MERCH IRs

(30) IRM 4.19.3.8.10.3(10) b Note - revised to the zero literal may not appear

(31) IRM 4.19.3.8.10.4(2) - moved from (5) Caution, 1099R IRs which match 5498 RCONV amounts can’t be considered rolled over

(32) IRM 4.19.3.8.10.7(8), step 2 - revised suggested Special Paragraph verbiage to correct Pub number and add how to access/obtain

(33) IRM 4.19.3.8.12.1(12) a - added tax year example, for clarity

(34) IRM 4.19.3.8.17.1(4) b Caution - added clarification on decedents

(35) IRM 4.19.3.8.17.2(1) and b and c - added LSE indication from c to (1); corrected b to 15PAY, 14PAY, 13PAY and 12PAY; deleted c

(36) IRM 4.19.3.8.18.1(3) d Note - added clarification

(37) IRM 4.19.3.8.18.1(6) - new instructions for medals, prizes and awards paid by the U.S.Olympic Committee

(38) IRM 4.19.3.8.19.2(12) and step list - revised to correct information and clarify

(39) IRM 4.19.3.8.20.1(2) and (5) - moved information from (5) to (2) and revised for changes in identifiable event codes; added Caution to delete IRs indicating bankruptcy or foreclosure, if not system deleted; deleted (5)

(40) IRM 4.19.3.8.20.1(8) - added guidance for when the taxpayer indicates the cancelled debt is not taxable

(41) IRM 4.19.3.8.20.1(11) Note - revised and clarified information

(42) IRM 4.19.3.8.23.1.1(1) - added Categories 61 and 79

(43) IRM 4.19.3.8.32(2) - deleted step list; moved information to new (3) and (4)

(44) IRM 4.19.3.8.32(3) - new, information moved from (2) a; revised wording and added table to explain, by tax year, impact of excluding foreign earned income on the additional child tax credit

(45) IRM 4.19.3.8.32(4) - new, information moved from (2) b

(46) IRM 4.19.3.8.33(3) - added clarification regarding W/H for lawful permanent residents/green card holders

(47) IRM 4.19.3.8.33(3) c - added clarification to c and Note regarding "tie-breaker rules" of a treaty

(48) IRM 4.19.3.9.2(7) - added Note that employer contributions to an AMSA can’t be deducted by the taxpayer

(49) IRM 4.19.3.9.2(8) - added Note that employer contributions to an HSA can’t be deducted by the taxpayer

(50) IRM 4.19.3.9.7.1(2) - revised to clarify from an individual during a tax year

(51) IRM 4.19.3.10(22) Reminder under c - deleted the Reminder

(52) IRM 4.19.3.11.1(1) c - added Note to check the ELECT TO ITEMIZE box if the TP chose to itemize, even though the amount was less than the standard deduction

(53) IRM 4.19.3.11.3.1(1) - revised suggested Special Paragraph verbiage to include how to access/obtain Pub

(54) IRM 4.19.3.14.5(1) - revised instruction to recompute Form 8863 whenever an education credit was claimed on the return

(55) IRM 4.19.3.14.5(6) - revised to remove limitations for recomputing Form 8863

(56) IRM 4.19.3.14.5(6) table, Then column, 1st row - deleted step 4 and added Note that Paragraph 98 is automatic when there is no Form 1098-T

(57) IRM 4.19.3.14.5(6) table, Then column, 3rd row - deleted step 5 and added Note that Paragraph 98 is automatic when there is no Form 1098-T

(58) IRM 4.19.3.14.5(6) table, Then column, 5th row - added Note that Paragraph 98 is automatic when there is no Form 1098-T

(59) IRM 4.19.3.14.5(7) table, Then column, 1st row - deleted step 4 and added Note that Paragraph 98 is automatic when there is no Form 1098-T

(60) IRM 4.19.3.14.5(7) table, Then column, 3rd row - added Note that Paragraph 98 is automatic when there is no Form 1098-T

(61) IRM 4.19.3.14.5(12) - added that Paragraph 58 will not generate automatically if there is an amount input in the MANUAL EDUCATION CREDIT field in the Education Credit window

(62) IRM 4.19.3.14.5(13) - added that Paragraph 98 is automatically generated when there is no Form 1098-T

(63) IRM 4.19.3.14.5.1(1) - revised suggested Special Paragraph verbiage to include how to access/obtain Pub

(64) IRM 4.19.3.14.5.1(2) - revised to clarify that documents/statements match the amount originally claimed

(65) IRM 4.19.3.14.5.1(3) - new to provide instructions for when documents/statements are less than the amount originally claimed

(66) IRM 4.19.3.14.7(3) - new Note to toggle off PARAGRAPH 188 when adoption credit increases

(67) IRM 4.19.3.14.7(3) - revised information; Paragraph 188 automatically generates when the adoption credit decreases

(68) IRM 4.19.3.14.5.1(3) - new instructions for actions to take when the TP provides Form 1098-T with a lesser amount or a signed explanation of amounts paid for less than was originally claimed

(69) IRM 4.19.3.15.5(3) - revised suggested Special Paragarph verbiage to include how to access/obtain Pub

(70) IRM 4.19.3.15.6(5) - new for cases when the taxpayer was not originally subject to AMT but due to UR income is now subject to AMT

(71) IRM 4.19.3.15.8(1) - added gains from trading in financial instruments or commodities to list of investment income

(72) IRM 4.19.3.15.8(4), 3rd bullet - added Note for when a new or revised Form 8960 is provided

(73) IRM 4.19.3.15.8(5) 1st and 2nd bullets - revised and corrected to include return line numbers, based on the tax year, and to clarify which return/Schedule E line amounts are needed for the calculation

(74) IRM 4.19.3.15.11(1), (2), (3) (4) and (5) - revised information in (1), (4) and (5) for clarity, deleted (2) and (3) and renumbered paragraphs

(75) IRM 4.19.3.15.11(7) - added, AUR will not address SRP changes in TY 2016, unless the taxpayer response indicates a change to SRP is needed

(76) IRM 4.19.3.16.2(6) - revised instruction for creating an IR and added Exception for ELF payer documents when there is no IR; deleted Note

(77) IRM 4.19.3.16.2(16) a and b - revised to provide instructions for ELF payer documents for which there is no IR; added new b to provide instructions for handling when the TP does not meet all the conditions to claim excess SST

(78) IRM 4.19.3.16.3(8), 2nd bullet - added clarification TP must be within qualifying ages at the end of the tax year

(79) IRM 4.19.3.16.5(6) - added that Paragraph 38 will not generate automatically if there is an amount input in the MANUAL RFNDBLE EDU CREDIT field in the Education Credit window

(80) IRM 4.19.3.17.1(5) - added table for minimum penalty amount, by tax year

(81) IRM 4.19.3.17.3(3) table, Then column, 1st, 2nd and 3rd rows - clarified that ES Penalty is recomputed by IDRS

(82) IRM 4.19.3.17.5(4) - updated Revenue Procedure number

(83) IRM 4.19.3.17.6(5) - revised for OUO information

(84) IRM 4.19.3.20.1(1) - added new guidance to thoroughly research the entire case to identify and resolve all the conditions and issues which caused the case to be built into BT 84

(85) IRM 4.19.3.20.1(4) – added new Reminder for TC 971 AC 501 and AC 506

(86) IRM 4.19.3.20.1(4) table, Then column, 3rd row, step 2 and following paragraphs - added example to clarify that a police report can be any law enforcement incident report

(87) IRM 4.19.3.20.1(5) Note – revised for clarity

(88) IRM 4.19.3.20.1(5) table, Then column, 1st row – removed instructions to research to determine whether the AC is current or expired

(89) IRM 4.19.3.20.1(5) table, If column, 2nd row – revised to add literal UNWORK and added Note to deal with claims made prior to April 3, 2017

(90) IRM 4.19.3.20.1(5) table, Then column, 3rd row – revised instruction to remove the requirement to request IDT documentation other than Form 14039/a police report and added Note for AMS research

(91) IRM 4.19.3.20.1(5) table, If column, 6th row – removed reference to IRM 25.23.2

(92) IRM 4.19.3.20.1(5) table, If column, 8th row – deleted Note

(93) IRM 4.19.3.20.1(5) table, 9th row – new to add If and Then instructions for AC 506 on the AUR tax year

(94) IRM 4.19.3.20.1(5) table, If column, 11th row – deleted Note

(95) IRM 4.19.3.20.1(5) table, If column, 12th row – deleted Note

(96) IRM 4.19.3.20.1(6) - added AC literal UNWORK

(97) IRM 4.19.3.20.1(6) f - added "-A" to list of new Freeze Code transactions

(98) IRM 4.19.3.20.1(16) - revised for OUO information

(99) IRM 4.19.3.20.1(17) - revised for OUO information

(100) IRM 4.19.3.20.1(19) - new, to provide procedures for notices issued for questionable O/C SSTAX

(101) IRM 4.19.3.21.1(8) - new instruction for when a TP indicates receipt of an AUR notice/letter and there is no record on AUR

(102) IRM 4.19.3.21.1.2(4) and (5) - moved from (5) to (4) interest can be abated if there is an IRS computational error and deleted example in (5)

(103) IRM 4.19.3.21.1.6(1) Exception - deleted Exception regarding Recon address changes on AUR

(104) IRM 4.19.3.21.1.6(3) d Note - changed the Note to a Caution and added instruction to change address on a closed AUR case on both the AUR system and on IDRS, if taking another account action; if not taking an account action, advise TP to submit Form 8822 to change their address

(105) IRM 4.19.3.21.1.8(1) - added Recon information to table

(106) IRM 4.19.3.21.1.8.1.1(1) Caution - revised wording to do not use Universal Work for cases in BT 89004, 89005 and 89006

(107) IRM 4.19.3.21.1.8.1.1(2) - added Exception for deceased non-petitioning spouse cases

(108) IRM 4.19.3.21.1.8.1.1(3) - new, for handling deceased NPS cases

(109) IRM 4.19.3.21.1.8.1.1(4) 2nd Note - revised timeframe for MFT 31 account to be established to 3 – 4 weeks, generally

(110) IRM 4.19.3.21.1.8.1.1(6), step 2 - revised for clarity

(111) IRM 4.19.3.21.1.8.1.1(7), step 2 - revised for clarity

(112) IRM 4.19.3.21.1.8.1.1(11) - added Caution to use IPC S8 to refile cases to BT 89006

(113) IRM 4.19.3.21.1.8.1.1(13) - deleted Note regarding agreed and default assessments

(114) IRM 4.19.3.21.1.8.1.1(16) - revised to include no change closure procedures for MFT 31 and for AUR

(115) IRM 4.19.3.21.1.8.1.1(17) - new instructions for assessment of NPS cases on MFT 30 and MFT 31

(116) IRM 4.19.3.21.1.8.1.1(18) - new instructions for closing default NPS cases on AUR and forwarding the file to Appeals

(117) IRM 4.19.3.21.1.8.1.1(19) - new instructions for closing agreed NPS cases on AUR and forwarding the file to Appeals

(118) IRM 4.19.3.21.1.9(4) step 3 - revised instruction to correct information and paragraph numbers

(119) IRM 4.19.3.21.1.9(5) step 2 - revised instruction to correct information and paragraph numbers

(120) IRM 4.19.3.21.1.9(6) - deleted (6) and renumbered the remainder of the subsection

(121) IRM 4.19.3.21.1.10.2(1) - added instruction for obtaining the correct Insolvency contact number

(122) IRM 4.19.3.21.1.10.2(6) a - corrected process codes, added letter information, revised and clarified amount; also revised for OUO information

(123) IRM 4.19.3.21.1.10.2(6) b - revised and clarified amount

(124) IRM 4.19.3.21.1.10.2(c) Note - added TC 690

(125) IRM 4.19.3.21.1.10.2(7) a - revised and clarified amount

(126) IRM 4.19.3.21.1.10.2(8) - revised to provide additional information for contact with Insolvency

(127) IRM 4.19.3.21.1.10.2(9) - added instruction for establishing 31 modules

(128) IRM 4.19.3.21.1.10.2(10) - added instruction to input TC 971 AC 110

(129) IRM 4.19.3.21.1.10.2(11) - added instructions to move payments from MFT 30 to MFT 31 modules

(130) IRM 4.19.3.21.1.10.2(12) - added instruction to input the adjustment using the IAT "REQ54" tool when assessment is needed

(131) IRM 4.19.3.21.1.10.2(15) Note - revised and clarified amount

(132) IRM 4.19.3.21.1.10.2(16) b - revised and clarified amount

(133) IRM 4.19.3.21.1.10.2(27) - added Additional Medicare Tax on wages or RRTA compensation and SRP

(134) IRM 4.19.3.21.1.10.2(30) and step 1 - added Additional Medicare Tax on wages or RRTA compensation

(135) IRM 4.19.3.21.1.10.2(31) - new to address SRP

(136) IRM 4.19.3.21.1.10.2(32) - new, instruction for PC to use when a partial assessment for non-statutory items was previously input and case is being closed, not placed into suspense

(137) IRM 4.19.3.21.1.18(1) - revised for OUO information

(138) IRM 4.19.3.21.1.18.1 - complete revision of the sub-section, including OUO information,and added instructions for assessment

(139) IRM 4.19.3.21.1.18.1(13) - revised to include instruction to cross reference payments to the secondary TP’s MFT 31 account

(140) IRM 4.19.3.21.1.19(7) table, last row, Then column - revised instruction to refer the case to Exam for technical advice

(141) IRM 4.19.3.21.1.20.1(3) - added Exception for cases containing Form 8857 and Form 14039

(142) IRM 4.19.3.21.1.20.2 - rewrote subsection

(143) IRM 4.19.3.21.1.21(2) step 4 - corrected paragraph to be included on letter

(144) IRM 4.19.3.21.1.22(3) bullets - deleted 2nd bullet and moved information to a Note in the 1st bullet

(145) IRM 4.19.3.21.1.25 - moved RPM sub-section and clarified instruction

(146) IRM 4.19.3.21.1.26 - sub-section re-written to include new IDT procedures

(147) IRM 4.19.3.21.1.26.1 - sub-section re-written to include new IDT procedures

(148) IRM 4.19.3.21.1.26.2 - new sub-section for telephones, to include new IDT procedures

(149) IRM 4.19.3.21.1.26.3 - sub-section re-written to include new IDT procedures

(150) IRM 4.19.3.21.1.26.4(1) a Note and b Note - deleted Note in a and revised Note in b to coordinate with IS Coordinator to ensure CCISO is advised of IDT determination

(151) IRM 4.19.3.21.1.26.4(2) step list - revised for clarity and deleted step 5

(152) IRM 4.19.3.21.1.26.4(3) Exception - revised for clarity

(153) IRM 4.19.3.21.1.26.4(4) - revised step list for clarity, to remove instruction to input IPC 9R and to include new IDT procedures

(154) IRM 4.19.3.21.1.26.4(6) step 3 - revised instruction to input IPC SI

(155) IRM 4.19.3.21.1.26.4(7) table, If Column, 3rd rown - added RPM

(156) IRM 4.19.3.21.1.26.4(9) and Note - revised, IDTVA has 120 days to complete processing unless they contact AUR for an extension; added table to clarify which PC/IPC to use and revised Note to remove IPC 9R

(157) IRM 4.19.3.21.1.26.4(12) and Note - added alpha list for correct PC to use; revised Note to coordinate with IS Coordinator to ensure CCISO is advised of IDT determination and added Caution to hold case for 2 weeks before input of PC 17, when IDTVA notification is received there is a payment on the account

(158) IRM 4.19.3.21.1.27(2) and (3) - deleted (3) and added to (2) as an Exception for telephones

(159) IRM 4.19.3.21.2(1) - added Note that telephone assistors may provide information from written response instructions during a call, in lieu of sending a letter

(160) IRM 4.19.3.21.2(2) 1st bullet - removed transfer number for W&I; AUR telephone assistors will use one number to transfer to a bilingual assistor, also deleted the last 2 bullets and the Note following the last bullet

(161) IRM 4.19.3.21.2.2(3) 2nd bullet - revised to request first and last name and added Note for situation when the TP is not able to answer verify all items

(162) IRM 4.19.3.21.2.2(4) - revised for clarity and add account related systems may be used to verify at least 2 items

(163) IRM 4.19.3.21.2.2(5) - removed reference to IRM 25.25

(164) IRM 4.19.3.21.2.2(7) - revised for clarity and correctness

(165) IRM 4.19.3.21.2.2.1(1) - added Note other account related systems may be used is information is not available on the Disclosure Verify screen

(166) IRM 4.19.3.21.2.2.1(3) Note - deleted existing Note regarding the CAF number and added Note explaining the new "BATCH" box, which displays the current batch type, allowing the case to be identified as open or closed, without accessing the case

(167) IRM 4.19.3.21.2.2.1(4) Caution and step 2 - deleted Caution and revised step 2 to verify first and last name

(168) IRM 4.19.3.21.2.2.1(4) step 5 - revised to verify Authorized Third Party name and POA’s name and address

(169) IRM 4.19.3.21.2.2.1(5) - new reference to Disclosure sub-section if there is a need to verify additional information

(170) IRM 4.19.3.21.2.2.1(6) - new, to click "High Risk" box when appropriate

(171) IRM 4.19.3.21.2.2.2(1) c and Note - revised c for clarification and Note to clarify a copy of case contents can be provided if enforcement is not impaired

(172) IRM 4.19.3.21.2.3(1) table, Transfer number column, 6th row - added Note to transfer call to ACS W&I, if the return was processed by a W&I campus, and to ACS SBSE, if the return was processed by an SBSE campus

(173) IRM 4.19.3.21.2.4(9) and steps 3 and 4 - reordered numbered items; in step 3 corrected toll-free number and added instruction to provide toll-free numbers if TP wishes to call; in step 4 corrected both numbers

(174) IRM 4.19.3.21.2.4(16) – new, to refer to instructions for apparent fraudulent AUR notices/letters

(175) IRM 4.19.3.21.2.4(21) - new, for telephone requests for the payer address

(176) IRM 4.19.3.21.2.5(4) table, 3rd and last rows, Then column - removed walk in office example

(177) IRM 4.19.3.21.2.5(4) - new, to provide criteria for accepting faxed documents to close cases no change or fully agreed, using Universal Work, subsequent sections were renumbered

(178) IRM 4.19.3.21.2.5(5) step 3 - added Note that telephone assistors may request that the TP respond in writing if a recomputed notice is needed and a recalculation of PTC is required

(179) IRM 4.19.3.21.2.5(5) - new, to provide procedures for accepting faxed documents to close cases no change or fully agreed, using Universal Work, subsequent subsection renumbered

(180) IRM 4.19.3.21.2.5(6) - revised instruction to clarify these procedures apply when a paper document or fax is required and the case does not meet criteria in new (4)

(181) IRM 4.19.3.21.2.5(6) table, Then column, 4th row Note - instructions specific to the Philadelphia Call Site

(182) IRM 4.19.3.21.2.5(12) - revised instruction to clarify these procedures apply when the case does not meet the criteria in the new (4) but information is provided to close the case no change

(183) IRM 4.19.3.21.2.5(14) - added clarification for appropriate checking of the action required box

(184) IRM 4.19.3.21.3.1(4) - added clarification

(185) IRM 4.19.3.21.3.6 - added Exception for references to Rev. Proc. 2016-47

(186) IRM 4.19.3.21.3.12(2) - changed alpha list to table and added guidance if TP provides and LSE worksheet

(187) IRM 4.19.3.21.3.13(3) e - added new response instructions for some MERCH IRs

(188) IRM 4.19.3.21.3.13(3) h - added clarification

(189) IRM 4.19.3.21.3.14(3) c - added clarification

(190) IRM 4.19.3.21.3.14(3) d - added instructions regarding Olympians/Paralympians

(191) IRM 4.19.3.21.3.16(4) - new guidance for when taxpayer indicates amount is not taxable

(192) IRM 4.19.3.21.3.19(2) - new, to provide instructions when the expenses are less than the gross distribution; renumbered remainder of subsection

(193) IRM 4.19.3.21.3.22(5) d - revised for clarity

(194) IRM 4.19.3.21.3.23(1) b - revised Special Paragraph example verbiage to include request to mail Form SS-8 and advise taxpayer we can’t accept a faxed form

(195) IRM 4.19.3.21.4(4) - removed PCs 39, 69 and 89 from the list of PCs which automatically generate a TC 290-0

(196) IRM 4.19.3.21.5(1) c - deleted instruction that signature under the third party authorization can be accepted as an agreed response if the "I agree with all changes" box is checked

(197) IRM 4.19.3.21.5.1(1) Caution - revised wording to do not use Universal Work for cases in BT 89004, 89005 and 89006

(198) IRM 4.19.3.21.5.1(1) - revised instructions for when MFT 31 modules must be established; deleted the Exception

(199) IRM 4.19.3.21.5.1(2) - revised instruction and incorporated information previously in (4) regarding updating addresses

(200) IRM 4.19.3.21.5.1(2) steps 6 and 7 - revised instructions for handling case when both signatures are received but do not have the same received date

(201) IRM 4.19.3.21.5.1(3) - revised instruction and incorporated information previously in (5) regarding sending additional correspondence, a recomputed notice or Stat notice; also revised table to remove instructions for when an assessment is necessary

(202) IRM 4.19.3.21.5.1(3) - revised instructions for cases when both signatures are received

(203) IRM 4.19.3.21.5.1(4) - new, to include guidance for determining when a secondary SSN is invalid and actions to take

(204) IRM 4.19.3.21.5.1(5) and 2nd Note - moved information previously in (2) to (5) and revised timeframe for MFT 31 account to be established to 3 – 4 weeks, generally

(205) IRM 4.19.3.21.5.1(6) and step 4 - moved information previously in (3) to (6) and revised to input spouse’s SSN in the XREF-TIN field

(206) IRM 4.19.3.21.5.1(8) - new, added assessment procedures for MFT 30 and MFT 31

(207) IRM 4.19.3.21.5.1(9) - new, added procedures for when it is determined MFT 31 accounts have been created that should not have been

(208) IRM 4.19.3.21.5.1(9) 1st table, Then column, 1st row, step 6 - revised Remarks

(209) IRM 4.19.3.21.5.1(9) 1st table, Then column, 2nd row - reordered input/select items to match IAT screen

(210) IRM 4.19.3.21.5.1(9) 2nd table, 1st row - deleted entire row

(211) IRM 4.19.3.21.5.1(9) 2nd table, Then column, new 1st row - deleted Note and added that information to step 1

(212) IRM 4.19.3.21.5.1(10) - new instructions regarding moving payments from MFT 30

(213) IRM 4.19.3.21.5.1(10) - revised examples provided to determine MFT 31 modules should not have been established

(214) IRM 4.19.3.21.5.1(11) - revised to include instruction to cross reference payments to the secondary TP’s MFT 31 account

(215) IRM 4.19.3.21.7.4(3) table To column, 1st row - added Caution both signatures are needed for a MFJ request

(216) IRM 4.19.3.21.7.4(5) - new instruction for referral of petition for U.S. Tax Court, received with a response

(217) IRM 4.19.3.21.7.5(2) – new Caution to generate Letter 2625C for the secondary TP on FS 2 cases using the IAT "Letters" tool, not through the AUR system

(218) IRM 4.19.3.21.7.5(2)b – new Reminder that manually completed Forms 12175 should be routed to the designated Third Party Coordinator weekly

(219) IRM 4.19.3.21.7.5(4) – revised instruction to include research when the TP disclaims knowledge of income/payer or disputes income amount and included in new Reminder instruction not to send Letter 2625C to the Social Security Administration

(220) IRM 4.19.3.21.7.5(5) – revised instruction/table for appropriate TP contact letter

(221) IRM 4.19.3.21.7.5(5) Caution - revised to include reference for preparing separate letters

(222) IRM 4.19.3.21.7.5(6) – new instruction for payer contacts for FS 1, 3, 4 and FS 2 cases when the disputed income belongs to the primary TP

(223) IRM 4.19.3.21.7.5(7) – new instruction for payer contacts for FS 2 cases when the disputed income belongs to the secondary TP

(224) IRM 4.19.3.21.10(4) - removed PC 89 from the list of PCs that AUR uploads all data items necessary for an automatic assessment and removed PCs 39 and 69 from the list of PCs which automatically generate a TC 290-0

(225) IRM 4.19.3.21.10(4) 12th bullet - added PC 89 to the list of PCs that a tax examiner verifies/inputs data items in the Assessment window to create an automatic assessment

(226) IRM 4.19.3.21.10.2(2) - added Note to input/verify the tax on the AUR assessment

(227) IRM 4.19.3.21.10.2(2) step 3 - added Note that indicated items will be included on the IDRS adjustment

(228) IRM 4.19.3.21.10.2(3) - added step 6 to include Posting Delay Code 1

(229) IRM 4.19.3.21.10.2.1 - new sub-section to provide instructions for over eight reference code assessments when PCs 67, 87 or 90 are used

(230) IRM 4.19.3.22.2(12) - added Exception for cases with a posted TC 788

(231) IRM 4.19.3.24.10(1) and steps - revised instruction to use IAT "Letter" tool to issue letters on Employee cases; revised step list to reflect use of IAT; renumbered step list and included the information previously in (2) and (3)

(232) IRM 4.19.3.24.10(2) and (3) - deleted (2) and (3)

(233) IRM 4.19.3.25(3) - added example to clarify that a police report can be any law enforcement incident report and revised to include claims of return preparer misconduct

(234) IRM 4.19.3.25(4) - added example to clarify that a police report can be any law enforcement incident report

(235) IRM 4.19.3.25(5) – new to provide instructions for Recon response claims of return preparer misconduct that do not include Form 14157 and/or Form 14157-A

(236) IRM 4.19.3.25.2(3) a and b - added BT 88

(237) IRM 4.19.3.25.2(4) - corrected instruction, Recons must be controlled within 10 days of receipt

(238) IRM 4.19.3.25.2.1 - added BT 88 to title of the subsection

(239) IRM 4.19.3.25.2.1(1) - added BT 88

(240) IRM 4.19.3.25.2.1(3) - new, to define BT 88

(241) IRM 4.19.3.25.2.1(3) - corrected batch status information to "RB"

(242) IRM 4.19.3.25.2.1(4) - added BT 88

(243) IRM 4.19.3.25.2.1(4) table – revised the definition of IPC 9B

(244) IRM 4.19.3.25.3(7) 6th bullet - revised wording

(245) IRM 4.19.3.25.4(3) - added Appeals requests to routing of non-AUR issues

(246) IRM 4.19.3.25.5(7) – revised wording to clarify the request for reconsideration of the AUR assessment can be considered, but actual refunds or credits may be not be allowable depending on when payments were made or offsets applied

(247) IRM 4.19.3.25.5(11) table, Then column, 6th row - revised instruction to see (12) below

(248) IRM 4.19.3.25.5(12) step 1 Note - revised for clarity

(249) IRM 4.19.3.25.5.2(1) step 5 - added Exception for cases when the Form 1040X or amended return matches the AUR tax change

(250) IRM 4.19.3.25.5.4(1) - added Exception; beginning with TY 2016 Recon Issue Codes will no longer be displayed or selected

(251) IRM 4.19.3.25.5.7(1) step 2 - revised instruction to remove requirement to input Recon Issue Code 12

(252) Exhibit 4.19.3-1 - revised for corrections and additions

(253) Exhibit 4.19.3-2 - added explanatory paragraph

(254) Exhibit 4.19.3-5 - added new BT 88, batch segments, associated RECON issue codes and definitions

(255) Exhibit 4.19.3-5 BATCH TYPE 88 - corrected batch status information to "RB"

(256) Exhibit 4.19.3-7 - select Paragraphs were revised to reflect TY 2016 information and some were revised for clarity

(257) Exhibit 4.19.3-7 - Paragraph 199 was removed

(258) Exhibit 4.19.3-16 - Revised identity theft Action Code descriptions, per changes to IRM 25.23.2

(259) Exhibit 4.19.3-17 - Revised identity theft Action Code literal descriptions, per changes to identity theft general case processing

(260) Exhibit 4.19.3-18 table, Literals column, 1st row - add "SCH"

Effect on Other Documents

IRM 4.19.3, effective 09/30/2017, for Tax Years 2016, 2015 and 2014 supersedes IRM 4.19.3 effective 09/30/2016 for Tax Years 2015, 2014 and 2013. The following IRM Procedural Updates are incorporated: 16U0327 (dated 02/12/2016), 16U0891 (dated 05-09-2016), 16U0983 (dated 05-26-2016), 16U1356 (dated 09-02-2016), 16U1478 (dated 10-14-2016), 16U1613 (dated 11-02-2016), 16U1779 (dated 12-20-2016), 17U0389 (dated 02-28-2017), 17U0874 (dated 05-19-2017), 17U0960 (dated 06-06-2017), 17U0992 (dated 06-09-20170), 17U1153 (dated 07-17-2017) and 17U1194 (dated 7-28-2017)...

Audience

AUR tax examiners at Small Business/Self-Employed sites

Effective Date

(09-30-2017)

Michael W. Damasiewicz
Director, Exam Field and Campus Policy
Small Business Self Employed

Program Scope and Objectives

  1. Purpose. This IRM section describes technical procedures for the Small Business/Self Employed (SB/SE), Individual Master File (IMF) Automated Underreporter Program (AUR). Specifically, IRM 4.19.3:

    1. Includes procedures for analysis and comparison of tax returns to third party information return documents.

    2. Outlines instructions for issuing AUR notices.

    3. Provides guidance for processing taxpayer written and telephone responses.

    4. Includes processes for AUR assessments.

    5. Provides instructions for reconsideration of AUR assessments.

  2. Audience. These procedures apply to all tax examiners who work in SB/SE IMF AUR.

  3. Policy Owner. The IMF AUR Program is under Small Business/Self-Employed Operations, Examination, Field and Campus Policy.

  4. Program Owner. IMF AUR Policy, which is under Examination, Field and Campus Policy, is responsible for providing guidance and procedures to work the IMF AUR Program, for the content of this IRM, and for oversight of the AUR system.

Background

  1. Potential AUR cases are systemically identified through computer matching of tax returns with corresponding Information Returns Master File (IRMF) payer information documents. Cases are selected for inventory in a manner determined to provide overall compliance coverage. Selected cases undergo an in-depth review by a tax examiner to identify underreported and/or overdeducted issues which require further explanation to resolve the discrepancy.

Authority

  1. Chapter 61 of the Internal Revenue Code (Information and Returns), Subchapter A (Records and Returns), Part III (Information Returns), sections 6031 – 6059, contain the requirements for the filing of information returns for income reporting purposes. Rev. Proc. 2005-32 classifies taxpayer contacts to verify a discrepancy between the taxpayer’s tax return and an information return, or between a tax return and information otherwise in the Service’s possession as taxpayer contacts and other actions not considered an examination, inspection or reopening.

Responsibilities

  1. The Director, Exam Field and Campus Policy, Small Business/Self Employed, is the executive responsible for the IMF AUR Program.

  2. The AUR Program Manager, Headquarters Exam Operations, Field and Campus Policy, IMF AUR Policy is responsible for IMF AUR policy and for providing guidance for the AUR Program.

Program Reports

  1. AUR inventory is monitored and managed using a series of specific, detailed reports accessed through the AUR system.

  2. IDRS reports applicable to AUR cases are accessed and monitored through the use of the Control-D reporting system.

Terms

  1. Terms used in this IRM are listed and defined in Exhibit 4.19.3-2, Glossary.

Acronyms

  1. Acronyms used in this IRM are listed and defined in Exhibit 4.19.3-1, Abbreviations.

Overview of IMF Automated Underreporter

  1. This manual provides instructions for Automated Underreporter (AUR), the automated analysis and processing of potential underreported (U/R) and/or over-deducted (O/D) issues identified through information return (IR) matching.

  2. AVOID "AUDITING" RETURNS. All returns in the AUR inventory were previously screened for unallowable items and audit potential. They were not selected for action in either event. See IRM 4.19.3.21.1 (1), Taxpayer Responses - Overview.

  3. Underreporter cases are built from two primary sources:

    • The Individual Master File (IMF) which contains information reported to IRS by TPs

    • The Information Returns Master File (IRMF)

  4. The IMF file contains information reported on:

    • Form 1040, U.S. Individual Income Tax Return

    • Form 1040A, U.S. Individual Income Tax Return

    • Form 1040EZ, Income Tax Return for Single or Joint Filers with No Dependents

  5. The IRMF information is matched with the IMF information to verify the TP reported all income as required. An AUR case results when computer analysis detects a discrepancy between the two data sources. Information in the IRMF file includes, but is not limited to:

    • Form W-2, Wage and Tax Statement

    • Form 1099-INT, Interest Income

    • Form 1099-DIV, Dividends and Distributions

  6. The information documents in the Form W-2 series (and Form 1099 if tax was withheld) should be attached to the tax return when it is filed.

  7. Taxpayers need not attach information documents in the Form 1099 (unless tax was withheld as noted above), Schedule K-1, Form 1098, and Form 5498 series to the return when it is filed.

  8. Discrepant cases are then categorized by type (wage, dividend, interest discrepancy, etc.) and underreported range (i.e., $200-499.99 tax change). These categories provide a logical system of criteria to select cases from the available inventory.

  9. After cases are selected from the inventory, they are worked according to procedures in this IRM.

  10. AUR Operations at seven campuses compile and control selected cases.

    1. Enterprise Computing Center at Martinsburg (ECC-MTB) sends tape information from the IRMF, Return Transaction File (RTF), Taxpayer Information File (TIF), and Payer Agent file. See IRM 4.19.3.6, Payer Agent, for additional information on the Payer Agent file. This information downloads to the AUR system.

      Note:

      Data from the TIF and Payer Agent file is updated weekly.

    2. A computer tape containing Form 4251, Return Charge-Out, data prints on a Campus printer. Each Form 4251 contains a social security number (SSN), tax year, and other case identification information, represented in a bar code and numeric format.

      Note:

      A Form 4251 will not be printed for Electronically Filed Returns (ELF) or Form 1040EZ (EZ).

    3. Federal Records Center (FRC) pulls and forwards returns to the Campus Files function for routing to Underreporter.

    4. Returns are controlled into the AUR system by scanning the bar code.

    Note:

    Electronically Filed Returns/Form 1040EZ (ELF/EZ) are considered virtual cases and are systemically built into screening batches.

  11. Tax examiners perform an in-depth analysis of each case and determine if the discrepant income or deduction(s) in question are satisfactorily identified or addressed on the tax return. If so, they close the case. If reasonable doubt remains, they send the TP either:

    • An AUR Notice, CP 2000 or

    • An Initial Contact Letter, CP 2501

    Note:

    The system auto generates CP 2000 Notices for select income categories.

  12. Process codes (PC) are used to provide an audit trail for AUR case processing. Integrated Data Retrieval System (IDRS) reflects PCs as pending actions until they post to the Master File.

    1. PC 0X (except 09) is computer generated to designate how and by which organization the case has been selected. PC 09 establishes an IDRS control base and reflects CP 2000 interest as pending.

    2. PC 20 adjusts Withholding (W/H), Excess Social Security/Railroad Retirement Tax (SSTAX) and Additional Medicare Tax withheld (MCTXW) only. A Letter 2893C is sent to advise the TP, as outlined in IRM 4.19.3.16.1.2, Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous.

    3. PC 30 establishes an IDRS control base whenever a CP 2501 is generated.

    4. PC 55 updates an IDRS control base when a CP 2000 is generated. An amended CP 2000 Notice also updates the existing IDRS control base.

    5. PC 75 and 77 updates the IDRS control base when a Statutory Notice of Deficiency (A CP 3219A and Form 5564, Notice of Deficiency - Waiver) is issued/generated.

    6. Other PCs are input during AUR processing. Select pc looKup in the Analysis Menu from the Case Analysis Screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Process Codes (PC).

  13. Internal process codes (IPC) are codes used in AUR processing and do not post to IDRS. See Exhibit 4.19.3-3, AUR Internal Process Codes.

  14. See Exhibit 4.19.3-1, Abbreviations (also see Glossary) and Exhibit 4.19.3-2, Glossary, for a list of abbreviations and definitions used in AUR processing.

  15. See Exhibit 4.19.3-12, Titles of Forms and Schedules, for a complete list of Forms and their titles.

Taxpayer Advocate Service (TAS)

  1. Even though the IRS strives to improve its systems and provide better service, some TPs still have difficulty in getting solutions to their problems or appropriate responses to their inquiries. The purpose of the Taxpayer Advocate Service (TAS) is to give TPs someone to speak for them within the Service - an Advocate. TAS is an independent organization within the IRS whose employees assist TPs who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

  2. Refer TPs to the Taxpayer Advocate Service (TAS) (see IRM Part 13, Taxpayer Advocate Service) when the contact meets TAS criteria (see IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria) and you cannot resolve the TP's issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve within 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the TP's issues. Do not refer these cases to TAS unless they meet TAS criteria and the TP asks to be transferred to TAS. Refer to IRM 13.1.7.4, Same Day Resolution by Operations. 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. In addition provide the TP with the number for the National Taxpayer Advocate (NTA) toll-free line, 1-877-777-4778 or TDY/TDD 1-800-829-4059 and advise the TP that TAS is available if they are not satisfied with the service he or she received.

    Note:

    It is important that all IRS employees handle cases with the TP's best interest in mind.

Taxpayer Rights Background and Importance of the Statutory Notice of Deficiency
  1. Taxpayers have the right to appeal an IRS decision in an independent forum. Taxpayers generally have the right to take their cases to court. Taxpayers also have the right to be informed. That is, they are entitled to clear explanations. Because the right to petition the U.S. Tax Court is a critical entitlement for TPs, it is important that employees understand and educate TPs about the foundation and impact of this right on TPs and the IRS.

  2. A Notice of Deficiency (NOD), also called a Statutory Notice of Deficiency (Stat), SNOD or "90-Day Letter," is the legal notice in which the Commissioner determines the TP’s tax deficiency. IRC 6212, IRC 6213, IRC 6214, and IRC 6215 require that the IRS issue a Stat before assessing additional income tax, estate tax, gift tax, and certain excise taxes unless the TP agrees to the additional assessment. The Stat is a legal determination that is presumptively correct and consists of the following:

    1. A letter explaining the purpose of the notice, the amount of the deficiency, and the TP’s options.

    2. A waiver to allow the TP to agree to the additional tax liability.

    3. A statement showing how the deficiency was computed.

    4. An explanation of the adjustments.

  3. The purpose of the Stat is to:

    1. Ensure the TP is formally notified of the IRS’ intention to assess a tax deficiency.

    2. Inform the TP of the opportunity and right to petition the U.S. Tax Court to dispute the proposed adjustments.

  4. A Stat is issued for unagreed deficiencies of income, estate, or gift tax liabilities as well as for certain excise taxes.

  5. The Stat must provide the TP with notice of the Commissioner’s basis for determining the proposed deficiency.

  6. IRC 6212 requires that the IRS issue this notice to the TP’s last known address by certified or registered mail. Once the IRS issues this notice, the TP has 90 days (150 days if the Stat is addressed to a person outside the United States) from the date the Stat is mailed to file a petition in the U.S. Tax court. This 90-day (or 150 day) period is statutory and IRS employees cannot extend it.

  7. If the TP does not petition the U.S. Tax Court within the 90 days (or 150 days), the IRS is permitted to assess the deficiency, plus any additions to tax, after the 90 days (or 150 days) have passed. Although the IRS does permit reconsideration of examination assessments in some situations, the TP loses significant administrative and judicial avenues to dispute the IRS’ decision if he/she does not file a petition. Therefore, it is critical that IRS employees understand the importance of the Stat and be able to explain its ramifications to TPs. The U. S. Tax Court website (www.ustaxcourt.gov) provides substantial information on the petition process.

  8. If the TP does petition the U. S. Tax Court within the 90 days (or 150 days), the IRS is prohibited from making the assessment until after the court enters a decision. Once the TP petitions, the IRS will usually send the case to Appeals to try to settle the case prior to the U.S. Tax Court hearing date unless the TP has already been through the IRS’ administrative appeal process.

Statute Awareness Program

  1. The Statute Awareness Program was created to minimize barred assessments and erroneous abatements. Because of the time involved in the processing of AUR issues, AUR employees must be particularly watchful for conditions that may indicate statute imminent cases.

  2. If the case is Statute imminent take the appropriate actions to prevent a barred assessment. If the case is identified during a phone call and the case belongs to another site, notify the Site immediately of the imminent statute (i.e., phone call, email, fax statute referral, etc.).

  3. Although the system generates the Statute Listing on a weekly basis to alert management to statutes in danger of expiring, employees must be personally knowledgeable of the rules that govern the assessment statute expiration date (ASED). These rules are outlined in IRM 25.6, Statute of Limitations.

    Note:

    The ASED can be found in the STATUTE EXP DATE field on the Tax Account screen, but the date should be verified.

  4. Each functional area should ensure that an adequate number of "Statute Specialists" are assigned.

Related IRMs and Publications

  1. Before disclosing any tax information, you must be sure you are speaking with the TP or authorized representative. See the Taxpayer Authentication guidelines in IRM 21.1.3.2.3, Required Taxpayer Authentication and IRM 21.1.3.2, General Disclosure Guidelines, for further information.

    • See IRM 11.3.2.6.1, Leaving Information on Answering Machine/Voice Mail, for proper disclosure protocols before leaving messages on a TP's answering machine.

    • See IRM 11.3.1.11, Facsimile Transmission of Tax Information, for proper disclosure protocols before faxing confidential information to the TP.

  2. The following additional IRMs and publications/documents are listed as a convenience when AUR determines that in-depth research is required to resolve unusual technical issues not covered in AUR instructions, Form 1040 instructions and various publications. When reference to one of the related IRMs is required for AUR processing, the complete IRM reference is stated in this IRM.

    Note:

    Technical issues that occur frequently should be brought to the attention of the IRM 4.19.3, IMF Automated Underreporter, author for consideration for inclusion in this IRM.

    • IRM 2.3, IDRS Terminal Responses

    • IRM 2.4, IDRS Terminal Input

    • IRM 3.13.62, Media Transport and Control

    • IRM 4.13.1, Audit Reconsiderations, Introduction

    • IRM 4.19.2, IMF Automated Underreporter (AUR) Control

    • IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures

    • IRM 5.9, Bankruptcy and Other Insolvencies

    • IRM 8.20.6, Account and Processing Support (APS). Interim Actions

    • IRM 8.20.7, Account and Processing Support (APS). Closing Procedures

    • IRM 10.5, Privacy and Information Protection

    • IRM 11.3, Disclosure of Official Information

    • IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria

    • IRM 20.1, Penalty Handbook

    • IRM 20.2, Interest

    • IRM 21.1.1, Accounts Management and Compliance Services Overview

    • IRM 21.1.3.18, Taxpayer Advocate Service (TAS) Guidelines

    • IRM 21.3.3, Incoming and Outgoing Correspondence/Letters

    • IRM 21.4.4, Manual Refunds

    • IRM 21.5, Account Resolution

    • IRM 21.6, Individual Tax Returns

    • IRM 25.15, Relief from Joint and Several Liability

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

    • Document 6209, IRS Processing Codes and Information

AUR Security

  1. The AUR system design protects both TP data and the individual AUR users. ALL users are responsible for protecting TP information. Users should access ONLY the data needed to perform their duties, and not divulge TP information to any employee who does not have an official "need to know" . Users will report infractions to their managers immediately.

Electronic Filing System

  1. Returns are filed electronically by electronic transmitters or from a home computer through a third party vendor (On-Line Filing). Initially individual electronic returns were transmitted to Andover (ANSC), Atlanta (ATSC), Austin (AUSC), Brookhaven (BSC), Cincinnati (CSC), Fresno (FSC), Kansas City (KCSC), Memphis (MSC), Ogden (OSC) and Philadelphia (PSC) Submission Processing Centers and Enterprise Computing Center - Memphis (ECC-MEM). Individual electronic returns are now transmitted to ANSC, AUSC, FSC, KCSC, PSC and ECC-MEM.

  2. All electronically transmitted returns are identified by a unique document locator number (DLN). The file location codes (FLC) shown below are for the electronic filing of individual income tax returns. The second number listed is the rollover FLC used when a site exhausts the regular FLC for a given processing date.

    Note:

    FLC information for electronically filed returns for TY 2013 and prior, is located in Document 6209, Sub Section 4.3, Campus and File Location Codes.

    • ANSC - 16; 14

    • AUSC - 76; 75; 21 for U.S. Possessions; 20 for International returns

    • FSC - 80; 90

    • KCSC - 70; 79

    • PSC - 30; 32

    • ECC-MEM - 72; 64

      Note:

      The system will not allow a user to order a transaction code (TC) 150 document with the above FLC codes.

  3. The TRPRT print is not considered the original return and is labeled "TRPRT PRINT DO NOT PROCESS" .

  4. Information such as loose forms, schedules, and correspondence CANNOT be attached to an ELF return. Do not use an attachment or association form.

  5. TRDB has a new Tab option: "Dotted…" . Dotted line literals are only available, on tax returns filed via Modernized e-File (MeF). MeF returns can be identified by a DLN Julian Date greater than 400. A TRDB screen, "Dotted…" tab display, with no entries, indicates either:

    1. The return was not filed via MeF (DLN Julian Date less than 400) or

    2. The MeF filed return included no dotted line literals

    Note:

    For a complete list of dotted line literals see Exhibit 4.19.3-18, Form 1040 Dotted Line Literals.

  6. TRDB has a new Tab option: "Attach" . When the user accesses the new "Attach" tab, each statement/attachment the TP electronically filed will be listed. There is no standard list of names/titles for the TP to use so the statement/attachment will be listed by the file name the TP used.

  7. No change PCs 15, 47, 48, 51, 52, 70, 71, 72, 73, 91, 92 and 93 automatically generate a TC 290-0 for electronically filed returns with a "Y" in the SOURCE DOCUMENT ATTACHED? field in the Assessment window.

    Caution:

    If there is no information (loose forms, schedules or correspondence) to be associated with the refile DLN, enter an "N" in the SOURCE DOC field in the Process Code window.

Integrated Automation Technologies (IAT)

  1. Automated Underreporter employees are mandated to use the Integrated Automation Technologies (IAT) tools. When an action must be taken on IDRS (unable to complete the action within the AUR system) and an IAT tool is available, AUR employees with access to IAT tools are required to complete the action using the IAT tool. The IAT tools assist the tax examiner with IDRS research and input. See Exhibit 4.19.3-20, Mandated IAT Tools, for a list of mandated IAT tools.

    Note:

    See Exhibit 4.19.3-21, Additional IAT Tools Available (Use Not Mandated), for additional IAT tools.

  2. If an IAT tool is not functioning properly, the case should be worked using IDRS. For more information on each tool see http://iat.web.irs.gov/.

Controlling Work

  1. Underreporter cases to be analyzed by AUR tax examiners are assembled into batches, which are then divided into work units. See Exhibit 4.19.3-5, Batch Types. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures for the following windows used to control cases:

    • Assign Work Unit window

    • Release Work Unit window

    • Transfer Work Unit window

    • Accept Transfer window

    • Assign Case window

    • Release Batch window

    • Transfer Case window

    • Request Case window

    • Universal Work window

Viewing Cases

  1. Each user may have clearance to view any case on the system. This function is necessary for any user answering TP phone inquiries.

  2. To view any case take the following actions:

    1. Select the appropriate Tax Year from the AUR Year menu.

    2. Select reView from the AUR Main menu.

    3. Select View case from the Review menu.

    4. Input the SSN to be viewed.

    5. Click on the PHONE CONTACT field if viewing the case due to a TP phone contact. The AUR program will extract telephone contact data based on this entry.

  3. The only entries that can be updated on the cases are:

    • Telephone number and contact hours on the Tax Account screen

    • Case notes on the Case Note window

    • Update address

    • Update third party contact

    • Update power of attorney (POA)

    • Action Required (Universal case) box

      Note:

      Any other changes will not save to the database.

  4. The Print menu option may be accessed when the user selects View Case from the Review menu.

Lost Cases

  1. When an SSN is assigned to a batch, and the corresponding paper case is missing, the case is considered a "lost case" .

  2. When a lost case is identified:

    1. Select the Process Code window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Process Code Menu.

    2. Input IPC LC (Lost Case).

      Caution:

      If the work unit contains both copies of Form 4251, it is not a lost case. Input IPC "0A" (Return Request).

    3. The AUR system moves the SSN to Batch Type (BT) 98XXX (immediately).

  3. If the missing case is:

    1. A Form 1040EZ, use the Form 1040EZ information at the bottom of the Case Analysis screen to work the case.

    2. An ELF return, see IRM 4.19.3.2.5, Electronic Filing System.

      Note:

      The system will not allow a user to input IPC LC when the case is a Virtual return. If there is no TRDB information for a case, see your Lead.

  4. Some cases are found to be missing after the work unit has been released by the tax examiner and is being disassembled by the Control Function. The Control Function notates "Lost Case" on a case transfer sheet and routes the case transfer sheet to the Lead. The Lead contacts the tax examiner who released the case.

    1. If the case is found, the tax examiner accepts and reworks the case on the system.

    2. If the case is not found, the tax examiner accepts and attempts to rework the case on the system, using a substitute Form 4251. If the case file contents are necessary to work the case, input IPC LC on the Process Code window and discard the case history/transfer sheet.

      Note:

      In an effort to eliminate unnecessary paper inventory, substitute charge outs should only be printed if absolutely necessary.

Wrong Pulls in Screening (WP)

  1. If the original tax return DLN and the Form 4251 DLN do not match:

    1. Leave the Form 4251 attached to the return.

    2. Input IPC "WP" and notate "WP" on the Form 4251.

    3. Leave the return in the work unit.

    The return is sent to FRC after the batch is disassembled.

  2. If the DLNs match, but the TP's name is different, close the case with PC 29.

  3. If the tax return is for the incorrect tax year (the DLNs match, but the TY is different), close the case with PC 29 and route the return to be processed to the correct tax year.

Case History

  1. The Case History screen is used to determine the location or status of a particular case. If the case is:

    1. Assigned to your unit, select the Unit Case History window from the Case Analysis menu.

    2. Assigned anywhere on the AUR system, select the Case History window (Analysis) using the Review option on the Main menu.

    See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Viewing Cases.

Archived Cases

  1. For TY 2007 and subsequent years, access the case data using View Case in the appropriate tax year on the system.

  2. For TY 2006 and prior, if information on the case is needed, the case must be ordered from files.

Case Information

  1. Each AUR case contains information for one tax account.

Underreporter Cases

  1. A case where a paper Form 1040 or Form 1040A was filed has an individual income tax return present in the case. If the Form 4251 is batched without an original tax return, order the TC 150 return on the Tax Account screen.

    Note:

    A Form 4251 is not generated for Virtual returns. Local management can determine whether there is a need for the report to be printed. Tax examiners may notate the applicable PC/IPC next to the corresponding SSN on the work unit listing for Virtual returns.

  2. Some cases may have an amended return, Form 1040X, Amended U.S. Individual Income Tax Return, attached to the original individual tax return.

    1. If the amended return was not processed, include it in the resolution of the case. Leave the amended return attached to the original return when the case is closed.

    2. If the amended return was processed, consider it in the AUR case resolution and refile separately when the case is closed.

  3. All cases have online data which displays in a series of screens. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, for more information.

  4. An action trail MUST be made part of the case data whenever significant actions are taken. Use either the IR Note window or the Case Note window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Case Notes and Information Return Notes.

    Exception:

    At times HQ may direct closure of a case or cases with one of the HQ Identified Program Problem closing process codes. Case notes are not required on these cases.

    Caution:

    Do not include personally identifiable information (PII) in IR notes or case notes.

    Note:

    IR notes and Case notes are part of the official case file and may be viewed by the TP.

  5. Form 4251 is attached to a return when it is pulled from the files at the Federal Records Center.

    Note:

    Virtual returns will have an individual work unit listing rather than a Form 4251. Local management can determine whether there is a local need for the report to be printed.

    1. Form 4251 MUST remain with the paper return when the case is closed.

    2. Notate the applicable PCs and IPCs on Form 4251.

    3. Keep the Form 4251 in the front of the case file with the bar code visible.

Case Analysis Screen

  1. The Case Analysis screen is the main screen used by tax examiners for the analysis of AUR cases. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Case Analysis Overview.

  2. Certain Transaction Codes, Freeze Codes, or Indicators may require research, referral, or other specific actions. When these conditions are present, the Message window displays on the Case Analysis screen when the SSN of the case is entered. If this window displays, review the information on the Tax Account screen to determine the appropriate action to take.

  3. Within the Case Analysis screen various windows display, dependent upon the issues involved on an individual case. You must work certain windows in the proper order if two or more of them are present. The twelve windows and their proper sequence are:

    1. Misc Adjust/Sch C Exp

    2. FICA Tax

    3. SST on Tips

    4. SE Tax

    5. SEP/KEOGH/SIMPLE

      Note:

      HSA/AMSA Contribution/Deduction. Although there is no HSA/AMSA window, this income type must be worked in the proper order. See IRM 4.19.3.9.2 (10), Health Savings Account (HSA) or Archer Medical Savings Account (AMSA) Deduction.

    6. SSA/RRB

    7. IRA (CONTR)

    8. Savings Bond Exclusion

    9. EPAB

    10. Student Loan Interest Deduction (SLID)

    11. Tuition and Fees

    12. Domestic Production Activity Deduction

    Example:

    The SE Tax window has been worked. Subsequently, the SST on Tips window is worked. The system displays a warning message describing the proper sequence. You must access the SE Tax window again to complete the proper sequence before going to the Return Value screen.

Tax Account Screen

  1. The Tax Account screen displays posted information from the TP's Master File account. It contains the name and address, Date of Birth (DOB) for both primary and secondary TPs, return amounts, transactions, and other current data (including Reason Codes (RC)). The data is downloaded to the AUR system from ECC-MTB. The TP's phone number and hours of contact can be entered. This screen is used to order a return if the related adjustment has posted to the account. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, - Tax Account Screen.

  2. Compare the Adjusted Gross Income (AGI) and Taxable Income (TXI) on the return with the AGI/TXI on the Tax Account screen. A mismatch could be due to a TP and/or processing error. The AUR Function is responsible for issuing a CP 2000 to correct these types of errors.

    Note:

    If the processing error resulted in an erroneous refund, see IRM 4.19.3.5.11, Erroneous Refunds, for further information.

  3. If the AGI on the return and the AGI on the Tax Account screen do not match, the TP/processing error may be found on page 1 of the return.

    1. The system displays the AGI as determined from Master File.

    2. Verify the AGI on the Tax Account screen.

    3. If appropriate, use the MISC ADJUSTMENT/SCHEDULE C EXPENSE window to account for the discrepancy. See IRM 4.19.3.5.9 (1), Miscellaneous.

      Exception:

      If the TP(s) AGI/TXI return amounts were correct, a processing error changed the AGI/TXI, and the TP(s) did not receive a Math Error Notice because the change was below tolerance, correct the AGI (by entering the TP's original amount in the AGI window). Leave a case note explaining the action taken.

  4. If the Tax Account screen displays an asterisk in the NEW TRANS field, a new TC has been added since the case was last analyzed. When an asterisk displays:

    1. Review the TC to determine if any action is required.

    2. Click on the asterisk and press ENTER to indicate the TC has been considered while working the case.

      Note:

      The system automatically totals TC 640 payments and displays a prompt: "Should amount be entered in Return Value Screen?" .

  5. If the Tax Account screen displays the Indicator KITA (Killed in Terrorist Action) or HSTG (Hostage in Terrorist Action) in the KITA IND field, or if the system displays the message "KITA/HSTG indicator present. Close case." , use PC 18 to close the case.

    Note:

    Because TP contact has not been made, no further actions are needed.

  6. If the Tax Account screen displays the indicator PDT (Potentially Dangerous Taxpayer), see IRM 25.4.1, Potentially Dangerous Taxpayer, for additional information. If the Tax Account screen displays the indicator CAU (Caution Upon Contact), see IRM 25.4.2, Caution Upon Contact Taxpayer.

Power of Attorney (POA)
  1. A POA is on file when an indicator is displayed in the Centralized Authorization File (CAF) Indicator field. The indicator is either alpha or numeric. See Document 6209, IRS Processing Codes and Information, for the applicable POA indicators. A TC may also be present.

    • TC 960 is a CAF Indicator (POA on file)

    • TC 961 reverses the CAF Indicator (POA revoked)

  2. Prior to the issuance of a CP 2000/CP 2501 or Recomputation Notice, the CAF is automatically researched for the valid POA's name and address.

  3. If issuing a notice, and there is a valid POA on file:

    1. A copy of the notice is automatically created for the POA. (If there are multiple POAs, the notice is only created for the first two POAs authorized to receive notices per the CAF.)

    2. PARAGRAPH 178 automatically generates on the CP 2000/CP 2501 and Recomputation Notice to inform the TP that a copy is being sent to the POA. See IRM 4.19.3-7, CP PARAGRAPHS.

  4. If an original POA is found attached to the tax return (not detached during processing), see IRM 4.19.3.21.1.22, Letters From a Third Party and Authorization From a Valid Power of Attorney (POA) and IRM 21.3.7, Processing Third Party Authorizations onto Centralized Authorization File (CAF), for instructions on determining validity.

  5. Disregard invalid POAs.

  6. Consider "valid" POAs approved.

    Note:

    CAF will only accept the Form 2848 with a revision date of October 2011 or later.

    1. Make a photocopy for the AUR case file.

    2. Forward the original to the CAF Unit for processing.

    3. Input the POA information on the Update Address window (POA). See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Updating Address Information.

      Note:

      A foreign address requires a period ("." ) in the first position of the State field.

Freeze Codes
  1. If certain freeze codes are present on the tax module, a message window displays on the Case Analysis screen when the SSN of the case is entered. Access the Tax Account screen to determine the proper action.

  2. If there is a Freeze Code "-A" , the case is worked by AUR. See IRM 4.19.3.4.3.3 (15) and (16), Transaction Codes Reflecting Tax Liability, for further instructions.

  3. A Freeze Code "-C " on the account indicates the TP was involved in a military operation in a designated combat zone and may be entitled to special tax treatment.

    1. The -C freeze remains on the TP's account even after the TP is no longer in the combat zone. If a case has a -C freeze present additional research is necessary to determine the TP's combat zone status.

    2. During screening if you receive the message: "12/31/9999 date is present, possible combat zone - See IRM 4.19.3" , close the case using PC 15.

    Research IDRS CC IMFOLE for the Combat Indicator.

    If the Combat Indicator is Then
    1 The TP is still serving in a combat zone. Close the case using PC 15.
    2 The TP is no longer serving in a combat zone. Manual Interest computation is required in order for the notice to generate.

    Note:

    During screening, close the case with PC 27.

  4. Freeze Code "-E" (TC 810 - code "4" ) indicates the case is currently being reviewed by the Frivolous Return Program (FRP). Freeze Code "-E" is placed on all refundable years when the TP has been identified as filing a frivolous return with a Form 1099-OID, Original Issue Discount. In either situation, refer the case to the local FRP coordinator who will provide instructions to either continue processing or to transfer case. If FRP wants the case transferred, use PC 13.

  5. Freeze code "F-" (TC 971 - action code (AC) 089) freezes the entire account and most adjustments will unpost. Refer the case to the local FRP coordinator who will provide instructions to either continue processing or to transfer case. If FRP wants the case transferred, use PC 13.

    Caution:

    Identity theft cases with a F- freeze should be referred after the TP has provided the Form 14039 and/or police or law enforcement incident report for identity theft.

  6. If a Freeze Code "-I" is present on Tax Account screen,

    If case is in And Then
    Screening phase Close case with PC 27.
    CP 2501 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Close case with PC 51, see IRM 4.19.3.20.1, No Response BT 84.
    CP 2501 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Continue processing.
    CP 2000 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Continue processing, see IRM 4.19.3.20.1, No Response BT 84.
    CP 2000 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Close case with PC 73, IRM 4.19.3.20.1, No Response BT 84.
    Stat phase Continue processing.

    See IRM 4.19.3.17.10, Manually Computed Interest for the CP 2000, for additional information.

    Note:

    If a Manual Interest computation is required, and the tax examiner attempts to input Process Code (PC) 55, 57, 59, or 95 or Internal Process Code (IPC) RN or SR, the system alerts the tax examiner that IPC MI is required.

  7. If a Freeze Code "I-" is present on Tax Account screen during screening close case with PC 27. After a notice has been issued and the case results in a refund then a Manual Interest computation is required see table in (6) above. See IRM 4.19.3.17.10, Manually Computed Interest for the CP 2000, for additional information

    Note:

    If the Return Value screen reflects a refund, and there is no "I-" freeze code present, input zero (0) in the MANUAL INTEREST field and continue processing. Do not input IPC "MI" .

  8. A Freeze Code "L-" identifies that an Innocent Spouse claim (Form 8857, Request for Innocent Spouse Relief) has been filed and is set by input of TC 971 AC 065. The TC 971 AC 065 also generates a TC 130 freezing the entire account for the non-requesting spouse.

    1. During the Screening phase, close the case using PC 28.

    2. During the Response phase, refer to , IRM 4.19.3.21.1.20.1Innocent Spouse Relief Cases - Tax Examiner Instructions, for more information.

  9. Freeze Code "-L" (Audit Indicators TC 420 or 424, not reversed by TC 421) indicates the return is currently being requested or audited by Exam. During case analysis (screening phase), research IDRS CC TXMODA for a pending TC 421 that will reverse the "-L" freeze. If there is a reversal, continue normal processing.

    If there is No reversal, research IDRS CC AMDISA for the CURRENT-STATUS-CD/DATE field. The CURRENT-STATUS-CD/DATE field determines case action as follows:

    1. If the AMDISA CURRENT-STATUS-CD/DATE field is "33" or "34" the case is controlled by the Tax Equity and Fiscal Responsibility Act (TEFRA) function. Continue normal processing. Do not use the Exam transfer PCs to close TEFRA cases.

    2. If the AMDISA CURRENT-STATUS-CD/DATE field is "06" or "08" AWAITING CLASSIFICATION, the cases have not yet been screened for possible selection for examination. Do not use the Exam transfer PC’s to close the case, continue normal processing.

    3. If the AMDISA CURRENT-STATUS-CD/DATE field is "10" , use the primary business code (PBC), secondary business code (SBC) and employee group code (EGC) to locate the correct Exam contact by accessing the EXAM Employee Group Code (EGC) Contacts, under the Who/Where Tab on SERP, then select Employee Group Code (EGC) Listing Contacts.

    4. If Exam wants the case use either PC 11 or 12 as appropriate to transfer the case to Exam. If Exam does not want the case, continue with normal processing.

      Note:

      To determine if the case is a Field or Campus audit see Document 6209 (http://serp.enterprise.irs.gov/databases/irm.dr/current/6209.dr/6209ch12.5.3.htm).

    5. If the conditions in a-c above are not met, input PC 13 (Case Analysis phase) to transfer the case to Exam.

  10. If the Freeze Code "-L" open TC 420/424 is present after an AUR notice has been issued, take the following actions:

    1. Research IDRS CC AMDISA to determine the primary business code (PBC), secondary business code (SBC) and employee group code (EGC).

    2. Use the PBC, SBC and EGC information from AMDISA to locate the correct Exam contact by accessing one of the following websites: If the PBC is 301-309:
      http://mysbse.web.irs.gov/exam/mis/contacts/empgroupcode/default.aspx
      all others:
      EXAM Employee Group Code (EGC) Contacts, under the Who/Where Tab on SERP.

    3. If the case is in CP 2501 or CP 2000 phase and Exam wants the case, input PC 38 (CP 2501) or PC 64 (CP 2000). Prepare Form 3210, including the appropriate Exam contact information, and leave it with the case

    4. If the case is in Statutory Notice phase and Exam wants the case, see (11) below.

    5. If Exam does not want the case, leave a case note and continue normal processing. If an assessment is needed see IRM 4.19.3.21.10, Assessments.

  11. If Exam wants the case, take the following actions:

    1. Allow the statutory period to expire.

    2. Access the Assessment window and enter an "N" in the SOURCE DOCUMENT ATTACHED field and the appropriate priority code.

    3. Commit the Assessment window.

    4. Prepare Form 3210, including the appropriate Exam contact information, and leave it with the case

    5. Input PC 94 and release the case.

  12. A Freeze Code "-O" on the Tax Account screen, is a Disaster Indicator set by TC 971 AC 086 or 087. This would be designated a Disaster Type 4. See IRM 4.19.3.5.6, Declared Disaster Areas, for more information.

  13. Freeze Code "P-" indicates the case may be assigned in the FRP or Integrity and Verification Operation (IVO) held the refund. Research IDRS.

    If And Then
    TC 599 AC 17 or 89 is present FRP has an open control (will show AUDT in control base) Refer the case to the local FRP coordinator who will provide instructions to either continue processing or to transfer case. If FRP wants the case transferred, use PC 13.
    TC 720 and TC 971 with either AC 052, 123, 129, 134, 617 is present During screening close the case no change using PC 28.

    If a notice was issued and there is a credit on the account, take the following actions to close the case:
    1. Access the MFT 30 Assessment window.

    2. Input/verify TC 290 .00.

    3. Input Hold Code 4.

    4. Input TC 888 – 0 (zero amount).

    5. Remove all other transaction/reference codes.

    6. Input remarks: No change.

    7. Commit the Assessment window.

    8. Input PC 52 (CP 2501), PC 71 (CP 2000) or PC 92 (Stat), as appropriate.



    If a notice was issued and there is no credit, close the case no change using PC 52, 71, or 92 as appropriate.
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  15. A Freeze Code "-R" on Tax Account screen reflects IVO or Taxpayer Protection program (TPP) involvement and is identified with TC 971 AC 052, AC 134, AC 617 or TC 570 with TC 971 AC 199 which indicates a frozen refund. Take the following actions to close the case:

    If Then
    During screening Close the case no change with PC 28.
    A notice was issued and there is a credit on the account
    1. Access the MFT 30 Assessment window.

    2. Input/verify TC 290 .00.

    3. Input Hold Code 4.

    4. Input TC 888 – 0 (zero amount).

    5. Remove all other transaction/reference codes.

    6. Input remarks: No change.

    7. Commit the Assessment window.

    8. Input PC 52 (CP 2501), PC 71 (CP 2000) or PC 92 (Stat), as appropriate.

    A notice was issued and there is no credit on the account Close the case no change using PC 52, 71 or 92, as appropriate.
  16. A Freeze Code "-S " replaces the assignment of computer condition codes to identify tax returns filed within a declared disaster area and is set with a TC 971 AC 688. The -S freeze does not suppress notices. Continue normal case processing. This would be designated as a Disaster Type 2. See IRM 4.19.3.5.6, Declared Disaster Areas, for more information.

  17. If a Freeze Code "-T" is present on Tax Account screen, there is a ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ entity freeze on the account, used for monitoring purposes only. Continue normal case processing.

  18. If there is a Freeze Code "-U" , see IRM 4.19.3.5.11, Erroneous Refunds, for further information. Freeze Code "-U" indicates the Erroneous Refund area is monitoring a case for available credits and a closure may release needed credits.

  19. If there is a Freeze Code "-V" and/or TC 520, a Bankruptcy condition is present. If identified on the Tax Account screen;

    1. During Case Analysis (i.e., pre-notice contact), close the case using PC 27.

    2. During Response phase (after the TP has been issued an AUR Notice), see IRM 4.19.3.21.1.10, Bankruptcy Procedures - Responses.

  20. If there is a Freeze Code "-W" with closing code (cc) 81, or cc 84 and/or a TC 520 (not reversed by TC 521 or 522), a Bankruptcy condition is present. If identified on the Tax Account screen;

    1. During Case Analysis (i.e., pre-notice contact), close the case using PC 27.

    2. During Response phase (after the TP has been issued an AUR Notice), see IRM 4.19.3.21.1.10, Bankruptcy Procedures - Responses.

  21. A Freeze Code "-Y " on the account indicates that the TP filed an Offer-in-Compromise with the Service. See IRM 4.19.3.4.3.4 (6), (11) and (12), Other Transaction Codes and Math Error Codes, for additional information.

  22. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

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

  23. If a Freeze Code other than those explained in (2) through (22) above, are indicated on the Tax Account screen, refer to Document 6209, IRS Processing Codes and Information.

Transaction Codes Reflecting Tax Liability
  1. A TC 150 indicates a return was filed and posted to the Master File. The TC 150 amount is the tax assessed when the original return was filed.

  2. TCs 290 and 300 indicate additional tax was assessed after the original return was filed. The system adds these amounts to the TC 150 amount to determine the total tax per return. If the TC 290/300 source document is present, determine if the adjustment source document (Form 5147, Form 5344, Examination Closing Record, Form 4700, Examination Workpapers, amended or duplicate return) resolves the U/R issue(s).

    • A TC 300-0 with a corresponding TC 764, TC 768, or TC 765 indicates Exam adjusted EIC with no change to AGI or TXI. See IRM 4.19.3.16.3, Earned Income Credit, for further instructions on EIC.

    • Certain modules where an overstatement of estimated tax payments or W/H credits resulted in a refund, offset, or a credit elect may show as assessed using TC 290, RC 051, for the amount of the overstatement. These accounts will generally not contain a TC 807.

  3. TCs 291 and 301 indicate a portion or all of a previously assessed tax was abated after the original return was filed. The system subtracts these amounts from the TC 150 amount to determine the total tax per return. If the TC 291/301 source document is present, determine if the adjustment source document (Form 5147, Form 5344, Examination Closing Record, amended or duplicate return) resolves the U/R issue(s). If the AGI/TXI on the Tax Account screen:

    1. Differs from the tax return, order the TC 291/301 document without screening for income discrepancies.

    2. Matches the tax return, screen for income discrepancies and see (5) below.

  4. Order the missing TC 290/291 or TC 300/301 adjustment source document

    1. Before issuance of a notice or

    2. Prior to taking a PC 20 action.

  5. Do not order the missing TC 290/291 or TC 300/301 source document for the following situations:

    1. The difference between the AGI/TXI on the return and the AGI/TXI shown on the Tax Account screen matches the total discrepant amount within ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Consider the amount in question reported and close the case if there are no other related issues (i.e., Self-employment tax (SE tax)), 10 percent tax, etc.)

      Note:

      To calculate the TP's reported self-employment income, divide the amount shown in the SE INCOME fields on the Tax Account screen by .9235 (92.35 percent).

    2. The adjustment changes the amount(s) or item(s) back to the original figures on the return (changes may have resulted from a math error code or unallowable code). The AGI, TXI and Tax (TC 150 minus TC 291) should equal the amounts on the original tax return.

    3. W/H, excess SSTAX, or additional MCTXW is the only issue (PC 20 criteria) and the adjustment does not have a TC 806/807 or TC 766/767 with credit reference number (CRN) 252 present.

    4. A TC 806/807 or a TC 766/767 with CRN 252 is the only change (there is no change to the AGI or TXI) and W/H or excess SSTAX is not an issue.

      Caution:

      Certain modules where an overstatement of estimated tax payments or W/H credits resulted in a refund, offset, or a credit elect may show as assessed using TC 290, RC 051, for the amount of the overstatement. These accounts will generally not contain a TC 807. Send a Special Paragraph using the following verbiage as an example "The other taxes as shown on this notice include the previous change made to your federal income tax withheld."

    5. The adjustment is a TC 291/301 when the AGI, TXI and the tax has been reduced to zero. Close case with PC 28 (these are generally filing status changes or incorrect SSN).

  6. Order the TC 290-0 adjustment source documents when one of the following corresponding TCs is present:

    • TC 976/977

    • TC 971 AC 010, 012 through 016 or 120

    • TC 806/807 with the TC 290-0

    • TC 764/765/768

      Exception:

      Do not order the TC 290-0 adjustment source document for changes to EIC and there is no change to AGI or TXI.

    • TC 766/767 with CRN 336

    • TC 766/767 with CRN 252

    • TC 766/767 with CRN 260

    • TC 766/767 with CRN 262

    • ELF return and the blocking series of the TC 290-0 is "05" or "15" .

  7. Do not order TC 290-0 adjustment source documents for the following:

    1. TC 290-0 adjustment source document is for changes to EIC (TC 764/765/768) and there is no change to AGI or TXI.

    2. The TC 290-0 has a corresponding TC 971 AC 071. These are injured spouse claims for which the refund was released.

    3. The TC 290-0, the TC 150 and the TC 846 have the same DLN with blocking series 92X (example: 18221-046-92337-5). These are also injured spouse claims for which the refund was released.

    4. The TC 290-0 has a corresponding TC 971 AC 270. These are cases where the amended return was sent back to the TP.

    5. The TC 290-0 is in the 98 blocking series (adjustment made without the original return) and there is a RC 062 or 065. These are penalty abatement request disallowances and have no impact on our AUR case.

    6. The TC 290-0 has a corresponding TC 271 which fully reverses the previous TC 270 amount.

    7. The TC 290-0 has a corresponding TC 971 AC 142. This is a true duplicate return.

  8. The Tax Account screen indicates if the adjustment source document is a Correspondence Imaging Services (CIS) document. If it is determined the adjustment is:

    • A CIS document, view document on Account Management System (AMS).

    • Not a CIS document, follow the instructions in (9) below.

  9. Request an amended return to resolve the case, if necessary.

    1. To request an amended return, enter an "X" in the ORDER RTN field for the applicable DLN on the Tax Account screen. During the screening phase, use IPC 0A.

      Exception:

      The system will not accept an "X" for any DLN where the DLN indicates the return is Virtual or a CIS document.

    2. If the DLN of the amended return is the control DLN on the Tax Account screen, attach the original return behind the amended return and refile together under the control DLN. Otherwise, refile them separately.

  10. Review all adjustment documents to determine if the U/R amount has already been taken into consideration. If so, close the case using PC 21. If a document has been requested, refile it separately when the case is closed.

  11. Consider all previous changes to income, deductions, refundable/non-refundable credits, taxes, and penalties when a CP 2000 is to be issued.

  12. When a TC 300/301 is present on the Tax Account screen with a TC 421 and no -L freeze, a disposal code displays on the Tax Account screen. If pursuing U/R income, determine the disposal code. The disposal code is located under the column titled "DIS CD" in the transaction section of the Tax Account screen.

    1. If the disposal code is 01 - 13, review the attached audit papers to determine if the U/R amount has been addressed. If there is still a U/R amount after review, issue a notice. Consider all changes made by Exam per the TC 300/301.

    2. If the disposal code is 20 - 99, no audit was performed. Continue processing the case.

  13. If a TC 300/301 and a TC 577 with Julian Date 999 is displayed on the Tax Account screen (no -L Freeze present), the U/R income has not been addressed by the Examination Function. Review the papers to determine what changes were made and take those changes into consideration when calculating U/R income adjustments.

  14. When a TC 896 with the literal "OFF to IRA" is present, the TP has paid additional tax on excess contributions on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. This tax is posted to the TP’s Master File Tax (MFT) 29 account and is not included in the TC 150 amount. The system adds this amount to the TC 150 amount to arrive at total tax per return.

    Note:

    TC 892 offsets a TC 896.

  15. If a duplicate/amended return is filed (TC 976/977 or TC 971 AC 010, 012 through 016 or 120), a CP 2000, CP 2501 or PC 20 is to be issued, a TC 290/291 is present, and the duplicate or amended return is not in the case file:

    1. Order the duplicate/amended return by requesting the TC 290/291 DLN unless the conditions in (7) above apply.

    2. Close the case using PC 29 if the duplicate/amended return is not available.

  16. If a duplicate/amended return is posted (TC 976/977 or TC 971 AC 010, 012 through 016 or 120), a CP 2000, CP 2501 or PC 20 is to be issued, a TC 290/291 is NOT present, and the duplicate/amended return is not in the case file:

    1. Transfer the case to the Unit Suspense batch.

      Exception:

      If 45 days or more from the TC 976/977 or the TC 971 pending/posted date have passed, continue processing the case.

    2. Monitor the case for 45 days from the TC 976/977 or the TC 971 date for the pending/posting of the TC 290/291.

      If the TC 290/291 posts, order the adjustment document.

      If the TC 290/291 does not post, continue processing.

      Note:

      Underreporter functions that work their own Accounts Maintenance Research (AMRH) Transcripts should forward these cases to the appropriate unit after the batch has been disassembled.

  17. TC 295 indicates a tentative allowance from Form 1045, Application for Tentative Refund, was input on the TP's account by Adjustments. TC 299 indicates an abatement of the original tax. If there is a TC 295 or 299 unreversed, or only partially reversed by TC 294 or 298, and there is U/R income, issue a notice.

  18. TC 305 indicates a tentative allowance from Form 1045 was input on the TP's account by Exam. TC 309 indicates an abatement of the original tax. If there is a TC 305 or 309 unreversed, or only partially reversed by TC 304 or 308, and there is U/R income, issue a notice.

  19. If TC 599, TC 720 and/or TC 570 are present, see IRM 4.19.3.4.3.2 (13) table, Freeze Codes, for instructions on how to process.

Other Transaction Codes and Math Error Codes
  1. Other TCs shown on the Tax Account screen may require additional action.

  2. TC 160 or 166 indicates a Delinquency/Failure to File Penalty was assessed. TC 161 or 167 means a portion or all of the penalty has been abated. When a U/R issue exists, the system computes or recomputes the Delinquency/Failure to File Penalty when required. See IRM 4.19.3.17.1, Failure to File (FTF) Penalty, for additional information.

  3. TC 170 or 176 indicates an Estimated Tax (ES) Penalty was assessed. TC 171 or 177 means a portion or all of the penalty has been abated. When a U/R issue exists, a recomputation of the ES penalty may be required. See IRM 4.19.3.17.3, Estimated Tax (ES) Penalty, for additional information.

  4. TC 270 or 276 indicates a Failure to Pay Penalty (FTP) was assessed. TC 271 or 277 means a portion or all of the penalty is abated. See IRM 4.19.3.17.2, Failure to Pay Penalty (FTP), for additional information.

  5. TC 460 indicates a request for extension of time to file was approved. The extension date appears in the Remarks column.

  6. TC 480 (not reversed by TC 481 or 482) indicates the TP has filed an "Offer in Compromise" (OIC) with the Service. Continue normal AUR processing. A TC 29X may be input on these types of cases. Send copies of the case data to Collection OIC function upon their request.

  7. TC 540 indicates that the TP is deceased. See IRM 4.19.3.5.5, Deceased Taxpayers, for further instructions.

  8. TC 604 indicates either bankruptcy has been discharged/revoked or close-out of the MFT 30 module in preparation of mirroring to MFT 31.

    1. During screening, close the case using PC 27.

    2. During responses (AFTER the TP has been issued an AUR notice), refer to either the local Innocent Spouse (when TC 971 AC 065 is present) or Bankruptcy Coordinator (all others).

  9. TC 764 or 768 indicates earned income credit (EIC) was allowed. TC 765 indicates the credit was fully or partially reversed. If TC 764, 765, or 768 is present, EIC may need to be computed or recomputed. See IRM 4.19.3.16.3, Earned Income Credit, for instructions.

  10. TC 766 with:

    1. CRN 336 indicates Additional Child Tax Credit was allowed. TC 767 (with CRN 336) indicates the credit was fully or partially reversed. If TC 766/767 (with CRN 336) is present, Additional Child Tax Credit may need to be computed or recomputed. See IRM 4.19.3.16.4, Additional Child Tax Credit (ACTC), for instructions.

    2. CRN 252 indicates excess SSTAX has been adjusted (TY 2006 and subsequent tax years only). TC 767 (with CRN 252 indicates the credit was fully or partially reversed. If TC 766/767 (with CRN 252) is present, excess SSTAX may need to be computed or recomputed.

    3. CRN 260 indicates previously allowed American Opportunity Credit (AOC).

    4. CRN 261 indicates previously allowed Refundable Adoption Credit.

    5. CRN 262 indicates previously allowed Premium Tax Credit (PTC).

  11. If a TC 780 has been fully reversed by a TC 781 or 782, continue normal AUR processing.

  12. If an unreversed TC 780 is present on the Tax Account screen, a warning message displays to close the case. Take the following action:

    1. Close case using the appropriate PC (28, 52, 71, or 96).

    2. Leave a case note stating that this is an OIC closure.

    3. Issue a Letter 1802C, if closing the case with PC 52, 71 or 96.

  13. TC 806/800 credits the tax module for the amount of W/H claimed on a tax return. TC 807/802 reverses the TC 806/800 credit in whole or in part. W/H may need to be adjusted because of AUR processing. Before proposing a change to W/H, be certain that the adjustment has not been previously allowed. See IRM 4.19.3.16.1, Withholding - General, for instructions.

    Note:

    Certain modules where an overstatement of estimated tax payments or W/H credits resulted in a refund, offset, or a credit elect will show as assessed using TC 290, RC 051, for the amount of the overstatement. These accounts will generally not contain a TC 807.

  14. TC 971AC 151 indicates duplicate filing by secondary TP. If the message window displays "DUP TIN filing, take appropriate action" , close the case using PC 10.

  15. TC 971 with certain Action Codes (AC), indicate the TP may be a victim of identity theft. During response phase, see IRM 4.19.3.21.1.26, Identity Theft (IDT) Claims - Overview, and IRM 4.19.3.21.1.26.3, IDT Claims - Responses, for additional information. During screening phase:

    If there is a TC 971 AC Then
    501 Close case PC 23
    504 Close case PC 23
    505 Close case PC 23
    506 Close case PC 23
    522 Close case PC 23
    523
    1. Continue normal AUR processing.

    2. Leave a case note acknowledging the TC 971 AC 523.

    3. DO NOT TRANSFER TO IDTVA.

    524
    1. If filing status (FS) 2, research IDRS CC INOLES to determine which TP is deceased.

    2. Continue AUR processing following IRM 4.19.3.5.5, Deceased Taxpayers, and IRM 4.19.3.21.1.14, Decedents.

    3. Leave a case note acknowledging the TC 971 AC 524.

    4. DO NOT TRANSFER TO IDTVA.

    525 Close case PC 23

    Note:

    For a list of AC meanings see, Exhibit 4.19.3-16, Identity Theft Action Codes.

  16. TC 972 with corresponding AC indicates identity theft has been reversed. DO NOT TRANSFER TO IDTVA, continue normal AUR processing.

  17. If a TC other than those explained in IRM 4.19.3.4.3.3, Transaction Codes Reflecting Tax Liability, or IRM 4.19.3.4.3.4, Other Transaction Codes and Math Error Codes, are indicated on the Tax Account screen, refer to Document 6209, IRS Processing Codes and Information.

  18. If there is a math error code on a case, the math error code number displays in the MATH ERROR CODE field of the Tax Account screen. If there are multiple math error codes, they display up to a maximum of five (5) codes in this field.

    Note:

    The math error code verbiage displayed on the Tax Account screen is abbreviated and paraphrased from the actual verbiage in Document 6209, IRS Processing Codes and Information.

Correspondence Imaging Services (CIS) Documents
  1. CIS is used to manage scanned images of amended Individual Master File (IMF) returns, documents and electronic case files.

  2. When there is a duplicate/amended return on Tax Account (TC 976/977 or TC 971 AC 010, 012 through 016 or 120 and a posted TC 290/291) an indicator "1" is displayed in the Tax Account screen in the CIS column when a CIS document is available.

  3. If a CIS document is indicated, take the following actions:

    1. Access IDRS.

    2. Access AMS.

    3. From the AMS screen, click on "Cases by TIN" in the Case Management section.

    4. In the Taxpayer Lookup screen, enter the TP SSN in the "Request by TIN" field and then click on >Go< or press >Enter< on the keyboard. The TP account summary screen appears.

    5. In the Alert section, click on the "View Images" link.

    6. Select the tax year to review from the CIS image list and click on "Open Image" .

      Note:

      The thumbnail view can be used to view each page

      .

    7. Compare the amended return to the U/R issues to determine if any or all issues are addressed. Continue normal processing.

    8. After processing changes, input the IRS received date located on the amended return.

  4. To exit AMS:

    1. Click on the "Exit Account" link in the upper right hand corner.

    2. In the Taxpayer Lookup window, click on the "Logoff" link to exit the system.

Information Return Window

  1. The Information Return window displays the complete IR. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Information Return window.

  2. Payer address information, as shown on the Information Return window, displays on the CP 2000/CP 2501.

Income Comparison Screen

  1. The Income Comparison screen displays a comparison of amounts reported by payers on IRs and the amount the TP reported on his/her tax return. Access this window when it is necessary to view RETURN and IRP amounts or to determine the discrepant income type. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Income Comparison Screen.

  2. The OFFSET field displays codes describing how matched return and IRP amounts were offset for identification of potential discrepancies.

  3. When attempting to offset income, make sure the income to which it is being offset has not already been used. However, if you can determine that offsets were applied incorrectly, analyze that issue as well.

Analysis Procedures

  1. The following instructions are for use by AUR tax examiners. They are to be used in conjunction with training materials and the IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures.

    1. An UNDERREPORTED (U/R) condition exists when there is income shown on the IR(s) that was not reported by the TP on Form 1040, Form 1040A, or Form 1040EZ. Proposed tax adjustments are based on these U/R amounts, as well as on reported income amounts for which the TP failed to include the required additional taxes (e.g., SE tax).

    2. An OVER-DEDUCTED (O/D) condition exists when the TP claims more of a deduction than is substantiated by IR(s) and/or allowed by law (e.g., Mortgage Interest Deduction or Individual Retirement Account (IRA) Deduction).

    3. An UNDERCLAIMED (U/C) condition exists when the TP fails to claim all the payments to which he/she is entitled (e.g., W/H).

    4. An OVERCLAIMED (O/C) condition exists when the TP reduces his/her tax liability by an amount that either exceeds the amount shown on the IR(s), and/or the amount cannot otherwise be substantiated (e.g., Education Credits).

  2. If Exam issues are discovered during AUR processing, consult with the team leader. Then, if necessary, consult with an Exam representative to decide the appropriate action(s) to take.

  3. Computer identified income/deduction discrepancies of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ are displayed in the LIST OF DISCREPANCIES field on the Tax Account screen. If the category is a combination type, all appropriate discrepancies are displayed.

  4. The IR(s) contributing to the discrepancies are listed first on the Case Analysis screen, and the specific income type is identified with an asterisk. The AUR system alerts the user that a discrepancy exists where is no IR(s) to mark.

    Exception:

    O/D and O/C deduction(s) in question will not have a system generated IR. See (6) below.

  5. Cases involving U/R and EIC are identified in Subfile E. An EIC discrepancy can occur when there is unreported: interest, dividends, capital gain net income (including securities), rents, royalties or income from certain passive activities and the TP claims investment income less than the amounts shown in the table below. If the TP’s total investment income exceeds the amount listed in the table below (regardless of overall AGI), the EIC is disallowed.

    TY 2014 TY 2015 TY 2016
    $3,350 $3,400 $3,400
    1. Due to the investment income limitation for EIC, cases have been created with small amounts of apparent U/R investment income. These investment income discrepancies are not asterisked, (in either Case Analysis or the Income Comparison screens) to alert the tax examiner of where the discrepancy lies. The system does not display a warning message.

    2. When accessing cases in Subfile E, screen ALL IRs.

    3. If there is any U/R (regardless of amount), complete the Return Value screen.

  6. If the Case Analysis screen does not contain any asterisked items, go to the Income Comparison screen to determine the discrepancy and screen the case accordingly.

  7. Discrepant income types are identified with an asterisk on the Income Comparison screen and Information Return window.

    Note:

    Because of computerized offsets, some APPARENT W/H discrepancies are not asterisked. Follow procedures in IRM 4.19.3.16.1, Withholding - General, for these cases.

  8. The Case Analysis screen may contain IRs that HAVE NOT been identified as discrepant. These IRs were added after the case creation and must be analyzed. These IRs are listed along with the discrepant IRs and are identified with an indicator in the AMENDED INDICATOR field. IRs containing the same income types, MUST BE screened and an applicable IR Code assigned to each element of the IR. The indicators are shown as follows:

    • N - New

    • AN - Amended New

    • RN - Replace New

    • DN - Duplicate New

    • XN - Delete New

  9. Initially analyze the asterisked elements on the IR(s) related to the computer identified discrepancies. Also analyze other issues related to the income on the discrepant IR.

    Example:

    Consider adjustments to: Child Care Credit when the DCB element is asterisked; consider SE tax when NEC, MERCH, MED, FISH, etc. elements are asterisked (or when the system identifies a potential SE tax issue); consider the 10 percent tax when Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., element is asterisked and the IR contains a COD, "J" , "L" , "1" , "5" or "7" (with a PGR Indicator of 1), etc.

    Note:

    The AUR system identifies potential SE tax discrepancies on reported income from Form 1040, lines 12, 18 or 21 where no SE tax was paid. The system alerts the user that a discrepancy exists when there are no IRs to mark. An asterisk displays in the SELF EMPLOYMENT TAX field on the Income Comparison window. Follow IRM procedures for specific income types and see IRM 4.19.3.15.1, Self-Employment Tax, and Exhibit 4.19.3-22, Examples of Self Employment Income, to determine when SE tax needs to be considered.

    1. If the asterisked IR is discrepant and it contains W/H, always screen W/H element(s).

    2. If there are no asterisked elements for cases in Subfile E, see (4) above.

    3. If the asterisked element(s) is/are fully reported on the line(s) designated for that income on the tax return (i.e., discrepant wages are fully reported on Form 1040, line 7), then check the INCOME COMPARISON screen for a possible misplaced data entry. Screen the income type related to the misplaced data entry.

    4. If the asterisked element is identified as being included in another type of income, analyze all related IRs. (i.e., Pensions are identified as discrepant but are found reported on the wage line - analyze both pensions and wages).

    5. If the asterisked element results in above tolerance U/R, screen the remaining non-asterisked items.

  10. If the discrepant IR(s) element(s) is/are reported and/or the system identified SE tax discrepancy is resolved, close the case using PC 21.

  11. When there is U/R income or if related tax/credit adjustment issues are involved, proceed to Return Value.

    Note:

    It is not necessary to mark non-asterisked IR(s) to access the Return Value screen.

    1. AUR multiplies the CHANGE TO AGI field amount by the highest tax rate for the tax year. If this calculation does not result in either ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

      If any of the following is an issue - Schedule A Mortgage Interest, MIP, SE tax, Federal Insurance Contributions Act (FICA), W/H, excess SSTAX, Dependent Care Benefit (DCB), Child Care Credit, Employer Provided Adoption Benefits (EPAB), Education Credits, EIC, and/or Premature Distribution Tax on retirement income, complete the Return Value screen before closing the case. Ignore the Case Analysis screen system prompt to close the case.

    2. Complete all applicable windows.

    3. If the dollar tolerance for issuing a notice is not met, the system displays a message to close the case. Use PC 22 to close below tolerance cases.

  12. Proposed adjustments on the CP 2000/CP 2501 require an explanation to the TP. There is a single set of explanation paragraphs for both the CP 2000/CP 2501. Paragraphs are either manually selected or automatically generated based on the case condition. All applicable paragraphs display in the SELECTED PARAGRAPH field(s) on the Notice Summary screen. All automatic PARAGRAPHs are automatic toggle. If a CP 2501 Notice is selected (PC 30), the system prevents any non-CP 2501 paragraphs from printing on the notice. If issuing a CP 2501do not"toggle off" apparent inappropriate CP 2501 paragraphs. Non-automatic PARAGRAPHs may be viewed, selected, deleted, and/or added.

    • There is a single Notice Summary screen. This is to facilitate automatically generating a CP 2000 from a CP 2501 no-response.

    • The programming that automatically selects paragraphs occurs in different screens (Case Analysis, Return Value or Notice Summary) depending on the conditions needed to set the paragraph. To reduce the instances of paragraphs resetting, the tax examiner should only"toggle off" or "toggle on" paragraphs from the Select Notice Paragraph window accessed in the Notice Summary screen.

    • CP 2000/CP 2501 automatic and non-automatic paragraphs are notated in this IRM as "PARAGRAPH XX" .

    • Miscellaneous Letter paragraphs are notated as "Special Paragraph" . The verbiage provided in the Special Paragraphs is for example only and can be modified as needed.

    • There are 40 numbered paragraphs for local use by AUR. In situations where the numbered paragraphs are not applicable, a Special Paragraph may be written in the Special Paragraph window.

    Note:

    Special Paragraphs MUST BE reviewed by a manager or lead tax examiner. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Selecting, Viewing and Deleting Notice Paragraphs.

  13. Twelve different income types can be marked as underreported. If there are more than twelve U/R income types, an error message displays. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  14. When issuing a notice for underreported issues, send the applicable element(s) of the IR. The entire IR will not be sent unless all elements (income types) on an IR are marked with a "S" . This includes modified and created IRs. When an IR is marked with a "U" , the system automatically enters the Send Indicator. If it is determined that the IR should not be sent, remove the Send Indicator.

    Note:

    The Send Indicator must be manually entered on any created or modified IR that the tax examiner wants to include on the Notice. In order for a created IR to be considered valid for inclusion on the notice, it must contain: a payer name, payer EIN, and an income amount greater than zero (in addition to other required entries).

  15. Close short year returns with PC 28.

Information Returns - Review

  1. The initial review of IRs is accomplished from the Case Analysis screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures- Case Analysis Overview.

    • All IR(s) with the same document type are sorted in payer Employer Identification Number (EIN) sequence.

    • Be aware of Payer Agent information.

  2. Delete EIN IRs as invalid if any of the following apply:

    1. The payer EIN or name on Form W-2 or Form 1099 matches the payee EIN or name on the IR in question.

    2. Schedule E contains a Partnership or Small Business Corporation with the same EIN or name as the payee EIN or name on the IR(s) in question, UNLESS the payer on the IR is the partnership or small business corporation shown on Schedule E.

  3. Delete the EIN IR when the payee name line(s) is obviously not the TP. For example, the name line(s) contains any of the following groups:

    • Government agencies - federal, state, or local

    • School - private, public, colleges, universities, etc.

    • Charitable and tax-exempt organizations - hospitals, churches, medical centers, etc.

    • Pension Profit Sharing Plan name line(s) with the words "trustee for" , "trustee" , etc.

  4. Consider the EIN IR valid (as belonging to the TP) when ANY of the following conditions are present:

    1. Primary or secondary TP's name is the only payee name on the IR.

    2. Primary or secondary TP's name appear in the first or the second name lines on the IR.

    3. The payee address on the EIN IR is the same address as shown on the tax return, Form W-2 or Form 1099 attached to the tax return, or other SSN IRs.

    4. The payee name on the IR implies a sole proprietorship type business, or the TP's occupation as shown on Form 1040, Form 1040A, Form 1040EZ, or Schedule C or F is typically operated as a sole proprietorship or small business.

    5. The payee EIN on the IR matches the EIN on the Schedule C or F.

    Exception:

    If it appears the EIN listed on the Schedule C or F does not belong to the TP (i.e., the listed EIN matches a payer EIN on another IR), use IDRS CC INOLES to determine the validity of the EIN.

  5. Compare all valid EIN IRs to amounts on the tax return and related schedules. Use instructions for the particular type of income involved.

  6. Assert SE tax, as appropriate, only on the issues that are normally subject to SE tax. SeeIRM 4.19.3.15.1, Self-Employment Tax, for further instructions and Exhibit 4.19.3-22, Examples of Self Employment Income.

  7. EIN IRs do not display with an Income Identify Code in the INC CD field. If SE tax applies, enter the appropriate Income Identify Code. If it cannot be determined which Income Identify Code to enter, see Exhibit 4.19.3-9, Income Identify Codes, and enter the value from the "Displayed Codes" column. If the IR has a status code of "U" , it is necessary to remove the "U" before an Income Identify Code can be entered.

  8. Delete IRs when:

    1. Payer Agent Indicator "Y" is present and the Payer Agent window contains instructions to delete the IR. SeeIRM 4.19.3.6, Payer Agent.

      Note:

      If all U/R income is from identified Payer/Agents and the Payer Agent window contains instructions to accept or delete the IR, close the case with PC 24.

    2. The payee entity contains the words "Estate of" .

    3. The TP's name is preceded by the word "by" .

    4. The payee(s) name is obviously different from the Tax Account names and does not contain obvious business words, even though the SSN matches.

    5. EIN 99-9999999, foreign income, is present and another EIN is present for the same payer. IR dollar amounts may vary due to currency exchange rates.

      Note:

      Delete the 99-9999999 IR ONLY when both are present. Foreign Source IRs are treated the same as domestic source IRs.

    6. The literal is "DELET" .

    7. The filing status is "3" or "6" and the SSN on the IR is for the spouse.

    8. The IR contains non-select term(s) and you determine that the payee is NOT the TP. See Exhibit 4.19.3-10, Non-Select Table.

    9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. Consider IRs with the following conditions valid and pursue any U/R amounts:

    1. The payer's name is garbled, missing, or incomplete. See IRM 4.19.3.5.2 (11) c, Comparison of IRP Information Returns With Return Information.

    2. The payee's first and last name are in a different order on the IR.

    3. The payee name is a foreign version of an English name (i.e., Peter listed as Pedro or Pierre).

    4. The payee name line includes the TP's title (MD, DDS, CPA, etc.).

    5. Only a name control is showing as the payee name and it matches the TP's name.

    6. The payee second name line includes "c/o" (or a variation) followed by the TP's name.

    7. The payee name line contains obvious business words and you determine that the payee is the TP.

    8. The literal is "AMEND" and the document does not match the original documents. See (11) below for further instructions.

    9. The payee name is followed by "and" or "or" without other names.

    10. The IR payee name is a maiden name. If the payee's first name or initial on the IR are the same as the Tax Account name, pursue the IR.

    11. The word "rollover" is present on either the payee or payer side on a 1099R IR. See IRM 4.19.3.8.10.4 (1), Rollovers, for further information.

  10. The payee entity name line of the IR may contain terms or variations of terms. See Exhibit 4.19.3-10, Non-Select Table.

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ for that document type unless you determine that the payee is the TP.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ present of the same document type NOT containing a non-select term.

  11. Amended IRs are identified on the Case Analysis screen by Indicator "A" , "R" , "D" or "X" in the AMD IND field. Amended IRs are identified on the Information Return window by the literal "AMEND" , "REPLC" , "DUPLE" , or "DELET" . If the computer has pre-identified amended IRs that are used to replace the original IR, the amended IRs have the literal "REPLC" and the literal on the original is "DELET" . PARAGRAPH 47 automatically generates when Amended IRs are included on the notice. See IRM 4.19.3-7, CP PARAGRAPHS. Delete original IRs if amended IRs match an original. The amended and original IR must have:

    • The same payer name and/or EIN.

    • The same account number (if present).

    • The same type of income if the money amount changes or different income types when the money amount stays the same (i.e., amending a Form 1099-MISC, Miscellaneous Income, from NEC to OTINC).

    Pursue all IRs if the amended IR(s) does not match an original, or if the amended IR matches more than one of the other IRs.

    1. Amended IRs may reflect incomplete information; neither amount literals nor $0 (zero dollar amounts) are displayed. If such an IR is present, assume the payer/employer attempted to zero out an incorrect income amount previously reported.

    2. A blank in the amount field of an amended IR represents $0 (zero). Amended IRs with $0 amounts appear on the Case Analysis screen only if there is another IR with at least one money amount or the IR is for a Form W-2.

  12. If all elements (SSN/EIN, name, amount, account number, income type, etc.) on any two IRs are identical:

    1. Including the source, delete one of the IRs.

    2. Except the source, delete the paper source IR.

  13. If all elements on any two IRs are identical except that one does not contain an account number, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  14. If all elements (except the account numbers) of any two IRs are the same and it can be determined that the account numbers of both IRs contain the same sequence of numbers or characters, delete one of the IRs.

    Example:

    Account number 0003013826 and account number 3013826 are account numbers which contain the same sequence of numbers.

  15. Do not consider IRs as duplicates when the account numbers are obviously different, even though all other elements are identical.

  16. Do not consider duplicate any two Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or Form 1099-S, Proceeds From Real Estate Transactions, IRs unless the sales date is the same.

  17. If a 99MIS and Schedule K-1 (PTK-1, SBK-1 or TRK-1) IR are present for the same TP, from the same payer AND for an identical money amount, see IRM 4.19.3.8.12.1 (10), Conduit Income - Analysis, for further information.

Comparison of IRP Information Returns With Return Information

  1. Different income types may be combined on one information document, (e.g., Form W-2 may include ordinary wages, allocated tips, W/H, etc.). On the Case Analysis screen, each income type is displayed separately and can be assigned a status code.

    Note:

    If an IR with multiple income elements is U/R, input status code "U" ONLY for the income element that is actually U/R. If necessary, enter status code "R" or "N" for any remaining income elements that are not U/R.

  2. An Income Identify Code in the INC CD field of the Case Analysis screen and the Information Return window identifies certain income types to the system so that U/R income is included in related calculations (i.e., earned income qualifying for earned income credit (EIC), income subject to SE tax, etc.). See Exhibit 4.19.3-9, Income Identify Codes. The tax examiner may change or delete this code if information on the TP's return indicates that the displayed code for U/R income types is inaccurate.

  3. The following general rules apply to the analysis of all types of IRs:

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

    2. Consider an IR reported if the TP reports the same amount of income but under a different payer name.

    3. Allow a tolerance of $1 (rounding) for each IR. In those processes which do automatic calculations and grouping (e.g., SS/RR, IRA Deduction, etc.), the system considers the (rounding) tolerance.

      Note:

      The system does not consider a rounding tolerance during automatic calculations that apply to W/H excess SSTAX, additional MCTXW, or the 10 percent tax. Follow the TP's intent as to rounding, dropping cents, etc. when working these issues.

    4. Consider Payer Agent criteria when evaluating IRs. See IRM 4.19.3.6, Payer Agent, for further instructions regarding Payer Agent data.

  4. Misplaced entries on the tax return are frequent causes of U/R discrepancies. Taxpayers report income on their returns in a variety of places. It is important to thoroughly review the ENTIRE return before identifying income as being underreported.

    1. If there is unearned income (i.e., UNEMP, TX/A, income excluded per Notice 2014 - 7 (Medicare waiver or difficulty of care payments/IHSS), etc.) reported as wages, complete the Return Value screen adjusting the TOTAL EARNED INCOME field of the EIC window if necessary.

    2. Be sure that income identified on an attachment is carried forward and included in the adjusted gross income.

  5. When comparing IRs with entries on any line not specifically identified for that income type, the amount must match within $1 or be clearly identified as the income type in question.

    1. If the amount matches within $1, consider the IR reported.

    2. If the amount does not match within $1, but the income type has been clearly identified, consider the IR(s) reported if the entry is a larger amount, or consider the IR partially U/R if the entry is a lesser amount.

  6. When payer documents are attached (Form W-2, Form 1099-MISC, etc.) to a paper return, consider them more accurate than the IR UNLESS:

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

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ continue processing and consider the IR the most accurate.

    3. There is an amended IR that corresponds with the payer document. Consider the amended IR the most accurate.

    4. They appear to be for an incorrect tax year.

  7. Taxpayers recreate payer information (such as Form W-2, Form 1099-R, etc.) to include with their ELF return. Due to the increase for potential input errors of the payer information, such as transposed money amounts or missing information (ex: pension plan box on Form W-2, COD on Form 1099-R, etc.), always consider the information on the corresponding IR more accurate than the ELF payer document.

    1. When the ELF payer document indicates more income than the IR, assume the TP is reporting correctly per an amended document. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. When the TP includes ELF payer document(s) for which there is no corresponding IR, consider the income amounts reported when determining overall U/R income and AGI changes. If necessary, create an IR for the additional amount(s).

      Exception:

      Do not give credit for W/H, SSTAX or additional Medicare tax withheld (MCTXW) claimed on an ELF payer document for which there is no IR.

  8. For ELF returns, consider the IR more accurate than the ELF payer document when the ELF payer document shows less income than the IR. All elements of the IR are considered more accurate than the ELF payer document elements.

  9. If the return is missing supporting forms or schedules, research IDRS. If the information is not available, take the following action(s):

    1. Allow credit against IRs for wages, W/H, interest, and dividends reported on the return unless there is an indication the return amounts are not from the same payer(s) on the IR(s).

    2. For all other types of income, do not allow credit against IRs unless the return amount matches an IR within $1.

    3. Do not make any changes in the calculation windows (e.g., Child Care Credit, Schedule A, Alternative Minimum Tax), but allow the system to compute if the necessary supporting schedule or form is missing.

  10. The Create Information Return window is used to create a new IR. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Creating Information Returns.

  11. Create an IR if:

    1. The TP reports income/deductions for which there is no corresponding IR, and the reported amount is needed by the system to perform related calculations. (The corresponding information document may or may not be attached to the return.)

    2. There is an attached information document with no corresponding IR, and the income is not reported. Send PARAGRAPH 139, see IRM 4.19.3-7, CP PARAGRAPHS.

    3. The payer's name is garbled, missing or incomplete. Use the EIN to research IDRS CC INOLES for the proper payer name. If the income is U/R, recreate the IR as shown on the Case Analysis screen, including the correct payer name. Include the created IR on the notice.

      Caution:

      In order for a created IR to be considered valid for inclusion on the notice, it must contain: a payer name, payer EIN, and an income amount greater than zero (in addition to other required entries). The Send Indicator must be manually entered on the IR by clicking in the SEND INDICATOR field on the Case Analysis screen.

    4. The tax examiner determines other conditions exist that require creation of an IR.

  12. The Modify Information Return window modifies an existing IR. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Modifying Information Returns.

  13. Modify an IR if:

    1. The COD/PGR Indicator is incorrect.

    2. The Payee Indicator is incorrect.

    3. One or more IR(s) belongs to both TPs and the income/deduction amount needs to be allocated (e.g., the TPs divided nonemployee compensation from one IR between two Schedules C, and SE tax is an issue).

    4. One or more IR(s) is reported on more than one schedule or form (e.g., mortgage interest on Schedule A and Schedule E), and the income must be allocated in order to reflect the correct Income Identify Code.

    5. It is determined other conditions require modification of an IR.

      Reminder:

      After an IR is modified the system marks the original amount with an "X" . To include the modified IR on the notice, click the SEND INDICATOR field next to the original amount.

  14. Use the SEARCH option to view only those IRs that fit specific criteria (e.g., payer name, income type, etc.). See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Search Function.

  15. Use the SCROLL IR option to view multiple IRs on the Information Return window, without returning to the Case Analysis screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - CA Tools Menu.

  16. Use the GROUP option when the TP has not provided a breakdown and it is necessary to compare a total money amount for related IRs with a single line entry on the TP's return. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Grouping Information Returns.

    Note:

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

    1. If the group total amount is larger than the single line entry on the return, assign status code "U" to the group.

    2. If the group total amount is smaller than the single line entry on the return, assign status code "R" to the group.

    Note:

    All IRs of the same income type are grouped together, regardless of the Income Identify Codes. After grouping, it may be necessary to remove an IR(s) from the group because of the Income Identify Code.

  17. If a 99MIS IR has two identical money amounts (e.g., NEC is $500 and MED is $500) and the TP reports one of the amounts, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  18. A photocopy of a prior year CP 2000 response may be attached to the return. Consider the information in the previous year's response. This information may result in resolving the U/R issue(s).

  19. When a U/R issue for the same type of income from the same payer was resolved per a copy of a Letter 2625C response from a prior year attached to the return, delete any current year IR.

    Note:

    If a prior year AUR closure letter (CP 2005, Letter 1802C, etc.) is attached to the return, research the prior year to see if the resolved issue(s) corresponds to the current AUR year discrepancy. If so, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  20. If all IRs are matched exactly, but there is still a U/R amount:

    1. Add the amounts reported on the return. (There has probably been a math error.)

    2. Pursue the U/R issue.

    3. Send an appropriate paragraph to advise the TP of the error.

  21. If the discrepancy is resolved, close the case using PC 2X.

  22. Foreign source income IRs are identified by:

    • A payer TIN of "99-9999999" .

    • An unusual payer name (Bundesent fer Finazen, Banque de Quebec) or a payer name indicating a foreign country (French Dividends, German Securities, United Kingdom Royalties).

    • Foreign country abbreviation in the State field.

    • Account Code Type "T" .

      Note:

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

Service Center Recognition/Image Processing System (SCRIPS)
  1. The following procedures apply to the analysis of Service Center Recognition/Image Processing System (SCRIPS) IRs.

  2. The system displays a warning message when STATUS CODE "U" is assigned to a SCRIPS IR(s). When this message is received, the tax examiner should screen the related IR with EXTREME care.

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

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

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

      Example:

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

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

      Example:

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

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

  4. If a SCRIPS IR is asterisked and is deleted due to one of the conditions in (3) above and the other asterisked item(s) are reported or below tolerance, close the case. If the other asterisked item(s) are U/R, continue processing.

  5. If a SCRIPS IR is U/R and none of the conditions in (3) above are present, consider the IR correct and pursue the issue using normal procedures.

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

    2. Do not send SCRIPS IRs with erroneous information to the TP. Create an IR to reflect the correct information and include it on the notice.

  6. Do not send information regarding erroneous SCRIPS IRs to the AUR Payer Agent Coordinator, unless some other payer agent (P/A) condition exists.

Jointly Owned Income

  1. Joint ownership is indicated when there are two or more names on the IR, or one payee name is on the IR followed by "and" or "or" . This situation occurs primarily when working with interest, dividend and/or securities income.

  2. When the TP reports the appropriate percentage of ownership from a jointly owned IR, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Exception:

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

  3. If the TP resides in a Community Property state, see IRM 4.19.3.5.4, Community Property States, for further instructions.

  4. If the filing status is 3 (Married Filing Separately), the spouse's name appears on the IR, the TP does not report ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the income in question or does not include a statement that ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , research IDRS using CC INOLE, RTVUE, ENMOD, etc. for the spouse's return.

    Note:

    If the IR is solely for the spouse, delete the IR.

    1. If the spouse did not file a return, issue a CP 2000.

    2. If the spouse filed a return, it may be possible to determine if the spouse reported the jointly owned income. If the difference between the spouse’s IRPTR data and his/her reported per return amount (from CC RTVUE, or IMFOLR) for the related income type equals the U/R amount (within tolerance) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . If not, issue a notice for the full U/R amount to the AUR TP.

  5. If the filing status is 6 (TP claiming an exemption for spouse not filing), issue a notice as appropriate to the primary TP for the U/R issue.

    Reminder:

    If the filing status is 6 and the IR is for the spouse, delete the IR.

Community Property States

  1. Taxpayers who reside in a community property state and who are subject to the state’s community property laws must follow the state community property laws to report their community/separate income on a federal tax return.

  2. AUR may receive requests for filing status changes based on the June 26, 2013 Supreme Court ruling on a provision of the 1996 Defense of Marriage Act (DOMA). The effect of the Supreme Court’s opinion is that same-sex couples who are lawfully married under state law are treated as married for all federal tax purposes including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming earned income tax credit (EITC) and child tax credit (CTC). If the TP submits a Form 1040X requesting a filing status change see IRM 4.19.3.21.7.4 (3), Referrals.

  3. The Community Property states are:

    • Arizona

    • California

      Note:

      A Chief Counsel Advice Memorandum issued in May of 2010 provides that in computing federal income tax California’s community property laws apply to registered domestic partners (RDP) who reside in California in computing the partner’s federal income tax.

    • Idaho

    • Louisiana

    • Nevada

      Note:

      The states community property laws apply to RDP as of October 1, 2009.

    • New Mexico

    • Texas

    • Washington

      Note:

      The states community property laws apply to RDP as of June 12, 2008.

    • Wisconsin

  4. Married TPs can elect to file either a joint return or separate returns (to get a greater tax advantage). If the TPs meet certain conditions, they may be eligible to file a non-joint return using either FS 1 (single) or FS 4 (head of household), as opposed to FS 3 (married filing separate).

  5. RDPs are not married for federal tax purposes. They can use only the single filing status, or if they qualify, the head of household filing status. RDPs treat income as jointly owned. An RDP must report half of all community income and all of his/her separate income on his/her tax return. Taxpayers attach Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States, (or similar statement) to show how the income has been allocated.

  6. Community income is generally income from:

    • Community property (e.g., a jointly owned savings account)

    • Salaries, wages or pay for services that either spouse performed during their marriage

    • Real estate that is treated as community property under the laws of the state where the property is located

  7. Separate income is generally income from separate property. Separate income belongs to the TP who owns the property.

    Note:

    Contribution limits on IRAs are applied without regard to community property interests.

  8. When married TPs choose to file separate tax returns, they should use Form 8958 (or similar statement), to list their income, deductions and W/H. Each TP is instructed to attach the Form 8958 (or similar statement) or a photocopy of the other spouse's payer documents (Form W-2, Form 1099, etc.) to each of their individual tax returns.

  9. On the Form 8958 (or similar statement), community income is generally equally divided between both TPs and each TP would report their separate income.

    1. Earned income (e.g., wages, nonemployee compensation, etc.) is generally considered community income and the TPs would divide their combined income equally between them.

      Note:

      The amount of W/H would also be combined and divided between both TPs.

    2. Jointly held savings accounts are treated as community property. Individual savings accounts that earn either interest or dividends are generally considered separate property.

      Exception:

      The Community Property laws for those TPs who reside in Idaho, Louisiana, Texas or Wisconsin stipulates that income from separate property is generally treated as community income. For example, interest earned on an individual savings account would be considered community income.

  10. On an individually filed tax return, if there is partially reported income/deductions and the TP resides in a community property state as listed in (3) above, determine if the AUR condition is the result of the income allocation.

    1. Consider the information return fully reported if attached statements/worksheets or Form 8958 identifies that the income was allocated between both spouses (including RDPs).

    2. If the discrepant information return is not addressed in the attached statement/worksheet or Form 8958, pursue the full amount of the income.

Deceased Taxpayers

  1. On married filing joint (FS 2) returns if there is an indication that the primary or secondary TP is deceased, but the Tax Account screen (Entity section) does not reflect this, research IDRS CC INOLES to determine which TP is deceased.

  2. Follow the procedures listed below to screen the case:

    Note:

    When one of the TPs is deceased, see IRM 4.19.3.8.17.1 (4), SS/RR - Analysis, for procedures to resolve SS/RR discrepancies on jointly filed returns.

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

      Caution:

      If the decedent's income is reported on the return, consider the IR reported and enter status code "R" . This allows the system to correctly calculate any changes.

      Exception:

      If the surviving spouse's U/R income causes a change in the taxable portion of a decedent's reported SS/RR, Student Loan Interest Deduction, IRA Contributions and/or Tuition and Fees, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send PARAGRAPH 129, see IRM 4.19.3-7, CP PARAGRAPHS.

    4. Issue a notice if the U/R IR(s) show ownership for the surviving spouse.

  3. If issuing a notice, input the current information in the Update Address window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Updating Address Information.

    1. Update the first name line.

    2. For joint returns, enter DECD after the given name of the deceased TP.

    3. For other than joint returns, enter DECD after the TP's last name, including suffix.

      Note:

      The first name line is limited to 35 characters. If DECD will not fit on this, input the deceased TP's name and DECD on the second name line.

    4. Enter the second name line, if present.

    5. Enter "D" in the Split Code field.

Declared Disaster Areas

  1. AUR Coordinators input Zip Codes for specific declared disaster area situations as necessary based on IRS Disaster Relief Memos. Follow system prompts to ensure proper handling of declared disaster area cases. Disaster types with case impact:

    Note:

    Use of IPC 0D and batch type 35 to process disaster cases should occur ONLY when directed by AUR HQ and ONLY for impacted sites.

    1. Type 2 - suppresses CP 2000/CP 2501 and Statutory Notices.

    2. Type 3 - prevents cases from defaulting (notices continue to be issued).

    3. Type 4 - suppresses CP 2000/CP 2501 and Statutory Notices AND prevents cases from defaulting.

  2. Cases with the following characteristics may require special and/or manual processing:

    1. Special rules for withdrawals and loans from IRAs and other qualified retirement plans, reported on Form 8930, Qualified Disaster Recovery Assistance Retirement Plan Distributions and Repayments, and taken into consideration on Form 8606, Nondeductible IRAs.

    2. Education Credits on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits).

      Note:

      Follow procedures in the income/issue specific subsections when there is an indication of the items listed above.

Frivolous Return Program (FRP)

  1. A frivolous return is defined as noncompliance with filing and/or paying tax based on unfounded legal or constitutional arguments per IRM 25.25.10, Frivolous Return Program. If in doubt about whether the return is frivolous, consult with your lead or manager. If it is determined during screening that the return is frivolous, close the case with PC 13, notate the case for clerical "FRP to Ogden" .

    Note:

    See IRM 4.19.3.5.9 (6), Miscellaneous, if the TP is quoting an IRC.

  2. If the return is determined NOT to be frivolous, continue normal processing.

  3. If FRP requests an AUR case after TP contact, close the case with the appropriate PC (38, 64 or 85), notate the case for clerical "FRP to Ogden" .

Fraud Referral Program

  1. The primary objective of the fraud program is to foster voluntary compliance through the recommendation of a criminal investigation/prosecution and/or civil penalties against TPs who evade the assessment and/or payment of taxes known to be due and owing.

  2. Tax fraud is often defined as an intentional wrongdoing on the part of a TP, with the specific purpose of evading a tax known or believed to be owing. Tax fraud requires both:

    1. a tax due and owing; and

    2. fraudulent intent

  3. The objective of the Campus Fraud Referral Program is to:

    1. Identify cases with potential fraud.

    2. Develop fraud guidance from the Campus Fraud Referral Specialist (FRS).

    3. Refer potential fraud cases to Field Exam for further development.

  4. Fraud Technical Advisor (FTA) - The FTA assists with the development of fraud in the Campus Examination environment.

  5. Functional Fraud Coordinator (FFC) - The FFC is a fraud liaison assigned to a specific function or operation within the Campus. The FFC is responsible for reviewing the Forms 13549, Campus Fraud Lead Sheet, and conducting research used to establish a pattern of non-compliance. See IRM 4.19.10.4.3, Responsibilities of the Functional Fraud Coordinator (FFC), for additional information.

  6. Campus Fraud Coordinator (CFC) - The CFC is a fraud liaison assigned to each SB/SE Campus. The CFC is the main point of contact with the FTA assigned to that campus.

  7. Exam Fraud Coordinator (EFC) - The EFC is a fraud liaison assigned to each W&I Exam function. The EFC is the main point of contact with the FTA assigned to that campus.

Identifying and Developing Fraud in AUR
  1. During the course of AUR case work, situations may be encountered involving potential fraud, referred to as indicators of fraud. Although only a small percentage of cases are fraudulent, it is essential to detect and report any potential fraudulent activities. IRM 25.1.2.3, Indicators of Fraud, provides several lists of Fraud Indicators. The following list has been developed for AUR and identifies examples of indicators of fraud that are most likely to be found in a campus environment (this list is not all inclusive and may involve a promoter/return preparer):

    • Altered Documents

    • False deductions/adjustments to income

    • False/overstated Form W-2 for EIC purposes (may be preparer/promoter)

    • False Schedule C for EIC purposes

    • Identity theft (sale or purchase)

    • False basis in assets

    • False transaction date for asset disposition

    • False statements made by TP

    • False exemptions

    • Use of decedent’s SSN

    • False business, rental, or farm expenses

    • False or overstated refundable credits

    • False/overstated Form 1099- MISC

    • Amended returns with any of the above

  2. Fraud is developed by trained Fraud caseworkers until it is determined that affirmative acts (deceit, subterfuge, camouflage, concealment or some attempt to color or obscure events or to make things seem other than they are) exist. The Service must prove that the TP acted deliberately and knowingly with the specific intent to violate the law. Once a suspicion or indicator of fraud is found, it is essential that the case be transferred to the designated AUR Functional Fraud Coordinator (FFC) for further development.

  3. See IRM 25.1.1.3, Indicators of Fraud vs. Affirmative Acts of Fraud.

Online Fraud and Other Scams (PHISHING)
  1. Cases where the TP indicates receipt of an AUR notice/letter but there is no record on the AUR system of any notice/letter issuance for the tax year in question; i.e. fake CP 2000, require special handling. See the table below to determine the proper actions to take:

    If the TP received the notice Then
    Via mail
    1. Advise the TP to report the incident; i.e., access the information on https://www.irs.gov/uac/report-phishing and follow the directions.

      Note:

      If the TP does not have internet access, refer to (2), below.

    2. Request the taxpayer provide a copy of the notice/letter, including all enclosures and the packaging envelope, if available.

    3. Inform the TP the AUR department has no compliance issue and no further action is necessary.

      Caution:

      It may be necessary to research the TP’s account(s) to validate there are no other IRS issues; i.e., balance due, etc.

    4. If the TP’s identity is compromised; i.e., SSN is on the notice/letter, inform the TP they may be a victim of ID Theft and advise him/her to complete Form 14039, IRS Identity Theft Affidavit. See IRM 4.19.3.21.1.26.1, IDT - General. for additional information.

    5. Refer the matter to the AUR Coordinator. Provide a copy of the notice/letter, including enclosures and the packaging envelope, if available.

    Via email
    1. Inform the TP not to reply to the email, open any attachments as they may contain malicious code, or click on any links.

    2. Advise the TP to report the incident; i.e., access the information on https://www.irs.gov/uac/report-phishing and follow the directions.

      Note:

      If the TP does not have internet access, refer to (2), below.

    3. Request the TP provide a copy of the email/fax, if available.

    4. Inform the TP the AUR department has no compliance issue and no further action is necessary.

      Caution:

      It may be necessary to research the TP’s account(s) to validate there are no other IRS issues; i.e., balance due, etc.

    5. If the TP’s identity is compromised; i.e., SSN is on the notice/letter, inform the TP they may be a victim of ID Theft and advise him/her to complete Form 14039, IRS Identity Theft Affidavit. See IRM 4.19.3.21.1.26.1, IDT - General. for additional information.

    6. Refer the matter to the AUR Coordinator. Provide a copy of the email, if available.

  2. If the TP does not have internet access advise him/her to contact TIGTA. TIGTA can be reached at 800-366-4484 or by faxing information to 202-927-7018. Information can also be mailed to Treasury Inspector General for Tax Administration Hotline, PO Box 589 Ben Franklin Station, Washington, DC 20044-0589.

AUR Tax Examiners Fraud Responsibilities
  1. Identify indications of fraud that are uncovered through regular case processing. Prior to researching for fraud indicators, use the IAT "aMend" tool, research portion, to determine Scrambled SSN or Mixed Entity. If yes, prepare Form 4442 for referral to AM. If no, refer to the following:

    1. Fraud Refund Scheme listing found in the Job Aids section on SERP: http://serp.enterprise.irs.gov/databases/irm-sup.dr/job_aid.dr/RICS-IVO/FraudRefundSchemeListing.htm

    2. IRM 4.19.3.5.8.1, Identifying and Developing Fraud in AUR.

    3. IRP data versus the filed return; i.e. the only UR income is social security benefits that do not indicate a filing requirement. The posted return appears to have fraudulent income reported, such as Schedule C and wage income that cannot be verified on IRPTR. Refer to Exhibit 4.19.3-19, Filing Requirements for Most People, for additional information.

  2. Discuss the indicators of fraud with the group manager or lead. If the group manager or lead concurs:

    1. Complete Sections I, II and III of Form 13549, Campus Fraud Lead Sheet (information and indicators of fraud).

    2. Secure the group managers initials and date.

    3. Assign the appropriate IPC 0D, 3F, 6F, or 8F.

    4. Forward the case and the sheet to the AUR Functional Fraud Coordinator (FFC) for consideration.

  3. Documentation is critical in the development of fraud. Maintain complete and accurate case notes that include each of the following:

    1. All case actions.

    2. All documents received.

    3. All contacts must be adequately documented (e.g. changes to entity information were recognized/updated).

    4. All conversations with the TP, representative, return preparer, and third parties must be recorded (what was discussed and the responses).

  4. If Fraud refuses the case it will be returned to the tax examiner per IRM 4.19.3.5.8.3 (6), AUR Functional Fraud Coordinator Responsibilities. See the table below for the appropriate action to take.

    If Then
    The case is in the screening phase Close the case PC 28, if instructed by the FFC to do so.
    The TP's response indicates they did not file a tax return (regardless of agreement to the U/R income)
    1. Research and print ENMOD. If there is an indication of identity theft see IRM 4.19.3.21.1.26.3, Responses.

    2. If not, issue a Letter 2626C, and advise the TP to submit a completed return including the required signatures or a signed statement that they did not have a filing requirement with a copy of our notice. Refer to Exhibit 4.19.3-19, Filing Requirements for Most People, for additional information.

    3. Request Form 14039/a police report.

    4. Leave a detailed case note outlining the TP response and actions (i.e. "TP resp didn’t file. 2626C for rtn or signed stmt" ).

AUR Functional Fraud Coordinator Responsibilities
  1. The AUR Functional Fraud Coordinator (FFC) is responsible for developing fraud cases:

    1. Conducting preliminary screening of Form 13549, to determine if the referral should be forwarded to the CFC (all cases in IPC 0D, 3F, 6F, and 8F).

    2. Conducting research used to establish a pattern of non-compliance.

    3. Making a determination to accept (forward the case to the CFC) or decline the referral within 10 (ten) days of receipt.

    4. Leave a case note detailing actions taken (i.e. forwarded to Fraud, doesn't meet fraud criteria, etc).

  2. The AUR FFC is also responsible for monitoring and managing the Fraud Referral Program within the AUR Operation.

    1. Maintaining a copy of each Form 13549 for 3 years.

    2. Tracking all AUR fraud leads, including those declined/returned to AUR and those accepted for further fraud development. AUR will use a combination of the IPC listing and Form 13549 to track fraud referral cases.

    3. Submitting information on fraud referral/accepted/declined cases to Exam Headquarters by the fifth day of each month.

    4. Completing the Campus Fraud Monitoring report located at \\COV0010CPSHR1\Common\SBSE\Campus Compliance Services\Fraud.

  3. If the AUR FFC declines the fraud lead he/she will:

    1. Provide a written explanation for the declination in Section VI, Explanation for Declination, of Form 13549.

    2. Return a copy of the completed Form 13549, to the initiator through the initiator’s team leader/manager.

    3. Reassign the case to the initiator's User Identification Number (UID).

  4. If the AUR FFC accepts the fraud lead, he/she will:

    1. Annotate the acceptance on the Form 13549.

    2. Forward the fraud lead (case or scanned documents and Form 13549) to the CFC for a final fraud determination, following local procedures.

      Caution:

      The normal Assessment Statute Expiration Date (ASED) expires three (3) years from the due date of the return or three years from the received date of the original return; whichever is later. There must be at least 13 months remaining on the ASED, from the date the case is referred to the CFC. If less than 13 months remain and the case has good fraud potential, the FFC can contact the CFC who can consider accepting the case on a case by case basis.

    Note:

    The CFC is required to make a determination to accept or decline a lead within 21 business days of receipt.

  5. If the CFC accepts the fraud lead for further development, he/she will request the case be reassigned and ensure the case is established on AIMS. The AUR FFC will:

    1. Close the case using Fraud Closing PC 14, 44, 72 or 84, as appropriate.

    2. Annotate the Form 13549 and keep a copy for the AUR records.

      Note:

      Copies of Form 13549 must be maintained by AUR for three years.

    3. Make and send a copy of the Form 13549 to the initiator through the initiator's manager.

    4. Ensure the entire case contents are forwarded, following local procedures.

      Note:

      If the case contents are being trans-shipped to the CFC, recharge the return using IDRS CC ESTABDT or Form 2275, Records Request, Charge and Recharge.

  6. If the CFC declines the fraud lead, he/she will return the Form 13549 with a written explanation to AUR. The AUR FFC will:

    1. Return the Form 13549 to the initiator through the initiator’s manager.

    2. Transfer the case to the initiating tax examiner's UID.

Miscellaneous

  1. Initial processing errors, or additions to the AGI are corrected by entering the appropriate amount(s) in the MISCELLANEOUS ADJUSTMENT fields on the MISC ADJUSTMENT/SCHEDULE C EXPENSE window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Miscellaneous Adjustment/Schedule C Expense. When any amount is entered in this window send a Special Paragraph explaining the adjustment. The amount computed in the changed amount field is included in the AGI by the system and is considered in all calculations. This amount is included in the U/R Amount on the Return Value screen and displays on the Notice Summary as Miscellaneous Adjustment.

    Caution:

    Do not use this window for situations where a specific income/deduction type has its own window for the required adjustment. Also, the entry for the return field can be a negative or a positive amount, depending on the line entry being changed.

  2. If Form 6781, Gains and Losses from IRC 1256 Contracts and Straddles, is attached to the return, or if Form 1040, line 44, indicates that the tax is from Form 6781, continue normal processing. This is reported on Schedule D.

  3. A net operating loss (NOL) is identified by a negative entry on Form 1040, line 22 caused by negative amounts on lines 12, 14, 17 other than Schedule E Part I, line 18, or the indication of a carryover NOL on line 21.

    Note:

    A NOL is indicated by a negative amount on Form 1040, line 22. A NOL does not exist simply because there are negative entries on lines 12, 14, 17, 18, or 21.

    1. Verify that the correct amount is displayed in the NET OPERATING LOSS AMT field of the Return Value screen.

    2. If a NOL is caused by negative entries on Form 1040, lines 14 or 21, an amount does not display on the Return Value screen. Input the amount of the NOL in the NET OPERATING LOSS AMT field.

    3. The NET OPERATING LOSS AMT field displays an amount that is just a negative figure, not an actual NOL. If a displayed amount is not a NOL, delete the incorrect amount.

  4. If Form 1040 shows a net operating loss, continue normal processing.

  5. If IRC 6501(d), Request for Prompt Assessment, is noted on the tax return, or there is a statement requesting a prompt assessment, AND there is a U/R amount, the case MUST BE WORKED EXPEDITIOUSLY. Prompt Assessment cases have an 18 month statutory period for the assessment of additional tax. Refer to the table below for the proper action to take:

    If Then
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. Enter "Y" in the IRC 6501(d) field on the Tax Account screen.

    2. Enter the irregular statute of limitation date in the IRREG DATE field on the Tax Account screen.

    3. Control the case and continue processing.

  6. If an attachment indicates the income in question is nontaxable and the TP cites an IRC section, determine the validity of the TP's statement by researching the IRC. If the IRC submitted by the TP(s) is not valid, send a Special Paragraph to inform him/her that the explanation is not acceptable.

  7. Erroneous refunds caused by IRS error require special processing, see IRM 4.19.3.5.11, Erroneous Refunds, for further information.

  8. If a Form 8857, Request for Innocent Spouse Relief, or an attachment indicates a TP is claiming Innocent Spouse, see IRM 4.19.3.4.3.2 (8), Freeze Codes, and IRM 4.19.3.21.1.20.1, Innocent Spouse Relief Cases - Tax Examiner Instructions.

    • Do not confuse Innocent Spouse cases with Injured Spouse cases, which are worked in Accounts Management.

    • If the TP's claim for Innocent Spouse relief does not relate to the tax year of the open AUR case, send only the Innocent Spouse claim to CSC. Do not send the AUR case to CSC.

AUR Bankruptcy Coordinator Procedures - Contact by Insolvency

  1. When contacted by an Insolvency Specialist on a case in AUR inventory that has not yet been screened:

    1. Inform the Insolvency Specialist that there will not be an AUR issue for the year in question.

    2. Leave a detailed case note documenting the contact with the Insolvency Specialist.

    3. Take the following action to close the case with PC 27:

      If Then
      The case is currently in a batch (AB, AU OR BF status) Have the case assigned to yourself and input closing PC 27.
      The case is not currently in a batch (i.e., in a future run control) On a weekly basis, provide the clerical function with a listing of SSNs and request that they assign PC 27.

      Note:

      Follow the above procedures regardless of whether or not Bankruptcy indicators are present on the AUR system.

    4. Run the AUR Bankruptcy Status listing on a weekly basis and take appropriate steps to address the cases identified on the listing. Provide clerical with the SSNs of any "pre notice" cases identified from the listing to be closed with PC 27. See IRM 4.19.3.21.1.10.2 (9) a, Bankruptcy Procedures - AUR Bankruptcy Coordinator Instructions, for additional information.

  2. When contacted by an Insolvency Specialist on a case that has been screened but the notice has not yet been issued:

    1. Inform the Insolvency Specialist that there will not be an AUR issue for the year in question.

    2. Leave a detailed case note documenting the contact with the Insolvency Specialist.

    3. Stop the notice and input PC 27. See IRM 4.19.3.18.3, Stop Notice Functionality, for additional information on stopping notices.

      Note:

      Follow the above procedures regardless of whether or not Bankruptcy indicators are present on the AUR system and/or regardless of the proposed U/R amounts.

Erroneous Refunds

  1. An erroneous refund is any receipt of money from the Service to which the recipient is not entitled. It includes all erroneous payments to the TP, even if the erroneous refund involves returning the TP’s own money. An erroneous refund may occur when:

    • The statute of limitations has expired and a refund is issued

    • There are misapplied payments

    • The AUR adjustment erroneously releases a credit hold (i.e., IVO involvement TC 971 AC 134 is present)

    • The AUR payment is posted with TC 670 or TC 610.

  2. When an erroneous refund is identified and the TC 846 has not posted, use the IAT "Stop Refund" tool to stop the refund. The action to stop the refund must be input by 10:00 a.m. on the Wednesday preceding the date of the refund.

    Caution:

    Do not stop a direct deposit refund; which is identified by the number "10" in the DDRC field on IDRS CC IMFOLT.

  3. When an erroneous refund is identified and is the only issue, assign PC 28, 53, 68, or 88. If the Erroneous Refund Statute Expiration Date (ERSED) has expired, close the case with PC 28, 52, 71, or 96. Take appropriate actions to resolve the erroneous refund issue. See IRM 4.19.3.5.11.1, Recovering Erroneous Refunds, for additional information.

Recovering Erroneous Refunds
  1. There are four categories of erroneous refunds that AUR will work; Category A1, A2, B and D. Each category has a specific method that must be used to recover the erroneous refund and different statutes of limitation apply.

  2. The Statute of Limitation used when recovering erroneous refunds are:

    1. ASED (assessment statute expiration date) which is generally three years from the date the return was filed,

    2. CSED (collection statute expiration date) which is generally ten years from the date of assessment, and

    3. ERSED (erroneous refund statute expiration date) which is generally two years from the date of the erroneous refund check or direct deposit. A five year statute applies when the IRS can show the erroneous refund was induced by fraud or a misrepresentation of a material fact. ERSED is used to recover Category D erroneous refunds.

  3. When a case is determined to be an erroneous refund, there are two steps to follow for recovering an erroneous refund:

    1. Identify the appropriate erroneous refund category.

    2. Complete the required actions within the applicable statutes to correct the error that caused the erroneous refund.

    Category IRM Reference
    A1 See IRM 4.19.3.5.11.1.1
    A2 See IRM 4.19.3.5.11.1.2
    B See IRM 4.19.3.5.11.1.3
    D See IRM 4.19.3.5.11.1.4
Recovering Erroneous Refunds - Category A1
  1. Category A1 Erroneous Refunds occur when the tax liability has been understated due to an error by the IRS on either a tax assessment or on an adjustment to the tax liability and the error results in a refund.

    Example:

    The IRS lowered the tax when processing the original return or an incorrect adjustment on an amended return was made.

  2. The Category A1 Erroneous Refund is generally recovered with a deficiency assessment by the Examination function. The notice of deficiency must be issued by the ASED.

    1. Prepare Form 4442, Inquiry Referral, and include any information pertinent to the erroneous refund. Forward the Form 4442 to your local Examination function for the issuance of a deficiency notice.

      Exception:

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

    2. Use the IAT "REQ77" tool to input TC 971 AC 663; regardless of erroneous refund amount.

    3. Leave a case note and assign appropriate PC/IPC.

      Note:

      The Letter 510C is not issued on Category A1 Erroneous Refunds. Do not input a TC 470 or a TC 844 on these accounts.

Recovering Erroneous Refunds - Category A2
  1. Category A2 Erroneous Refunds involve errors on non-refundable and/or refundable credits that are subject to deficiency procedures. Examples of refundable credits subject to deficiency procedures include Additional Child Tax Credit and Earned Income Tax Credit.

  2. Category A2 Erroneous Refunds are generally recovered with a deficiency assessment by the Examination function. The notice of deficiency must be issued by the ASED.

    1. Prepare Form 4442 and include any information pertinent to the erroneous refund. Forward to your local Examination function for the issuance of a deficiency notice.

      Exception:

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

    2. Use the IAT "REQ77" tool to input TC 971 AC 663; regardless of erroneous refund amount.

    3. Leave a case note and assign appropriate PC/IPC.

      Note:

      The Letter 510C is not issued on Category A2 Erroneous Refunds. Do not input a TC 470 or a TC 844 on these accounts.

Recovering Erroneous Refunds - Category B
  1. Category B Erroneous Refunds occur when the TP overstates their W/H, additional MCTXW, excess SST, or estimated income tax payments on a return or a claim for refund.

    Note:

    If the IRS caused the overstatement of W/H, additional MCTXW, excess SST, or estimated tax payments, the erroneous refund becomes a Category D Erroneous Refund and can only be recovered through the Category D Erroneous Refund procedures. See IRM 4.19.3.5.11.1.4, Recovering Erroneous Refunds - Category D, for further information.

  2. Category B assessments are not subject to the deficiency procedures; however, the assessments must be made by the ASED.

  3. The Letter 510C is not issued on Category B Erroneous Refunds.

  4. Do not input a TC 470 or a TC 844 on these accounts.

  5. Do not use Hold Codes on the adjustment that will prevent the notice from being generated.

Recovering Erroneous Refunds - Category D
  1. Category D Erroneous Refunds include any erroneous refund that is not included in any other erroneous refund category. The Category D Erroneous Refunds can also include any other Category of Erroneous Refunds if the ASED has expired but the ERSED is still open.

  2. The Erroneous Refund Unit in Accounting inputs a false credit (TC 700) on Category D Erroneous Refunds to remove the erroneous refund amount from Masterfile and reestablish the account in Accounting.

    1. This action prevents notices and administrative collection action (liens or levies) from occurring on the erroneous refund liability.

    2. The TC 700 credit can be identified by a Document Code 58 and a blocking series 950-999 in the DLN.

    3. These accounts will have a -U Freeze (generated by a TC 844) and it informs other employees the account is being worked and monitored in Accounting.

    4. Do not release the TC 700 credit.

  3. The IAT "Erroneous Refund" tool may be used in the processing of Category D erroneous refunds.

  4. When a Category D Erroneous Refund is identified within the ERSED statute:

    1. Issue Letter 510C using the IAT "Letters" tool. The date of the letter is considered to be the Date of Demand. Two copies of the letter are needed; one to attach to Form 12356, Erroneous Refund Worksheet, and one for the AUR case file.

      Exception:

      Do not send Letter 510C when the ERSED is expired. Refer to (10) below.

    2. Input the adjustment using the IAT "REQ54" tool for the TC 807 (W/H) and/or TC 252 (EXSST) using blocking series 55 and Hold Code (HC) 3. Use source document "Y" if including the original return with the adjustment.

      Note:

      Failure to Pay Penalty (FTP) under IRC 6651(a)(2) and (a)(3), does not apply to Category D erroneous refunds. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. Input any necessary credit transfers using the IAT "Credit Transfer" tool. Use TC 570 on the debit side to suppress the CP 60 Notice. The IAT "Credit Transfer" tool contains a box for Debit Freeze and Credit Freeze and will input the TC 570 when checked.

    4. Input TC 470 using the IAT "REQ77" tool. If the ERSED has expired, do not input TC 470.

    5. Input TC 971 AC 663 using the IAT "REQ77" tool.

    6. Input a TC 844 using the IAT "REQ77" tool for TP error or refunds of more than $50,000. If the ERSED has expired, do not input TC 844. Enter the date of the erroneous refund in the "TRANS-DT" field.

      Note:

      The TC 844 generates a "-U" freeze on the account and the TC 470 will stop all systemic notices and collection processes.

    7. Input a TC 844 using the IAT "REQ77" tool for IRS error and refunds of $50,000 or less. If the ERSED has expired, do not input TC 844. Enter the Date of Demand in the "EXTENSION-DT" field, the date of the erroneous refund in the "TRANS-DT" field and the erroneous refund amount in the "FREEZE-RELEASE-AMT" field.

      Note:

      The TC 844 generates a "-U" freeze on the account and the TC 470 will stop all systemic notices and collection processes.


    Once the adjustment posts on IDRS:

    1. Create a new IDRS control with Category ERRF, assign the IDRS control base to the Erroneous Refund Unit in Accounting (A/ER), change the status to "M" with activity code "ERRORREF" . The first five digits of the Erroneous Refund Units IDRS numbers are as follows:

      Site IDRS
      Austin 06113
      Cincinnati 02116
      Fresno 10117
      Kansas City 09113
      Ogden 04117
    2. Prepare Form 12356, Erroneous Refund Worksheet, and include a copy of all pertinent information (i.e., Form 3465, Adjustment Request, case history sheet, case notes, etc.), including a copy of the Letter 510C which was sent.

    3. Refer the case to the A/ER. See IRM 3.17.80-4, Erroneous Refund Coordinators, for a list of A/ER functions and their corresponding Erroneous Refund Coordinators.

    4. Close the case by assigning PC 28, 53, 68, or 88, as appropriate, or appropriate IPC on Recon cases.

      Note:

      When assigning PC 53, 68, or 88, complete the assessment window and enter an "M" in the AUTO/MANUAL IND field to indicate a manual assessment, as the adjustment was input on IDRS.

  5. If the case involves a combination of Erroneous Refund (Cat D- W/H, additional MCTXW, and/or excess SSTAX) and other AUR issues, take the following actions:

    1. Use the IAT "REQ54" tool to input the adjustment using blocking series 05 and "N" source document since the original will be kept to work other AUR issues.

    2. Monitor for the adjustment to post on both IDRS and AUR Tax Account.

    3. After the adjustment for W/H, additional MCTXW, and/or excess SSTAX posts, issue a CP 2000 for the remaining AUR issues, following normal AUR processing procedures.

      Note:

      Do not create a new IDRS control with Category ERRF.

  6. If before a Statutory Notice of Deficiency was issued, a Category D erroneous refund was due to the AUR payment refunding in error, when the account was paid in full, take the following actions:

    1. Send Letter 510C using the IAT "Letters" Tool. Two copies of the letter are needed; one to attach to Form 12356 and one for the AUR case file.

      Exception:

      If the erroneous refund is discovered during phone contact with the TP, a case history can be input on IDRS instead of issuing a Letter 510C. Advise the TP to void and return the check if it has not been cashed. Enter history "PHTPERRF" on IDRS using IDRS CC ACTON or IAT "ACTON" tool. The date you request repayment on the phone is the Date of Demand. Leave a detailed case note on AUR.

    2. Use the IAT "REQ77" tool to input TC 844 and TC 470.

    3. Work the case as an AUR agreed response, assigning PC 53, 67, or 87. If partial payment see (8) below.


    Once the adjustment posts on IDRS:

    1. Use the IAT "REQ77" tool to input TC 971 AC 663.

    2. See (4) 2nd step 1 above, to create a new IDRS control.

    3. Prepare Form 12356, Erroneous Refund Worksheet, and include a copy of all pertinent information (i.e., Form 3465, Adjustment Request, case history sheet, case notes, etc.), including a copy of the Letter 510C which was sent.

    4. Leave a detailed case note.

  7. If after a Statutory Notice of Deficiency has been issued, a Category D erroneous refund was due to the AUR payment refunding when the account was paid in full, take the following actions:

    1. Send Letter 510C using the IAT "Letters" Tool. Two copies of the letter are needed; one to attach to Form 12356 and one for the AUR case file.

      Exception:

      If the erroneous refund is discovered during phone contact with the TP, a case history can be input on IDRS instead of issuing a Letter 510C. Advise the taxpayer to void and return the check if it has not been cashed. Enter history "PHTPERRF" on IDRS using IDRS CC ACTON or IAT "ACTON" tool. The date you request repayment on the phone is the Date of Demand. Leave a detailed case note on AUR.
      If the case is controlled at a different site, check the action required box for the controlling site to complete the erroneous refund procedures.

    2. Use the IAT "REQ77" tool to input TC 844 and TC 470

    3. Request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.

    Once the adjustment posts on IDRS:

    1. Use the IAT "REQ77" tool to input TC 971 AC 663.

    2. See (4) 2nd step 1 above, to create a new IDRS control.

    3. Prepare Form 12356, Erroneous Refund Worksheet, and include a copy of all pertinent information (i.e., Form 3465, Adjustment Request, case history sheet, case notes, etc.), including a copy of the Letter 510C which was sent.

    4. Leave a detailed case note.

  8. If the Category D erroneous refund was due to the AUR payment refunding in error, when a partial payment was received, take the following actions:

    1. Send Letter 510C using the IAT "Letters" Tool. Two copies of the letter are needed; one to attach to Form 12356 and one for the AUR case file.

      Exception:

      If the erroneous refund is discovered during phone contact with the TP, a case history can be input on IDRS instead of issuing a Letter 510C. Advise the taxpayer to void and return the check if it has not been cashed. Enter history "PHTPERRF" on IDRS using IDRS CC ACTON or the IAT "ACTON" tool. The date you request repayment on the phone is the Date of Demand. Leave a detailed case note on AUR.
      If the case is controlled at a different site, check the action required box for the controlling site to complete the erroneous refund procedures.

    2. Use the IAT "REQ77" tool to input TC 844 and TC 470.

    3. Assign PC 75 and release the case. Monitor the case for the PC 75 to post.


    After a Stat has been issued:

    1. Request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.

    2. Monitor IDRS for the adjustment to post. Once the adjustment posts on IDRS:

    3. Use the IAT "REQ77" tool to input TC 971 AC 663.

    4. See (4) 2nd step 1 above, to create a new IDRS control.

    5. Prepare Form 12356, Erroneous Refund Worksheet, and include a copy of all pertinent information (i.e., Form 3465, Adjustment Request, case history sheet, case notes, etc.), including a copy of the Letter 510C which was sent.

    6. Leave a detailed case note on AUR.

  9. If the case is in Reconsideration phase:

    1. Send Letter 510C using the IAT "Letters" Tool. Two copies of the letter are needed; one to attach to Form 12356 and one for the AUR case file.

      Exception:

      If the erroneous refund is discovered during phone contact with the TP, a case history can be input on IDRS instead of issuing a Letter 510C. Advise the taxpayer to void and return the check if it has not been cashed. Enter history "PHTPERRF" on IDRS using IDRS CC ACTON or IAT "ACTON" tool. The date you request repayment on the phone is the Date of Demand. Leave a detailed case note on AUR.

    2. Use the IAT "REQ77" tool to input TC 844 and TC 470.

    Once the adjustment posts on IDRS:

    1. Use the IAT "REQ77" tool to input TC 971 AC 663.

    2. See (4) 2nd step 1 above, to create a new IDRS control.

    3. Prepare Form 12356, Erroneous Refund Worksheet, and include a copy of all pertinent information (i.e., Form 3465, Adjustment Request, case history sheet, case notes, etc.), including a copy of the Letter 510C which was sent.

    4. Leave a detailed case note.

  10. When the ERSED is expired, complete the following:

    1. Notate "ERSED Statute Expired" on the case.

    2. Complete Form 12356 and include a copy of all pertinent information.

    3. Use Form 12634, Correspondence Transmittal, or Form 3499, Informational Transmittal, to route case documentation to the appropriate Erroneous Refund Unit. See table in (4), 2nd step 1, above for routing information.

    4. Do not input TC 844 or TC 470.

    5. Do not send Letter 510C.

    6. Use the IAT "REQ77" tool to input a TC 971 AC 663.

    7. Leave a case note on AUR.

    8. Close case with PC 28, 52, 71, or 96, as appropriate.

Repaid Erroneous Refunds
  1. Erroneous refunds which have been repaid may be discovered during AUR processing. Per IRC 6404(e)(2), a TP should not be charged interest from the date of the erroneous refund to the date repayment is demanded, if they did not cause the erroneous refund and the refund amount is $50,000 or less. Even though the refund was repaid, it is necessary to follow Category D erroneous refund procedures to protect the TP from interest charges.

    Note:

    Interest is not charged when a treasury check is returned (not cashed).

    Note:

    Interest is charged from the date of the refund if the erroneous refund amount is over $50,000.

  2. If the erroneous refund has been repaid take the following actions:

    Exception:

    If the TP returned the erroneous refund check (TC 841 on the account with "99999" in the DLN) see (3) below.

    1. Use the IAT "REQ77" tool to input TC 844, using the current date as the date of demand. This will reverse any systemically assessed interest.

    2. Complete Form 12356, Erroneous Refund Worksheet. In the details section include the following information, using the verbiage provided as an example: "Full paid erroneous refund. No Letter 510C sent. Please input TC 845 to reverse TC 844."

    3. Use the following table to determine the appropriate action:

      If Then
      The original payment was full payment received before a Stat was issued Work the case as an AUR agreed response, assigning PC 53, 67, or 87.
      The original payment was partial payment received before a Stat was issued
      1. Assign PC 75 and release the case.

      2. Monitor the case for the PC 75 to post and the Stat to be mailed.

      3. After the Stat has been issued, request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.

      Payment was received after a Stat was issued Request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.
      The case is in Reconsideration phase Use the IAT "xClaim" or "REQ54" tool to post the appropriate adjustment.


    Once the adjustment posts:

    1. See IRM 4.19.3.5.11.1.4(4), 2nd step 1 to create a new IDRS control.

    2. Use the IAT "REQ77" tool to input a TC 971 AC 663.

    3. Refer the case to the A/ER using Form 3210, Document Transmittal. See IRM 3.17.80-4, Erroneous Refund Coordinators, for a list of A/ER functions and their corresponding Erroneous Refund Coordinators.

    4. Leave a detailed case note on AUR.

  3. If the TP returned the erroneous refund check (TC 841 on the account with "99999" in the DLN) take the following actions:

    1. Use the IAT "REQ77" tool to input a TC 971 AC 663.

    2. Complete Form 12356, Erroneous Refund Worksheet. In the details section include the following information, using the verbiage provided as an example: "Check returned; TC 844 not needed. No Letter 510C sent."

    3. Use the following table to determine the appropriate action:

      If Then
      The original payment was full payment received before a Stat was issued Work the case as an AUR agreed response, assigning PC 53, 67, or 87.
      The original payment was partial payment received before a Stat was issued
      1. Assign PC 75 and release the case.

      2. Monitor the case for the PC 75 to post and the Stat to be mailed.

      3. After the Stat has been issued, request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.

      Payment was received after a Stat was issued Request the case and hold in unit suspense until the taxpayer responds or the suspense period has expired. If no response is received, default the case using the appropriate PC.
      The case is in Reconsideration phase Use the IAT "xClaim" or "REQ54" tool to post the appropriate adjustment.


    Once the adjustment posts:

    1. Refer the case to the A/ER using Form 3210, Document Transmittal. See IRM 3.17.80-4, Erroneous Refund Coordinators, for a list of A/ER functions and their corresponding Erroneous Refund Coordinators.

    2. Leave a detailed case note on AUR.

Payer Agent

  1. The Payer Agent file is a compilation of Employer/Payer Information Return documents (Form W-2, Form 1099, Form 1098, etc.) which have been verified as erroneously filed or processed. The AUR Payer Agent file is tax year specific.

  2. Payer Agent (P/A) Indicator "Y" in the PA field of the Case Analysis screen indicates that the Payer Agent file contains data for the IR in question.

  3. Taxpayers and/or Employer/Payers may contact/notify AUR that a discrepancy with documents or the filing of IRs for a tax year has occurred. Tax examiners are encouraged to request that the TP and/or Employer/Payer forward the information to the site AUR Payer Agent Coordinator.

Tax Examiner - Instructions

  1. Access the Payer Agent window for all IRs showing Payer Agent Indicator "Y" . The Payer Agent window lists the payer's name, EIN, document type, source, and a synopsis of the reporting problem. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Viewing Payer Agent Information.

    Note:

    If all U/R income is from identified Payer/Agents and the Payer Agent window contains instructions to accept or delete the IR, close the case with PC 24. If U/R issues remain, continue normal processing (the P/A closing PC would NOT apply).

  2. During the screening phase, the tax examiner may identify questionable IRs, which appear to be erroneous but are not marked with a Payer Agent code "Y" . When IRs appear to be questionable and the tax examiner determines the IRs should be investigated, take the following steps:

    1. Print the Case Analysis screen and the Info Return screen.

    2. Forward both screen prints and any additional supporting information documents to the site AUR Payer Agent Coordinator.

    3. Continue normal processing.

  3. During the response phase, the examiner may receive information from the payer or the TP indicating the proposed U/R is the result of a payer reporting error, or a payroll processing mistake. Take the following action to forward the information to the site Payer Agent Coordinator:

    1. Photocopy the TP statement or payer letter and print the Case Analysis screen and the Info Return screen.

    2. Forward these photocopies and any additional supporting information documents to the site AUR Payer Agent Coordinator.

    3. Continue normal processing.

AUR Site Payer Agent Coordinator - Instructions

  1. The AUR Site Payer Agent Coordinator will perform the following tasks.

    1. Take action on all IRs referred by tax examiners as questionable/suspicious Payer Agent data.

    2. Sort and review the screen prints received from tax examiners deemed questionable/suspicious. Begin research when four or more screen prints with the same EIN are identified. The Site P/A Coordinator should attempt to make a determination about the discrepant IRs. If payer contact is necessary to determine the impact, check IDRS for a telephone number or call XXX-555-1212 (XXX represents the area code of the city/state being called).

      Note:

      Revised Third-Party procedures allow for the administrative action of verifying information received from Employers/Payers. This verification is not considered a third-party contact if the purpose of the contact is to process information received from the source and/or to ensure its validity/correctness.

    3. Create a Payer Agent record when a Payer Agent record does not currently exist, and the information available leads to a determination that the Payer Agent should be added to the Payer Agent File.

    4. Update payer name and text lines, when required. There may be more than one type of income or source code for each Payer Agent EIN entered. Verify by scrolling both type and source fields; P=Paper and T=Tape (magnetic media).

    5. Input the EIN to search/query the Payer Agent File.

    6. View and/or print Payer Agent reports from the Payer Agent Coordinator menu.

    Note:

    A Payer Agent cannot be created if a Payer Agent record already exists for the EIN, document type, source code or tax year. If this condition exists, the system displays a message.

  2. At the end of the AUR program for the tax year, print a copy of the Payer Agent Listing and retain in the Payer Agent file for three years.

National Designated AUR Payer Agent Coordinator - Instructions

  1. Employer/Payer identified IR filing discrepancies are submitted through the Enterprise Computing Center at Martinsburg (ECC-MTB) Management and Technology Information Returns Division. Documentation received from Employers/Payers is reviewed at ECC-MTB and copies are provided to the HQ (national) designated AUR Payer Agent Coordinator (currently located in Ogden). The HQ (national) designated AUR Payer Agent Coordinator has access to the national AUR Payer Agent File and is responsible for the input of all Employer/Agent Information Return documents received from ECC-MTB.

    Note:

    IR documents are identified as tape source or a combination paper/tape source.

  2. Query the Payer Agent File to determine if the Payer information received should be established or needs to be updated.

  3. A Payer Agent cannot be created if a Payer Agent record already exists for the EIN, document type, source code or tax year. If this condition exists, the system displays a message. To Update/Create a Payer Agent record:

    1. Enter the EIN of the identified Payer Agent.

    2. Select the appropriate document type from the list displayed.

    3. Enter the appropriate Source Code: "P" for Paper or "T" for Tape (magnetic media).

    4. Enter the payer name.

    5. Select or enter new instructions for the tax examiners.

  4. The AUR Payer Agent Program is automatically invoked during the weekly run process. The program updates the Payer Agent File for all sites during the weekly process with the new and updated records.

  5. Revised Third-Party procedures allow for the administrative action of verifying information received from Employers/Payers. This verification is not considered a third-party contact if the purpose of the contact is to process information received from the source and/or to ensure its validity/correctness.

Determination of CP 2501 Issuance

  1. Issuance of a CP 2501 (assignment of PC 30) is required for the conditions listed below. In certain other situations, issuance of a CP 2501 may provide better customer service since it is an inquiry instead of a proposal of assessment. If in doubt, consult your lead or manager for guidance.

    Exception:

    Do not issue a CP 2501 when HQ issues direction to stop issuing CP 2501 at a certain point in the AUR processing year.

    1. The U/R income is $100,000 or more.

    2. Cases involving partially reported K-1 IRs when the discrepant amount is $50,000 or more per income type, per payer.

      Exception:

      Partially reported INT, DIV, LTCG, STCG, and ROYAL discrepancies do not require a CP 2501.

    3. Cases involving questionable underclaimed W/H and/or additional MCTXW that result in an overall refund. See IRM 4.19.3.16.1.2 (3), Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous, for further information.

      Exception:

      If the refund is due to U/C W/H from a Form 1099-SSA, and the income is reported correctly, do not issue a CP 2501.

    4. Cases resulting in an overall refund due to underreported income.

    5. Cases involving U/C excess SSTAX on ELF returns - see IRM 4.19.3.16.2 (16) c, Social Security Tax/Tier I Railroad Retirement Tax.

    6. Cases involving Form 8615, Tax for Certain Children Who Have Unearned Income, and the parent or child used the Qualified Dividends and Capital Gains Worksheet, Schedule D or Schedule J tax methods. See IRM 4.19.3.13.1, 8615 Window.

    7. Cases where the On File Date is the same for multiple IRs and none of the IRs are reported. See IRM 4.19.3.8.12.1 (10), Conduit Income - Analysis.

    8. Cases in Category 30 and EARN is being pursued.

      Note:

      If Earn is being pursued as a secondary issue (in category other than Category 30), issue a CP 2000.

Analysis of Each Income Type

  1. These instructions are used to process the various U/R income amounts by each income type and must be used in conjunction with the general instructions in IRM 4.19.3.5, Analysis Procedures.

Wages - General

  1. Wages are compensation for employee services and are not subject to SE tax.

  2. Wages are identified on the Case Analysis screen by the literal "W-2" in the DOC TYPE field and the literal "WAGES" in the INCOME TYPE field.

Wages - Analysis
  1. Compare WAGES amount with entries on:

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

      Note:

      If wages are U/R and the TP enters "SNE" (Special Needs Exclusion) on the dotted line portion of Form 1040, line 7, compare the U/R amount with Form 8839, Qualified Adoption Expenses, see table below for line numbers. If the amount on the Form 8839, line numbers in the table below, matches the U/R amount within $1, accept wages as reported. If the amount is not equal to the U/R wages, consider the difference U/R.

      TY 2014 TY 2015 TY 2016
      Form 8839, line 29 Form 8839, line 29 Form 8839, line 29
    3. Form 1040EZ, line 1.

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

    1. Form 1040, line 16b.

    2. Form 1040A, line 12b.

    3. Form 1040, line 21.

      Note:

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    4. Schedule C or Schedule F - If wages are reported here, see IRM 4.19.3.8.1.3, Wages Paid to Statutory Employees, for instructions regarding Statutory Employees.

    5. Attachments to the return.

    6. Form 2106, Employee Business Expenses, Part 1, line 7 - Give credit for these amounts if the payer name on the IR is related to the occupation box on Form 2106. If the occupation box on Form 2106 is blank, consider the IR(s) fully U/R unless amounts match within $1. If line 7 is greater than line 6, in column A of Form 2106, the excess reimbursements must be included as income on page 1 of Form 1040.

  3. When comparing reported wages to IRs, do not allow partial credit for unidentified amounts UNLESS the return is missing supporting Form(s) W-2. Returns that were processed through OCR or ELF may not have Form(s) W-2 attached. DO NOT request the Form(s) W-2 from FRC. Allow the TP credit for amounts reported on lines shown in (1) above. Issue a CP 2000 for discrepancies.

  4. If the TP reports the same amount of Form W-2 income as shown in the IR, but under a different payer name, consider the IR reported.

  5. Consider any two WAGE IRs, for the same TP, that contain identical income information, as duplicates even if the payer names and EINs are different. Take the following action:

    1. If the TP failed to report either WAGE IR, consider only one of the IRs U/R (mark all elements of the other IR with status code "D" or "N" ), and show both of the IRs on the notice.

    2. If the TP reported one of the IRs, delete the IR the TP did not report (mark all elements of the IR with status code "D" or "N" ). If there are no other U/R issues, enter PC 24.

  6. If there are two WAGE IRs for the same TP, from the same payer (payer name and EIN match) take the following action:

    1. If the TP fully reports one of the IRs, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (mark all elements of the IR with status code D or N).

      Exception:

      If the payer is IHSS (In Home Support Services) do not apply the 25 percent rule, continue normal processing.

    2. If the TP does not fully report one of the WAGE IRs, group them together and consider the difference U/R.

  7. Allow TPs (i.e., police officers, firefighters, etc.) who have sustained injuries in the line of duty to reduce Form W-2, Box 1 Wages, by amounts indicated as line of duty injury payments when ALL of the following conditions are present:

    1. The TP is under age 65.

    2. The payer statement is attached indicating the TP was injured while on duty and provides a specific amount of excludable income. If the attached payer letter does not provide a specific amount, allow the exclusion if the TP includes a worksheet providing a breakdown of excludable income.

      Note:

      When pursuing excluded amounts because the above condition is not met, send a Special Paragraph requesting payer documentation to support the TP's claim.

    3. The amount has not been excluded from Box 1 Wages as shown on the attached Form W-2.

      Note:

      If the TP has double excluded the amount (Social Security Wages are more than the Wages shown on Form W-2, Box 1), send PARAGRAPH 46. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. Retired/non-active status members of the military employed as Junior ROTC (Reserve Officers Training Corps) instructors receive allowances for uniforms, housing, subsistence, etc. However, unlike active duty military personnel, these TPs CANNOT exclude these allowances. Disallow any excluded amounts and send PARAGRAPH 154. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. When wages or Social Security wages are U/R, and the TP paid SE tax, or is now subject to SE tax, input/verify the appropriate entries in the SE Tax window.

  10. Use status code "R" in the SSWAG and SSTIP literal when screening valid Wage IRs. Do not use status code "N" or "D" . Status code "N" or "D" may result in an incorrect excess SSTAX calculation.

  11. The system automatically enters status code "R" on MCWGE. The status code can be changed to "D" if necessary.

    Note:

    The system no longer marks the MCTXW element with a status code "R" , this amount is used in the calculation of the Additional Medicare Tax withheld, see IRM 4.19.3.16.1.4, Additional Medicare Tax (Withholding Reconciliation).

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

    Note:

    Many WAGE IRs involving the potential illegal use of SSNs are from agricultural, farming, food processing, or wholesale/retail employers.

  13. When TPs exercise statutory (qualified) employee stock options, the amount is generally excluded from ordinary income and the gain may be reported as a capital gain on Schedule D when the shares acquired upon exercise are sold.

    1. Taxpayers may reduce Form W-2, Box 1, Wages by the amount shown in Box 14 (identified as: stock, incentive stock options (ISOs), employee stock purchase plan (ESPP), etc.) and report the difference as a gain on Schedule D/Form 8949, column (h).

      Note:

      If the stock received upon exercise was not held a minimum of 2 years from the date the option was granted or 1 year from the date the option was exercised, the employer may not identify the exercised amount on the Form W-2, Box 14. If the balance of the WAGE IR is found on Schedule D/Form 8949, column (h), consider the issue resolved.

    2. Review Form 1040, line 7, and Schedule D before determining any U/R WAGE amount.

    3. If the TP did not report the full WAGE amount, send PARAGRAPH164. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      When the option is exercised, Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, may also be issued to show the value of the stock. Since the STOCK IR relates to the exercise of the statutory employee stock option, allow credit for amounts reported on Schedule D/Form 8949, column (d) against STOCK IRs.

  14. When TPs exercise non-statutory (non-qualified) employee stock options, the gain upon exercise is reported as ordinary income. Employers include the exercised amount on Form W-2, Box 1 and identify the stock option amount in Box 12 using code "V" .

    Note:

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

    Caution:

    Taxpayers may reduce Form W-2, Box 1, wages by the amount shown in Box 12 (Code "V" ) and report the difference as a gain on Schedule D/Form 8949, Part 1, column (h).

    1. Review Form 1040, line 7 and Schedule D, Part 1 before determining any U/R WAGE amount.

      Caution:

      If the TP reports the non-statutory option gain as a long term capital gain (Schedule D/Part II) AND a notice is being sent for other U/R issues, remove the non-statutory option gain from the LONG TERM GAIN(LOSS) field in the Sch D/8814/ECR window. Send PARAGRAPH 165, see IRM 4.19.3-7, CP PARAGRAPHS.

    2. If the TP did not report the full WAGE amount, send PARAGRAPH 164. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      When the option is exercised, Form 1099-B may also be issued to show the value of the stock. Since the STOCK IR relates to the exercise of the non-statutory employee stock option, allow credit for amounts reported on Schedule D/Form 8949, column (d) against STOCK IRs.

  15. Whenever wages are U/R, compute W/H or consider W/H.

    1. If there is an U/R WAGE IR with no W/H amount, there are no other IRs with W/H, and there is a TC 806, 807, or TC 290 with Reason Code 51 and/or Reason Code 136 on the Tax Account screen, complete the Withholding window. See IRM 4.19.3.16.1.1, Withholding - Analysis, for additional information. Reason Code 136 is present when Additional Medicare Tax from Form 8959 was adjusted.

    2. If there is an U/R WAGE IR with no W/H amount, and there are no other IRs with W/H, the system automatically generates a W/H amount of zero (0) on the Summary screen.

  16. For a list of the codes found in Box 12 of Form W-2, see Exhibit 4.19.3-8, Form W-2 - Box 12 Codes.

Attached Forms W-2 - Analysis
  1. Consider wages U/R if wage amounts from attached Form W-2 are:

    • Omitted

    • Added incorrectly when there are multiple Form W-2 involved

    • Transposed

    • Taken from the wrong box(es) on Form(s) W-2. Send PARAGRAPH 2, see IRM 4.19.3-7, CP PARAGRAPHS.

  2. If it appears that the TP reduced Form W-2 box 1 Wages by the amount in box 11 (Nonqualified Plans), pursue the difference as U/R wages and send PARAGRAPH 50, see IRM 4.19.3-7, CP PARAGRAPHS.

    Note:

    Before considering the amount U/R, check to see if the TP reported the amount as pension income.

  3. An O/R situation exists if the TP's entry on Form 1040, line 7, Form 1040A, line 7, or Form 1040EZ, line 1 is greater than the total WAGE IR(s). Consider wage income O/R if you determine that the TP:

    • Made a double entry (math error)

    • Transposed figures

    • Used Social Security Wages from Form W-2, Box 3. Send PARAGRAPH 2, see IRM 4.19.3-7, CP PARAGRAPHS.

  4. The TP may exclude certain types of income. Wages reported on Form W-2, Box 1 are generally reduced by the amount of excluded income. Some of these exclusions are:

    1. Tax favored amounts.

    2. Elective deferrals to a 401(K) or 403(B). These are generally tax-deferred annuities for teachers and employees of 501(c)(3) organizations and/or plans. See Exhibit 4.19.3-8, Form W-2 - Box 12 Codes, for a complete list of the elective deferral codes found in Box 12 of Form W-2.

    3. Dependent Care Assistance Benefits (DCB). See IRM 4.19.3.8.2.1, Dependent Care Benefits (DCB), for limitation of excludable income.

    4. "IOD" (Injury on Duty) or "LODI" (Line of Duty Injury) payments. See IRM 4.19.3.8.1.1 (7), Wages - Analysis, for further information.

    5. Survivor annuity received by the spouse, former spouse, or child of a public safety officer killed in the line of duty or a chaplain killed in the line of duty after September 10, 2001 while responding to a fire, rescue, or emergency as a member or employee of a fire or police department will generally be excluded from the recipient's income regardless of the date of the officer's death.

    6. Cost of living allowances paid to federal employees working abroad.

    7. Ministers Housing Allowances Ensure excluded minister housing allowance is subjected to SE tax, unless: the TP notates “Exempt Form 4361” or “Form 4029” on Form 1040 (see table below IRM 4.19.3.8.1.5 (4), Wages Miscellaneous for line numbers) or the housing allowance is for a retired minister. This amount may be the difference between net Schedule C income and income subject to SE tax on Schedule SE, see IRM 4.19.3.8.1.5 (4), Wages Miscellaneous.

    8. Exercised Employee Stock Options. See IRM 4.19.3.8.1.1 (13) and (14), Wages - Analysis, for further instructions.

    Exception:

    Back pay settlements or awards under the ADEA (Age Discrimination in Employment Act) cannot be excluded from income and should be pursued as U/R if excluded. Liquidated damages recovered under the ADEA do not constitute wages and should be reflected as other income on Form 1099-MISC.

    Since the amount reported on Form W-2, Box 1 should reflect these exclusions from income, the TP should not subtract the above items from the amount reported as wages.

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

    • The Form W-2 attached to the return appears to be altered, AND

    • There is a W/H discrepancy, AND

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

      Note:

      Use the IR as the most correct information, if the case does not meet referral criteria or if the referral is returned.

  6. If wages are U/R, check the attached Form W-2 and/or any attachments to determine if the TP excluded the amount as sick pay.

    1. Accept the exclusion if there is an indication that the TP paid the premiums (an amount present on Form W-2, Box 12, with code "J" that matches the excluded amount) and per attached pay-stubs or other documentation, the payer incorrectly included employee paid sick pay on Form W-2, Box 1. Form W-2, Box 1 matches Box 3, SSWAG, or attached payer documentation.

    2. If there is no clear indication per a. above, consider the amount U/R and issue CP 2000. Send PARAGRAPH 25, see IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      Payers are instructed to indicate the amount of sick pay not included in income (and not shown in Boxes 1, 3, and 5) in Box 12 of Form W-2 with Code "J" when the employee contributed to the sick pay plan.

  7. If the TP attaches a substitute Form W-2 and reports a lesser amount than shown on the IR from the same payer, consider the difference U/R.

  8. Consider W-2 IRs fully reported when Wage or W/H amounts on the IRs are ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    Note:

    This also applies to Virtual cases.

  9. If the TP participates in a nonqualified deferred compensation plan that does not meet all requirements as specified in IRC 409A, the employer must report the deferred compensation as income and the amount is subject to an additional tax.

    1. The employer identifies income under IRC 409A on Form W-2 in box 12 with Code Z.

      Note:

      The amount in Form W-2 box 12, Code Z is already included in box 1 (WAGES). If WAGES are U/R and the difference corresponds to the NQDC amount, pursue the discrepancy as WAGES and include a Special Paragraph using the following verbiage as an example: "Income recognized due to participation in a nonqualified deferred compensation plan that did not meet the requirements of Internal Revenue Code Section 409A is considered taxable. You cannot reduce your wages or nonemployee compensation by this amount" .

    2. Income recognized under IRC 409A is identified on the Case Analysis screen by the literal "W-2" in the DOC TYPE field and the literal "NQDC" in the INCOME TYPE field.

      Note:

      Enter status code "R" on the "NQDC" element(s).

    3. The "NQDC" amount is subject to an additional tax. See IRM 4.19.3.15.7, Additional Taxes on Income from Nonqualified Deferred Compensation Plan (IRC Section 409A), for further instructions.

      Reminder:

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

Wages Paid to Statutory Employees
  1. Statutory employees are self-employed independent contractors, for purposes of reporting income and expenses on their tax returns, who are treated as employees for FICA tax purposes.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and consider him/her a statutory employee if his/her occupation is listed in IRM 4.19.3.21.3.1.1 (2), Statutory Wages. Do not make any adjustments to the Schedule C/C-EZ and/or SE tax.

  3. Statutory employees should receive a Form W-2 with the statutory employee box checked in Box 13. If the Statutory Employee box was checked, the SEI literal has a value of "1" displayed on the IR. If it was not checked, the SEI literal has a value of "0" (zero).

  4. Statutory employees report their Form W-2 Wages on Schedule C or C-EZ, line 1, along with business expenses. This income is NOT subject to SE tax and business expenses are not subject to the 2 percent limitation for miscellaneous itemized deductions. This income is subject to social security and Medicare taxes that should be withheld at the source by the payer and shown on Form W-2 as SS/Medicare Tax Withheld, SS Wages, and Medicare Wages and Tips.

    Note:

    Follow the TP's intent, do not refund SE tax computed on wages paid to statutory employees.

  5. Performing artists are not statutory employees, but, they may report Form W-2 income on Schedule C (instead of Form 2106), if during the tax year ALL of the following conditions apply:

    1. They perform services in the performing arts for at least two employers,

    2. They receive at least $200 each from any two of these employers,

    3. Their related performing arts expenses are more than 10 percent of their gross income from the performance of those services, AND

    4. Their adjusted gross income (AGI) is not more than $16,000 before deducting these business expenses.

  6. Cases involving wages of statutory employees are created when:

    1. Wages received by an individual other than a statutory employee were reported on the Schedule C or C-EZ, and the individual incorrectly deducts expenses on Schedule C or C-EZ.

      Note:

      Only statutory employees may deduct expenses on Schedule C or C-EZ.

    2. The statutory employee did not report the wages on Schedule C or C-EZ, line 1, or as wages on Form 1040, Form 1040A, or Form 1040EZ.

  7. There is a discrepancy if there is a difference between the total of all wages (but not allocated tips) on all Form W-2 when the statutory employee indicator in Box 13 of Form W-2 is checked and the wages per return, Schedule C or C-EZ, line 1.

  8. Input Income Identify Code"SW" in all U/R wages from Statutory Employee IRs if wages are U/R.

  9. Consider wages from Statutory Employees U/R and send PARAGRAPH 115, (see IRM 4.19.3-7, CP PARAGRAPHS) if the Wage amounts from attached Form(s) W-2 are:

    • Omitted

    • Added incorrectly when there are multiple Form(s) W-2 involved

    • Transposed

    • Taken from the wrong box(es) on Form(s) W-2, send PARAGRAPH 2. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. If the TP combines non-statutory wages with statutory wages or self-employment income (i.e., NEC, MERCH, OTINC, MED, etc.) on the same Schedule C, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  11. If the TP includes only non-statutory wages on the Schedule C or C-EZ, disallow the expenses from Schedule C, line 28 (or Schedule C-EZ, line 2) and the amounts on Schedule C, lines 2, 4, and/or 30.

    1. Input the amount of disallowed expenses in the PRIM/SEC SCH C EXPENSE PER RETURN field(s).

    2. Enter a zero (0) in the PRIM/SEC SCH C EXPENSE NOW field(s) on the MISC ADJUSTMENT/SCHEDULE C EXPENSE window.

      Note:

      These amounts display on the CP 2000 Summary as a changed item (changes to the Primary and/or Secondary Schedule C expenses displays as a single item on the Summary screen).

    3. Send PARAGRAPH 116, see IRM 4.19.3-7, CP PARAGRAPHS.

    Note:

    When disallowing expenses on Schedule C or Schedule C-EZ due to the conditions above, do not adjust any SE tax claimed. Manually access the SETAX window to suppress the change. See IRM 4.19.3.15.1, Self-Employment Tax.

Fellowships, Grants, and Stipends
  1. If an explanation attached to the return indicates the fellowship, grant, or stipend was used for tuition, fees, books, supplies, and equipment required for the course, AND:

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

      Note:

      The TP cannot deduct or exclude expenses that exceed the IR. (i.e., enters a negative amount.)

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

    3. The TP excludes expenses not shown above, then pursue the unallowable expenses. Send PARAGRAPH 124, see IRM 4.19.3-7, CP PARAGRAPHS.

  2. If an explanation attached to the return indicates the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , consider the income reported.

  3. If the TP enters "SCH" next to Form 1040, line 7, accept as fully reported.

  4. If no explanation is attached and the IR is not fully reported, pursue the amount not reported. Send PARAGRAPH 124, see IRM 4.19.3-7, CP PARAGRAPHS.

Wages Miscellaneous
  1. If Wages are U/R and the TP has Form W-2 wages, determine if the TP makes any reference to repayment of supplemental unemployment benefits. If the TP correctly reported net wages after repayment of supplemental unemployment benefits, consider the wages reported.

  2. If wages are U/R and the TP is claimed as a dependent on another person's return, see IRM 4.19.3.12 (4), Standard Deduction, for further instructions.

  3. If wages are U/R, the system requires that you analyze W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

  4. If the TP is a minister and has reported Form W-2 wages on a Schedule C:

    1. If the Form W-2 and/or WAGE IR shows that SSTAX has NOT been withheld, allow the expenses. The net income is subject to SE tax UNLESS the TP has a Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, or Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits, exemption annotated on line 56 of Form 1040.

    2. If the Form W-2 and/or WAGE IR shows SSTAX has been withheld, disallow the expenses. Do not adjust any SE tax claimed. Manually access the SETAX window to suppress the change. See IRM 4.19.3.15.1, Self-Employment Tax. Send PARAGRAPH 45, see IRM 4.19.3-7, CP PARAGRAPHS.

    3. Ensure excluded minister housing allowance is subjected to SE tax, unless: the TP notates “Exempt Form 4361” or “Form 4029” on Form 1040 (see table below for line numbers) or the housing allowance is for a retired minister.

      TY 2014 TY 2015 TY 2016
      line 57 line 57 line 57
  5. If the TP computes Social Security Tax on Tips on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, but did not include the tip income in the AGI, consider the tip income U/R.

    1. If necessary, create a W-2 IR with an A-TIP element for the amount of allocated tips for which Social Security Tip Tax was reported but was not included in income. See IRM 4.19.3.15.2 (3), Social Security Tax on Tip Income Unreported to the Payer.

    2. The system computes a 50 percent Social Security Tip Tax Penalty when the TP uses Form 4137, PARAGRAPH 15 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

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

Other W-2 Income

  1. In addition to wage income, Form W-2 can contain information relating to Dependent Care Benefits (DCB), Employer Provided Adoption Benefits (EPAB), etc.

Dependent Care Benefits (DCB)
  1. A TP whose employer excludes earnings from taxable wages designated to pay for child care and/or care for a dependent(s) who is unable to care for himself/herself can exclude the amount of this benefit (within certain limits). The excluded amount is limited to the smaller of the TP's earned income, the spouse's earned income, or $5,000 ($2,500 if married filing separately).

    Note:

    For each month, or part of a month, a spouse was a full-time student or was unable to care for himself/herself, he/she is considered to have worked and earned income. His/her income for each month is considered to be at least $250 ($500 if more than one qualifying person was cared for).

  2. The Case Analysis screen displays this benefit with the literal "W-2" in the DOC TYPE field and the literal "DCB" in the INCOME TYPE field.

    Note:

    Screen ONLY system identified discrepant DCB amounts (i.e., those marked with an asterisk). If the case is open because of other income discrepancies, mark any non-asterisked DCB amounts on the WAGE IRs with status code "N" or "D" .

  3. The gross benefit amount shows separately on Form W-2, Box 10. The wage amount on Form W-2, Box 1 SHOULD NOT INCLUDE the DCB for the tax year.

    Note:

    The employer includes any DCB over $5,000 in the TP's wages as shown on Form W-2, Box 1.

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

  5. Taxpayers MUST complete Form 2441, Child and Dependent Care Expenses, Parts I, II, and III in order to compute the correct amount of Child Care Credit and excludable DCB.

    1. Form 2441, line 15, contains the TOTAL BENEFIT AMOUNT less the amount forfeited.

    2. Form 2441, line 26 contains the TAXABLE BENEFIT AMOUNT. This taxable amount should be included with wage income on Form 1040 or Form 1040A, line 7 with "DCB" noted on the dotted line next to line 7. Verify that the correct amount of DCB is actually reported on line 7.

    3. See IRM 4.19.3.14.2 (5), Credit for Child and Dependent Care Expenses, for further instructions regarding Child Care Credit.

  6. The system computes the correct taxable amount of DCB. Input/verify the appropriate entries on the Dependent Care Benefits window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Dependent Care Benefits.

  7. If there is an indication that the TP participated in one of the following Cafeteria Plans: flex plan, flex credits, or flex dollars (pre-tax deduction) for Dependent Care Benefits and the TP IS NOT claiming Child Care Credit, consider the DCB reported.

  8. If the TP did not file Form 2441 and did not report DCB, the taxable portion is the DCB IR amount up to ≡ ≡ ≡ per payer and per TP. Take the following action to determine if DCB is U/R:

    1. Select the Dependent Care Benefits window.

    2. Enter zero (0) in the REPORTED DEP CARE BENEFITS field.

    3. Enter the total of all DCB reported by payer(s), but no more than ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , on the IR(s). Input/verify all other fields per the IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Dependent Care Benefits.

    4. PARAGRAPH 156 automatically generates when DCB is U/R.

  9. If the TP filed Form 2441 and Part III is blank or incorrectly completed, take the following action:

    1. Review the TP's entries in Part III, lines 12 through 26 and prepare a mock Form 2441 to correct any errors and/or complete any omitted entries. Use the total expenses shown in Part II, line 2, column (c), to determine the line 16 (qualifying expenses) amount.

    2. Access the DCB window and use the information from the mock Form 2441 to input all appropriate entries.

    3. Send PARAGRAPH 66, see IRM 4.19.3-7, CP PARAGRAPHS.

  10. Taxpayers who receive DCB generally do not qualify for Child Care Credit. If the TP claimed Child Care Credit, take the following action:

    1. If the DCB IR(s) is reported, click on the Send Indicator to show these IRs on the notice.

    2. Complete screening of ALL remaining IRs in the Case Analysis screen, following normal procedures.

    3. Access the Return Value screen. Ignore any system prompt to close the case below tolerance.

    4. See IRM 4.19.3.14.2 (5), Credit for Child and Dependent Care Expenses, to determine the correct entry in the QUALIFYING EXPENSES field in the Child Care Credit window.

  11. If the TP reduced his/her wages by the DCB IR amount, pursue the issue as an U/R WAGES issue.

Employer-Provided Adoption Benefits (EPAB)
  1. Employer-provided adoption benefits (EPAB) are available for TPs who adopt a child(ren) who is a U.S. citizen or resident or who adopt a foreign child(ren) if the adoption becomes final in the AUR tax year.

  2. Taxpayers may receive a cash allotment for each child in an adoption, including a Special Needs child adoption, of up to:

    Tax Year Amount
    2014 $13,190
    2015 $13,400
    2016 $13,460
  3. Employer-provided adoption assistance payments are shown on Form W-2, Box 12 and are identified with a code "T" .

  4. The wage amount on Form(s) W-2, Box 1 does not include the EPAB payments for the tax year.

  5. Taxpayers must complete Form 8839, Qualified Adoption Expenses, Part I, II and III in order to compute the correct amount of taxable or excludable EPAB. If no Form 8839 is filed, consider the EPAB fully U/R.

  6. Taxpayers should include this taxable benefit amount with wage income on Form 1040, line 7. They also write "AB" on the dotted line next to line 7.

  7. The Case Analysis screen displays this benefit with the literal "W-2" in the DOC TYPE field and the literal "EPAB" in the INCOME TYPE field.

  8. If the amount from the Taxable Benefits line of Form 8839, is not reported on Form 1040, line 7, create a WAGE IR for that amount. Send PARAGRAPH 191, see IRM 4.19.3-7, CP PARAGRAPHS.

    Caution:

    EPAB should not be claimed on a Form 1040A, however; TPs might report EPAB on line 7.

  9. Access the EPAB window by entering a "U" in the IR CODE field.

    Note:

    Screen EPAB IR(s) after analyzing all other potentially discrepant income types. After any subsequent analysis that changes the TOTAL AGI CHANGE field, reselect the EPAB window. Recompute all changes to adjustments to income before selecting this window.

    Exception:

    Compute taxable EPAB amount BEFORE Student Loan Interest Deduction (SLID), Tuition and Fees and/or Domestic Production Activities Deduction (DPAD). See IRM 4.19.3.4.2 (3), Case Analysis Screen, for the proper sequence when these issues are present on the same case.

  10. Input/verify the appropriate entries on the EPAB window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Employer-Provided Adoption Benefits.

  11. If it can be determined the TP reduced his/her wages by the EPAB payment, pursue the issue as U/R wages. Also pursue EPAB as a separate issue. Send PARAGRAPH 195, see IRM 4.19.3-7, CP PARAGRAPHS.

    Reminder:

    If "SNE" is noted on line 7, Form 1040 or Form 1040A, see IRM 4.19.3.8.1.1 (1) Note, Wages - Analysis.

  12. PARAGRAPH 190 automatically generates when EPAB is U/R. See IRM 4.19.3-7, CP PARAGRAPHS.

Interest - General

  1. Interest is reported by payers on Form 1099-INT, Form 1099-OID, and on Schedules K-1 from Form 1065, Form 1041, and Form 1120-S.

  2. Interest is identified on the Case Analysis screen by the literal "99INT" in the DOC TYPE field and the literal "INT" in the INCOME TYPE field.

Interest - Analysis
  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Municipal Bonds

    • Keogh (HR-10) or Tax Sheltered Annuities (403(b)) accounts

    • Simplified Employee Pensions (SEP) or Individual Retirement Accounts (IRA)

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

    • A Capital Construction Fund (CCF) account

    Note:

    If W/H is claimed, allow; ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  2. Compare INT amounts with entries on:

    1. Form 1040 or Form 1040A, lines 8a or 8b.

      Note:

      Form 1040 or Form 1040A, line 8b, is used to report tax exempt interest. If the amount on line 8b matches the interest amount(s) on a 99INT IR, consider the 99INT IR U/R unless the payer is a state or political subdivision of a state, the District of Columbia, or a U.S. possession.

    2. Schedule B, Part I, line 1.

    3. Form 1040EZ, line 2.

  3. Interest comparisons for the following entries must match within $1 or be CLEARLY IDENTIFIED as interest:

    1. Form 1040, line 21.

    2. Schedule C, line 6.

    3. Schedule E, Parts II, III, or IV.

    4. Schedule F, lines 8 or 43.

  4. If Schedule B (or an attachment in lieu of Schedule B) is attached, compare IRs with individual items. If you cannot match individual IRs:

    1. Group all INT amounts from the same payer.

    2. Compare to the total interest reported for that payer.

    3. If the group total amount is smaller, assign status code "R" to the group.

    4. If the group total is larger, assign status code "U" to the group.

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

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

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

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

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

    1. Group by income type INT.

      Note:

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

      Note:

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

    2. Compare the group total amount to the total interest amount reported on the return.

    3. If the group total amount is smaller, assign status code "R" to the group.

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

    5. If interest amounts are U/R, send PARAGRAPH 64. See IRM 4.19.3-7, CP PARAGRAPHS.

      Exception:

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

  7. Taxpayers often interchange interest and dividend income. Check any dividend income areas when comparing INT amounts. Offset interest income against dividend income ONLY if one of the following applies:

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

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

  8. If interest income is listed on Schedule B but is not added into the AGI:

    1. Consider the interest income U/R. If necessary create an IR for any income the TP included on Schedule B for which we do not have a corresponding IR.

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

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

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

    2. Group by income type INT.

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

    4. If the group total is larger, assign status code "U" .

    5. Send PARAGRAPH 79, see IRM 4.19.3-7, CP PARAGRAPHS.

    6. If the group total amount is smaller, assign status code "R" to the group.

Original Issue Discount (OID)
  1. A 99OID IR reflects the original issue discount allocable to the tax year and may show the qualified stated interest paid or credited on the obligation during the tax year.

    Caution:

    If there is an IR where the OID amount and the W/H amount are identical, refer these cases to the FRP. See IRM 4.19.3.21.9, Disagreed Responses.

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

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

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

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

      Note:

      OID on Treasury Inflation-Indexed Securities is reported in Box 8 on Form 1099-OID.

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

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

  5. If the TP reports a partial amount or no amount from a 99OID IR, consider whether the TP has made an adjustment for acquisition premium, or some other offset. Original issue discount may be reduced by these offsets provided the TP first included the gross amount of original issue discount on Form 1040, Schedule B, line 1. The line 2 amount should then reflect the taxable amount of original issue discount as adjusted for these offsets.

    Note:

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

  6. If the TP reports a partial amount or no amount from a 99OID IR and the Schedule B does not reflect any adjustments, consider the OID, S-INT and OIDTO amounts in determining the U/R amount.

  7. If 99OID and 99INT IR(s) are present from the same payer, and you cannot determine which amount is reported:

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

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

    3. If the group total amount is smaller, assign status code "R" to the group.

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

Savings Bonds, Treasury Bills, Treasury Bonds, and Treasury Notes
  1. Interest from U.S. Savings Bonds, Treasury Bills, Treasury Bonds, and Treasury Notes appear on 99INT IRs with the literal "BOND" . OID on Treasury Inflation-Indexed Securities is reported in Box 8 on Form 1099-OID.

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

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

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

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

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

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

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

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

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

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

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

    1. Group by income type BOND.

      Note:

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

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

    3. If the group total amount is smaller, assign status code "R" to the group.

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

    5. If bond amounts are U/R, send PARAGRAPH 64. See IRM 4.19.3-7, CP PARAGRAPHS.

      Exception:

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

  8. If the TP reports an amount as savings bond, T-Bill bond, or note interest, and the 99INT IR shows only regular interest, consider the IR reported if the amounts match within $1 ONLY if the TP has not excluded interest on Schedule B, line 3, for college tuition. PARAGRAPH 108 automatically generates when the exclusion is fully disallowed.

  9. 99INT IRs should not show EWPEN amounts if only bond interest is present. Treat such IRs as potential Payer Agent data or questionable.

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

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

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

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

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

    Reminder:

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

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

    1. The TP is married filing a separate return

    2. The new Modified Adjusted Gross Income (MAGI) is:

    Filing status TY 2014 TY 2015 TY 2016
    Single and Head of Household $91,000 or more $92,200 or more $92,550 or more
    Married Filing Joint or Qualifying Widow(er) $143,950 or more $145,750 or more $146,300 or more

    Note:

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

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

    Filing status TY 2014 TY 2015 TY 2016
    Single and Head of Household $76,000 $77,200 $77,550
    Married Filing Joint or Qualifying Widow(er) $113,950 $115,750 $116,300
  8. If the system determines the exclusion claimed should be disallowed in whole or part, an IR is created by the system for the amount of the disallowance and coded with status code "U" .

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

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

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

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

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

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

      Note:

      When SS/RR is also present, see IRM 4.19.3.8.17.1 (7), SS/RR - Analysis.

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

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

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

  3. PARAGRAPH 85 automatically generates to inform the TP he/she may be subject to Backup Withholding (BWH) when the total of U/R interest, dividends, and patronage dividends is greater than $500.

  4. 99INT IRs may reflect an Early Withdrawal Penalty (EWPEN). See IRM 4.19.3.9.5, Early Withdrawal Penalty (EWPEN) - General, for further instructions.

    Caution:

    Taxpayers may net the EWPEN against the interest. See IRM 4.19.3.9.5.1 (3) and (6), Early Withdrawal Penalty (EWPEN) - Analysis.

  5. If a 99INT IR, from the U.S. Treasury, with EIN 38-1798424 is shown on the Case Analysis screen, it is credit interest paid to the TP(s) by IRS for refund cases and is fully taxable.

  6. 99INT IRs may reflect W/H. If there is an indication that the interest account is jointly owned with someone other than the TP's spouse or the filing status is 3:

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

    2. Send PARAGRAPH 6, see IRM 4.19.3-7, CP PARAGRAPHS.

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

      Note:

      See IRM 4.19.3.5.3, Jointly Owned Income, for additional instructions on jointly owned income.

    4. See IRM 4.19.3.16.1, Withholding - General, for further instructions on W/H.

  7. A fully U/R 99INT IR with a payee EIN is considered self-employment income. Input an Income Identify Code to assess SE tax. See IRM 4.19.3.15.1 (4) and (5), Self-Employment Tax and Exhibit 4.19.3-9, Income Identify Codes.

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

Dividends and Capital Gain Distributions

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

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

Dividends - General
  1. The types of dividends compared are:

    • Ordinary Dividends - Entire amount is taxable

    • Capital Gain Distributions - Are considered taxable

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

    • "ORDIV" - Ordinary dividends

    • "QDIV" - Qualified Dividends may be eligible for the Capital Gains rate shown in the table below

      TY 2014 TY 2015 TY 2016
      20 percent 20 percent 20 percent
    • "NDDIS" - Non-dividend distributions (non-taxable)

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

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

    • Ordinary Dividends

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

  4. If a 99DIV IR with multiple income types is U/R, and the tolerance for issuing a notice is met, screen all elements of the IR.

Dividends - Analysis
  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    • SEP or IRA accounts

    • Municipal Bond funds

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

    • Capital Construction Fund (CCF) account

    Note:

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

  2. Compare ORDIV amounts with entries on:

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

      Note:

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

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

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

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

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

    1. The QDIV are included in the ORDIV.

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

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

    1. Group ordinary dividend amounts from the same payer.

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

    3. If the group total amount is smaller, assign status code "R" to the group.

    4. If the group total amount is larger, assign status code "U" to the group.

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

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

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

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

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

    1. Group all ORDIV together.

      Note:

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

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

    3. If the group total amount is smaller, assign status code "R" to the group.

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

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

      Exception:

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

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

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

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

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

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

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

  10. If the TP reports ordinary dividends on Schedule D/Form 8949,

    TY 2014 TY 2015 TY 2016
    lines 1a, 1b, 2, or 3 column (d) or lines 8a, 8b, 9 or 10 column (d) lines 1a, 1b, 2, or 3 column (d) or lines 8a, 8b, 9 or 10 column (d) lines 1a, 1b, 2, or 3 column (d) or lines 8a, 8b, 9 or 10 column (d)
    1. Consider the amount(s) in columns (e) and (g), (cost or other basis) U/R.

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

      Caution:

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

    3. Send PARAGRAPH 52, see IRM 4.19.3-7, CP PARAGRAPHS.

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

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

    2. Group by income type ORDIV.

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

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

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

    6. Send PARAGRAPH 79, see IRM 4.19.3-7, CP PARAGRAPHS.

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

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

    2. PARAGRAPH 4 automatically generates.

    Note:

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

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

  2. Dividends from money market funds may be reported under a different name. If a dividend amount on a 99DIV IR matches an amount on Schedule B, consider the IR reported unless there is an IR(s) for that individual payer.

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

  4. Reinvestment dividends are not allowable as an exclusion.

  5. 99DIV IRs may reflect W/H. If there is an indication that the dividend account is jointly owned with someone other than the TP's spouse or the filing status is 3:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send PARAGRAPH 6, see IRM 4.19.3-7, CP PARAGRAPHS.

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

      Note:

      See IRM 4.19.3.5.3, Jointly Owned Income, for further instructions on joint ownership.

    3. See IRM 4.19.3.16.1, Withholding - General, for further instructions on W/H.

  6. A fully U/R 99DIV IR with a payee EIN is considered self-employment income. Input an Income Identify Code to assess SE tax. See IRM 4.19.3.15.1 (4) and (5), Self-Employment Tax and Exhibit 4.19.3-9, Income Identify Codes.

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

  8. PARAGRAPH 85 automatically generates to inform the TP he/she may be subject to BWH when the total of U/R interest, dividends, and patronage dividends is greater than $500.

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

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

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

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

Capital Gain Distributions - Analysis
  1. Compare capital gain distributions amounts with entries on:

    1. Form 1040, line 13.

    2. Form 1040A, line 10.

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

    4. Form 8949, see table below for line numbers. (The TP may use an attachment in lieu of Form 8949).

      Form TY 2014 TY 2015 TY 2016
      8949 Part II, line 1, column (h) Part II, line 1, column (h) Part II, line 1, column (h)
  2. Verify that the TP has reported capital gain distributions on Schedule D, line 13, and that the proper amount was carried over to Form 1040, line 13, or if no Schedule D is present that the TP reported the capital gain distributions directly on Form 1040, line 13, or Form 1040A, line 10.

  3. When the TP reports Capital Gain Distributions directly on Form 1040, line 13 (Form 1040A, line 10), the Schedule D/8814 window in Return Value MUST be accessed manually. See IRM 4.19.3.13.2 (1), Sch D/8814/ECR Tax Window.

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

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

    1. Group by income type CG.

      Note:

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

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

    3. If the group total amount is smaller, assign status code "R" to the group.

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

      Note:

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

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

      Exception:

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

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

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

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

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

      Note:

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

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

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

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

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

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

      Note:

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

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

      Note:

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

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

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

  10. PARAGRAPH 24 automatically generates when CG are treated as ordinary income due to loss limitations. If the loss per return is less than $3,000 ($1,500 if MFS) toggle off PARAGRAPH 24 from the Summary screen.

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

State and Local Income Tax Refunds (SITR) - General

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

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

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

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

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

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

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

    Note:

    An entry in the STATE/LOCAL W/H field is required only when the TP has netted. See (11) below for additional information.

  4. 1099G IRs with reported SITR amounts for other than the prior tax year are deleted by the system. The literal "X" displays in the IR CODE field of the Case Analysis screen.

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

    1. SITR worksheets are attached to the return.

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

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

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

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

      Note:

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

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

    If And Then
    The current year filing status is "1" , "3" , or "4" and, the prior year filing status was equal to "2" or "5" It can be determined that the TP's SSN in the prior year was a secondary SSN Research the Primary and Secondary SSNs using IDRS CC RTVUE
    The current year filing status is "2" or "5" The prior year filing status is "1" , "3" , or "4" Access IDRS CC RTVUE for each spouse that has a SITR IR
    1. Mark the applicable SITR IR with status code "N" or "D" if the spouse did not claim state/local taxes on the prior year Schedule A.

    2. If the spouse reported SITR on the current year return and the prior year filing status was 1, 3, or 4 and the spouse did not itemize, enter the amount of SITR reported as a miscellaneous deduction in the SCH C EXP/MISC Adjustment window, to refund the amount. Send a Special Paragraph using the following verbiage as an example: "Since state and local taxes were not claimed as an itemized deduction on either your or your spouse's {enter previous tax year 201X} tax return, you are not required to report the refund for the spouse who did not itemize deductions. We have reduced the amount reported on line 10 of your return. This change is reflected on our notice as a miscellaneous adjustment."

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

      Caution:

      If TP chose to itemize (even when it is less than the standard deduction) and the TP claimed state/local tax deduction on the previous year’s Schedule A, do not allow the SITR refund. Mark the SITR IR with status code "N" or "D" .

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

    1. Access IDRS CC RTVUE.

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

      Caution:

      If TP chose to itemize (even when it is less than the standard deduction) and the TP claimed state/local tax deduction on the previous year’s Schedule A, do not allow the SITR refund. Mark the SITR IR with status code "N" or "D" .

  10. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

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

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

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

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

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

Nonemployee Compensation (NEC) - General

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

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

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

NEC - Analysis
  1. Compare NEC amounts with entries on:

    1. Schedule C, Part 1.

    2. Schedule C-EZ, Part II.

    3. Schedule E, Part II - see (3) below.

    4. Schedule F, Part I or III.

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

    Note:

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

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

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

      Note:

      If there is an indication ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

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

    5. Schedule D, see table below for line numbers.

      Form /Schedule TY 2014 TY 2015 TY 2016
      Schedule D Part I, lines 1a, 1b, 2 , or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d). Part I, lines 1a, 1b, 2 , or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d). Part I, lines 1a, 1b, 2 , or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d).
      Form 8949 Part I, line 1 column (d) or Part II, line 1, column (d). Part I, line 1 column (d) or Part II, line 1, column (d). Part I, line 1 column (d) or Part II, line 1, column (d).
    6. Form 8949, see table in e above for line numbers.

    7. Schedule E, Part I.

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

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

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

    11. Form 3903, Moving Expenses, line 4.

    Note:

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

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

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

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

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

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

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

    6. The TP is in the medical profession and there is an indication ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

    9. The combined NEC for both taxpayers equals the Schedule C within $1 or there is a statement indicating the amounts are included in a larger total.

  4. If Form 2106, column A, line 7 is greater than line 6, the TP ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The U/R amount cannot exceed the amount on Form 2106, column A, line 8. To arrive at the amount to input in the RETURN field, subtract the amount that should have been included in income (Form 2106, column A, line 8) from the IR amount.

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

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

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

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

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

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

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

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

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

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

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

    3. The TP excluded expenses not shown above, then pursue the unallowable expenses. Send PARAGRAPH 124, see Exhibit 4.19.3-7, CP PARAGRAPHS.

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

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

    2. DO NOT ASSESS SE tax on scholarship/stipend income.

  9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    Exception:

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

    1. Do not change the Income Identify Code.

    2. Access the SE Tax window and enter the Primary/Secondary Form 8919 tax in the PRI/SEC TAX FROM FORM 8919 INCOME field.

    3. Input the amount of reported NEC in the PRIM/SEC 8919 INCOME SUBJECT TO SE TAX field.

      Note:

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

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

    5. Remove any amount from the ADDITIONAL FICA TAX window that is subject to SE Tax in the PRIMARY/SECONDARY INCOME SUBJECT TO FICA field.

    6. Send PARAGRAPH 12, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    See IRM 4.19.3.21.3.23, Self-Employment Tax (SE Tax) vs. Employee Share of FICA.

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

    1. Do not change the Income Identify Code.

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

      Reminder:

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

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

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

      Reminder:

      Do not assess a tip tax penalty.

    5. Send PARAGRAPH 12, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    See IRM 4.19.3.21.3.23, Self-Employment Tax (SE Tax) vs. Employee Share of FICA.

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

    • INDIAN GAMING

    • INDIAN GAMING PROCEEDS

    • IGP

    • INDIAN TRIBAL DISTRIB

    • INDIAN TRIBAL INCOME

    • INDIAN TRIBAL FUND

    • INDIAN TRIBAL EARNINGS

    • NATIVE AMERICAN

    • NATIVE AMERICAN DISTRIB

    • IGE

    • ITI

    • ALASKA PERMANENT FUND

    • ALASKA PERMANENT FUND DIV

    • APF

    • APFD

  13. If the taxpayer reports NEC on Form 1040, line 21 and ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ "≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

NEC - Miscellaneous
  1. If a NEC amount on a 99MIS IR is U/R, verify the Income Identify Code so the system computes SE tax correctly. See Exhibit 4.19.3-9, Income Identify Codes.

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

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

      Note:

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

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

    3. The TP is exempt from SE tax on the net earnings covered by an approvedForm 4361 or Form 4029. If the TP writes “Exempt Form 4361” or “Form 4029” on Form 1040, see table below for line numbers, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      TY 2014 TY 2015 TY 2016
      line 57 line 57 line 57

      Note:

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

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

    5. If the TP indicates the compensation is for court awards/settlements. See IRM 4.19.3.8.18.2(1), Other Income Miscellaneous, for further information.

  3. If there is reported NEC on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed if NEC is asterisked or a CP 2000 is sent for another issue(s). Include the reported NEC amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax or Exhibit 4.19.3-22, Examples of Self Employment Income.

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

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

  4. If the TP reports NEC income, but indicates he/she worked as an employeeand

    1. Paid the employee percentage of FICA (see table below for percentages), follow the instructions in IRM 4.19.3.8.6.1 (9), (10) and/or (12) as appropriate, NEC - Analysis.

    2. Did not pay the employee percentage of FICA (see table below for percentages), charge the appropriate amount of SE tax.

      TY 2014 TY 2015 TY 2016
      7.65 percent 7.65 percent 7.65 percent
    3. The NEC IR is partially reported on Form 4137 or Form 8919 and SS/Medicare tax is paid on the reported amount instead of SE tax, unless the condition in IRM 4.19.3.8.6.1 is met, treat the U/R NEC from the partially reported IR as subject to SE tax and follow the instructions in IRM 4.19.3.8.6.1 (10) and/or (11), NEC - Analysis.

    4. Send PARAGRAPH 12, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  5. If the TP reports NEC income AND attaches a Form 4137, follow the instructions in IRM 4.19.3.8.6.1 (11), NEC - Analysis.

  6. If the TP reports NEC income AND attaches a Form 8919, follow the instructions in IRM 4.19.3.8.6.1 (9) or (10) as appropriate, NEC - Analysis.

  7. 99MIS IRs may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

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

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

      Note:

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

    2. Income subject to IRC 409A regulations is identified on the Case Analysis screen by the literal "99MIS" in the DOC TYPE field and the literal "409AI" in the INCOME TYPE field. Enter status code "R" on the "409AI" element(s).

    3. The "409AI" amount is subject to an additional tax. See IRM 4.19.3.15.7, Additional Taxes on Income from Nonqualified Deferred Compensation Plan (IRC Section 409A), for further instructions.

      Reminder:

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

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

Merchant Card and Third Party Network Payments (MERCH) - General

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

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

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

    Note:

    The IR may reflect the informational literal NOCRD, which is system deleted (X). Do not pursue NOCRD amounts.

MERCH - Analysis
  1. Compare MERCH amounts with entries on:

    1. Schedule C, Part I, line 1.

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

    3. Schedule E, Part II - see (5) below.

    4. Schedule F.

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

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

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

    5. Schedule D, see table below for line numbers.

      Form/Schedule TY 2014 TY 2015 TY 2016
      Schedule D Part I, lines 1a, 1b, 2, or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d) Part I, lines 1a, 1b, 2, or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d). Part I, lines 1a, 1b, 2, or 3 column (d) or Part II, lines 8a, 8b, 9 or 10, column (d).
      Form 8949 Part I, line 1 column (d) or Part II, line 1, column (d). Part I, line 1 column (d) or Part II, line 1, column (d). Part I, line 1 column (d) or Part II, line 1, column (d).
    6. Schedule E, Part I.

    7. Form 8949, see table in e above for line numbers.

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

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

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

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

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

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

    4. The MERCH IR is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

MERCH - Miscellaneous
  1. If MERCH is U/R, verify the Income Identify Code so the system computes SE tax correctly. See Exhibit 4.19.3-9, Income Identify Codes.

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

  3. If MERCH is not subject to SE tax (e.g., MERCH reported on Schedule E, Part I) remove the income identify code and leave the field blank.

  4. If there is reported MERCH on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed if MERCH is asterisked or a CP 2000 is sent for another issue(s). Include the reported MERCH amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax and Exhibit 4.19.3-22, Examples of Self Employment Income.

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

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

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

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

Medical Payments - General

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

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

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

Medical Payments - Analysis
  1. Compare MED amounts with entries on:

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

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

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

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

    4. Form 1040, line 21.

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

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

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

      Note:

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

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

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

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

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

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

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

    2. Delete the Income Identify Code(s).

  2. If MED payments are U/R and the TP is in the medical profession, treat U/R MED payments as self-employment income. See IRM 4.19.3.15.1, Self-Employment Tax.

  3. If there is reported MED on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed, if MED or SE tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported MED amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax, and Exhibit 4.19.3-22, Examples of Self Employment Income.

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

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

  4. IRs with MED amounts may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

Fishing Income - General

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

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

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

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

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

    2. Schedule E, Part I.

    3. Schedule E, Part II.

    4. Form 1040, line 21.

Fishing Income Miscellaneous
  1. If a FISH amount on a 99MIS IR is U/R, verify the Income Identify Code so the system computes SE tax correctly. Valid Income Identify Codes are "PB" , "PF" , "SB" , or "SF" , as applicable. See Exhibit 4.19.3-9, Income Identify Codes.

  2. If there is fishing income reported on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed if FISH or SE tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported FISH amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax, and Exhibit 4.19.3-22, Examples of Self Employment Income.

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

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

  3. 99MIS IRs with FISH amounts may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

Retirement Plans

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

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

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

  4. When distributions from Traditional or Roth IRAs, 401(k), 403(b), governmental 457, 501(c)(18)(D), SEP or SIMPLE plans, or qualified retirement plans as defined in section 4974(c) (including Federal Thrift Savings Plan) are determined to be U/R, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate. See IRM 4.19.3.14.6, Qualified Retirement Savings Contributions Credit, (QRSC), for more information.

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

    • "GR/A" - Gross amount

    • "TX/A" - Taxable amount

    • "ECG" - Eligible Capital Gains

      Note:

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

    • "UNRAP" - Unrealized Appreciation

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

      Note:

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

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

    Note:

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

    Example:

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

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

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

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

    • TOTAL DIST IND

    • TAX AMT NOT DET

    Note:

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

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

  7. The TP may erroneously treat Form 1099-R income as Social Security/Railroad Retirement Benefits, reporting the amount on Form 1040, line 20a and 20b or Form 1040A, line 14a and 14b. See IRM 4.19.3.8.10.5 (5), Railroad Retirement Board (RRB) IRs, for more information.

  8. Taxpayers make donations of cash and/or other assets (generally stocks) to nonprofit organizations and receive an annuity from the nonprofit organizations from their donations. These annuities are partly capital gains from the TP's donated assets as well as annuities. Nonprofit organizations report these capital gains and annuities on Form 1099-R; COD "F" in Box 7 indicates charitable gift annuities and may contain ECG amounts. See IRM 4.19.3.8.10.8, Lump-Sum Distributions, for further instructions.

Identifying Retirement Types
  1. The following references are for specific retirement types and MUST be used in conjunction with the general instructions in IRM 4.19.3.8.10.3, Retirement-Analysis, and IRM 4.19.3.8.10.4, Rollovers.

  2. See IRM 4.19.3.8.10.5, Railroad Retirement Board (RRB) IRs, when:

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

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

  3. See IRM 4.19.3.8.10.6, Pensions and Annuities, when:

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

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

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

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

  4. See IRM 4.19.3.8.10.7, IRA Distributions, when:

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

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

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

    4. The TP attached a written statement identifying the income as an IRA distribution.

    5. PGR Indicator of "1" is displayed.

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

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

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

    9. COD J is present.

  5. See IRM 4.19.3.8.10.8, Lump-Sum Distributions, when:

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

    2. The IR contains ECG amounts.

  6. See IRM 4.19.3.8.10.9, Employee Savings Plans, when:

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

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

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

  2. Compare retirement plan IRs with entries on:

    Caution:

    If Form 8606 is attached, see IRM 4.19.3.8.10.7 (5) - (9), IRA Distributions, before determining the U/R amount.

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

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

    3. Form 1040EZ, line 1.

    4. Form 4972. (If the TP was a teacher, see IRM 4.19.3.8.10.8 (11) c, Lump-Sum Distributions.

    5. Schedule D, see (3) below.

    6. Attachments to Form 1040.

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

    Note:

    If there is an indication the distribution is a life insurance policy surrendered for cash, see IRM 4.19.3.20.3.6, Retirement Distributions - Form 1099-R

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

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

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

      Exception:

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

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

    1. Only recapture the losses related to the retirement income.

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

    Note:

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

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

    • Attached Form 1099-R

    • Written a statement

    • Annotated the return

    • Claimed the W/H on a 1099R IR

    • Reported an amount within $1

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

    Note:

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

    • 6

    • G

    • H

    • N

    • P

    • Q

    • R

    • T

    • W

  7. When a 5498 ROLVR IR matches the amount on a deleted 1099R IR ≡ ≡ ≡ ≡ ≡ ≡ , do not use that ROLVR amount for any other IR. See IRM 4.19.3.8.10.4 (4), Rollovers.

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

  9. Delete 1099R IRs with COD code of "F" .

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

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

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

      Note:

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

  11. If there is an indication the Form 1099-R income is a military retirement distribution, see IRM 4.19.3.8.10.6.1, Military Pensions.

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

    Exception:

    For tax years ending after September 10, 2001, disability payments for injuries incurred as a result of a terrorist attack directed against the United States or its allies are not taxable and should not be included in income. See IRM 4.19.3.21.1.27 (2), Victims of Terrorist Attacks, for acceptable indications.

  13. If there is an indication that the distribution is a Qualified Charitable Distribution (QCD), see IRM 4.19.3.8.10.7 (3), IRA Distributions.

  14. When both "GR/A" and "TX/A" amounts are present on the same 1099R IR, the system automatically assigns status code "X" to the "GR/A" amount. Change the status code if necessary.

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

    Exception:

    If COD J is present, see IRM 4.19.3.8.10.7 (10), IRA Distributions.

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

    Note:

    If the TP reports an amount less than "GR/A" amount and the distribution code indicates the 10 percent premature distribution tax should be assessed, modify the IR to calculate the correct amount of the additional tax. See IRM 4.19.3.15.3 (8), 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for additional information.

    1. If COD J is present, see IRM 4.19.3.8.10.7 (10), IRA Distributions.

    2. If the payer is OPM, see IRM 4.19.3.8.10.3 (10), Retirement - Analysis.

    3. If payer is Railroad Retirement Board, see IRM 4.19.3.8.10.5 (4), Railroad Retirement Board (RRB) IRs.

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

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

    Note:

    If the IR contains both taxable amount not determined and total distribution or the TP writes "rollover" or provides another statement that the distribution was rolled over, see IRM 4.19.3.8.10.4, Rollovers.

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

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

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

    Note:

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

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

    Note:

    See IRM 4.19.3.8.10.2, Identifying Retirement Types, for additional information regarding identification of retirement plan IRs.

    Consider the income fully U/R.
  21. Consider 1099R IRs reported when the return indicates that the U/R amount is due to employee contributions AND:

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

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

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

  2. DO NOT consider 1099R IRs which match 5498 RCONV amounts to be rolled over.

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

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

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

    Note:

    The instructions in the table below do not apply when the IR containing the FMV amount also contains an RCONV amount.

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

    Note:

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

  6. When a distribution contains a TX/A amount and W/H, the TP receives a net amount (GR/A minus W/H). In order for a distribution to be considered fully rolled over (i.e., tax free), the TP MUST rollover the entire TX/A amount by supplementing the amount withheld with additional monies from another source. Adjust the W/H, if necessary. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

    If AND Then
    The net amount (GR/A minus W/H) is greater than or equal to the TX/A amount on the IR There is an indication of a rollover (per (4) above) Consider the issue resolved
    The GR/A and the TX/A amount on the IR are the same The GR/A is reported on line 15a or 16a and the difference between the IR and the Form 5498 equals the W/H amount and there is no indication that the TP supplemented the rollover amount to account for the W/H and the amount reported on line 15b or 16b does not match the W/H on the IR Consider the difference between the W/H on the IR and the TX/A amount reported as U/R. Send PARAGRAPH 49, (see IRM 4.19.3-7, CP PARAGRAPHS) when pursuing the W/H as U/R TX/A from the same IR.
    The GR/A and the TX/A amount on the IR are the same The GR/A is reported (line 15a or 16a) and the difference between the IR and the 5498 does not equal the W/H amount Consider IR fully U/R.
    The GR/A and the TX/A amount on the IR are different The GR/A is reported (line 15a or 16a) and the amount on line 15b or 16b does not equal the 5498 ≡ ≡ ≡ ≡ ≡ ≡ ≡ Consider IR fully U/R.
    1. For the conditions listed in the table above, adjust the W/H, as necessary. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

    2. It may be necessary to modify partially rolled over IRs. See IRM 4.19.3.15.3 (11) c, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for additional instruction.

  7. Taxpayers may partially rollover retirement plans reported on Form 1099-R. Consider a distribution to be partially rolled over when all the following apply:

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

    2. a lesser amount on the corresponding taxable line,

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

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

    Note:

    It may be necessary to modify partially rolled over IRs. See IRM 4.19.3.15.3 (11) c, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for additional instruction.

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

Railroad Retirement Board (RRB) IRs
  1. Pensions and annuities are reported from the RRB on Form RRB-1099-R.

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

    • Employee Contributions (Box 3)

    • Contributory Amount Paid (Box 4)

    • Vested Dual Benefit (Box 5)

    • Supplemental Annuity (Box 6)

    • Total Gross Paid (Box 7)

    • Prior Year Repayments (Box 8)

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

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

    • "X" - RRB-Tier 1

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

    • "Y" - RRB-Tier 2

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

    Note:

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

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

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

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

    3. Send PARAGRAPH 131, see IRM 4.19.3-7, CP PARAGRAPHS.

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

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

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

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

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

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

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

    Note:

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

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

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

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

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

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

    5. Distribution is payment(s) for disability due to injuries received from a terrorist attack, see IRM 4.19.3.21.1.27, Victims of Terrorist Attacks, or military action, see IRM 4.19.3.8.10.6.1, Military Pensions, for further information.

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

  6. An eligible retired public safety officer (i.e., law enforcement officer, firefighter, chaplain or member of a rescue squad or ambulance crew) can elect to exclude a maximum of $3,000 from income distributions made from an eligible governmental retirement plan that are used to pay the premiums for accident, health or long-term care insurance. Allow the exclusion if the TP indicates "PSO" next to line 16b, Form 1040 or line 12b, Form 1040A or is retired on a disability and is reporting the disability pension on line 7 of Form 1040 or Form 1040A.

    Note:

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

    .

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

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

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

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

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

    Exception:

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

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

    • total amount awarded

    • amount withheld

    • monthly entitlement and

    • payment start date(s)

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

    Note:

    You must add one month to the date listed under the heading of "Payment Start Date" or "Effective Date" because the amount is not actually withheld until the following month.

    Example:

    The year shown in the payment start date "201X" should be the AUR year of the case you are working.

    Total Award Amount Amount Withheld Monthly Entitlement Amount Payment Start Date
    $1,000 $450 $550 March 1, 201X
    $1,000 $0 $1,000 Nov. 1, 201X

    Payment start date of April 1, 201X (March 1, 201X plus one month) to next payment start date of December 1, 201X (November 1, 201X plus one month) is 8 months x $450 (amount withheld) = $3,600. The TP would be allowed to reduce the Form 1099-R TX/A amount by $3,600.

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

    Example:

    The year shown in the payment start date "201X" should be the AUR year of the case you are working, unless otherwise indicated.

    Total Award Amount Amount Withheld Monthly Entitlement Amount Payment Start Date
    $800 $250 $550 Sept. 1, 201X (prior year)
    $840 $260 $580 Apr. 1, 201X
    $840 $0 $840 Oct. 1, 201X

    Since the first payment start date is in a prior year, use January 1, 201X as the first payment start date. Payment start date of February 1, 201X (January 1, 201X plus one month) to next payment start date of May 1, 201X (April 1, 201X plus one month) is 4 months x $250 (amount withheld) = $1,000. From the June 1, 201X (May 1, 201X plus one month) payment start date to the next payment start date of November 1, 201X (October 1, 201X plus one month) is 6 months x $260 = $1,560. The TP would be allowed to reduce the Form 1099-R TX/A amount by $2,560 ($1,000 + $1,560).

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

  2. The following literals may display:

    1. RCONV (Roth Conversions)

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

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

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

      Note:

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

    2. The excluded amount of QCD does not exceed $100,000. On a jointly filed return (MFJ), each spouse is allowed to exclude up to a $100,000 of QCD if the minimum age requirement is met. Pursue any apparent underreporting of taxable distribution in excess of $100,000 (per spouse) and include a Special Paragraph explaining that nontaxable qualified charitable distributions are limited to $100,000 per spouse.

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

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

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

      Note:

      The 10 percent premature distribution tax may apply. See IRM 4.19.3.15.4, 20 Percent Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions, for further information.

      Reminder:

      Send reported 1099R IR elements when the 10 percent tax is adjusted.

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

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

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

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

    3. Distributions from Roth IRAs (Part III).

  6. If an attachment to the return indicates the IRA distribution ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    Caution:

    If, for the TP listed on Form 8606, there are any 5498 IRs that reflect a FMV, those amounts may need to be included on Form 8606, line 6, see (8) below.

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

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

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

  8. If the FMV amounts are not included on Form 8606, line 6,

    Note:

    If there is an indication that the 5498 IR is from a Roth account (i.e., contains the literals RCONV or RCONT) the FMV should not be included on Form 8606, line 6.

    1. Do not accept the Form 8606, consider the IR(s) partially or fully U/R.

    2. Include a Special Paragraph with the following verbiage as an example: "The Fair Market Value (FMV) of all your Traditional, SEP and SIMPLE IRAs must be included on Form 8606, line 6. Your IRA trustees have reported FMV amounts on Form 5498, box 5, which were not included on this line. Please send us a revised Form 8606 if applicable. Refer to Publication 590-B, Individual Retirement Arrangements (IRAs). Publication 590-B is available at www.irs.gov or by calling 1-800-829-3676."

    3. Send 5498 IRs that contain the FMV element for the TP listed on Form 8606.

    Note:

    Do not include 5498 IRs when it can be clearly determined that the IR is for a ROTH account.

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

    1. Consider the 1099R IR reported when the TP reports the total amount of the distribution on Form 8606 , line 8 or 16 and the taxable amount from Form 8606, line 18, Part II on Form 1040, line 15b or Form 1040A, line 11b (whether or not a matching Form 5498 RCONV is present).

      Note:

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

    2. The 10 percent premature distribution tax may also apply. see IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for further information.

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

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

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

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

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

      Note:

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

    4. The 10 percent premature distribution tax penalty may also apply. See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for further information.

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

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

    Caution:

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

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

    2. Was made because the TP was disabled,

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

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

    Note:

    Qualified distributions from a Roth IRA may be identified by COD "Q" or "T" . Do not pursue 1099R IRs with COD "Q" or "T" . See IRM 4.19.3.8.10.3 (6), Retirement -Analysis, for further instructions.

  13. Distributions from a SIMPLE (Savings Incentive Match Plan for Employees) plan are fully taxable as ordinary income. Premature distributions from a SIMPLE plan may be subject to the additional tax on early distributions. Distributions made within the first 2 years are subject to a 25 percent tax on early distributions and are identified by a COD "S" . See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for further information.

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

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

  14. IRA distributions do not qualify for special tax treatment on Form 4972, Tax on Lump Sum Distributions. See IRM 4.19.3.8.10.8 (11) and (12), Lump-Sum Distributions. Send PARAGRAPH 152, see IRM 4.19.3-7, CP PARAGRAPHS.

  15. COD 5 is used for prohibited transactions such as borrowing from an IRA or using an IRA as security on a loan. If either of these transactions occur, treat the entire value of the account as a distribution to the TP. These distributions are subject to the 10 percent tax on early distributions from qualified plans and cannot be rolled over. See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs.

Lump-Sum Distributions
  1. A lump sum distribution is the distribution or payment in one tax year of a plan participant's entire balance from all of the employer's qualified plans of one kind (for example, pension, profit-sharing, stock ownership plan (ESOP), qualified annuity plan, stock bonus plans) .

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

    Note:

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

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

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

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

    2. Enter the amount from Form 4972, line 30, in the 4972 TAX field, as applicable.

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

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

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

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

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

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

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

      Note:

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

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

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

    4. The TX/A amount less the ECG amount is on Form 1040, line 16b, and the ECG amount is reported on Schedule D or Form 8949, see table below for line numbers.

      Form/Schedule TY 2014 TY 2015 TY 2016
      Schedule D Part II, column (h), lines 8a, 8b, 9, 10 or 13 Part II, column (h), lines 8a, 8b, 9, 10 or 13 Part II, column (h), lines 8a, 8b, 9, 10 or 13
      Form 8949 Part II, line 1, column (h), Part II, line 1, column (h), Part II, line 1, column (h),
  8. The TP may elect to receive capital gains treatment and report the ordinary income and capital gains separately on Form 4972. The entire distribution must be included on the Form 4972, and cannot be allocated between different forms.

    Example:

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

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

    Note:

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

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

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

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

    2. The distribution is an IRA distribution.

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

    4. The distribution is a Civil Service annuity.

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

    1. Select the Lump Sum Tax window.

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

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

    4. Send PARAGRAPH 63, see IRM 4.19.3-7, CP PARAGRAPHS.

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

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

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

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

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

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

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

  2. Consider employee savings plan IRs reported if:

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

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

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

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

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

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

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

    2. See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for further information regarding the 10 percent premature distribution tax.

    3. Mark the 1099R IR element(s) with Send Indicator "S" when adjusting the 10 percent tax.

Retirement Miscellaneous
  1. 1099R IRs may be subject to an additional 10 percent or 25 percent tax. See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for further information.

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

  3. 1099R IRs may reflect W/H. Follow instructions in IRM 4.19.3.16.1, Withholding - General.

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

  5. PARAGRAPH 11 automatically generates to inform the TP whenever the proposed tax increase shown on the CP 2000 includes the additional 10 percent tax on early distributions from qualified plans. See IRM 4.19.3.15.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs.

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

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

Rents and Royalties (R/R) - General

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

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

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

Rents and Royalties - Analysis
  1. Compare RENT or ROYAL amounts with entries on:

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

      Note:

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

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

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

      Note:

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

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

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

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

    7. Form 2106, line 7, columns A and/or B. The amount must match within $1 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.8.6.1 (4), Nonemployee Compensation(NEC) - Analysis.

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

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

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

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

      Note:

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

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

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

  2. If there is reported rent or royalty income reported on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed if the Rent/Royalty or SE tax is asterisked or a CP 2000 is sent for another issue(s). Include the reported rent or royalty amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax.

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

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

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

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

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

      Note:

      Income Identify Code "SD" and "ST" allow the system to compute the Schedule D tax if applicable. See IRM 4.19.3.13.2, Sch D/8814/ECR Tax Window, for further instructions.

    3. See IRM 4.19.3.8.4.5, Capital Gain Distributions - Analysis, to access the Schedule D window.

  4. If there is U/R Schedule D RENT or ROYAL and the TP reported a capital loss on Form 1040, line 13, see IRM 4.19.3.8.4.5, Capital Gain Distributions - Analysis, to access the Schedule D window.

  5. 99MIS IR(s) may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

Conduit Income - General

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

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

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

    • "ORINC" - Ordinary Income

    • "REAL" - Real Estate

      Note:

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

    • "OTREN" - Other Rental

    • "ROYAL" - Royalties

    • "INT" - Interest Income

    • "DIV" - Dividend Income

    • "BNINC" - Ordinary Business Income

    • "STCG" - Short Term Capital Gains

    • "LTCG" - Long Term Capital Gains

    • "179EX" - Section 179 Expense amounts

    • "G-PAY" - Guaranteed Payment Amounts

    Note:

    The literal "179EX" (Section 179 Expense amount) is shown for information only. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    • Keogh accounts or 403(b) accounts

    • SEP or IRA accounts

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

    • Municipal Bond funds

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

    Note:

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

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

  4. The TP may combine negative distributive share amounts with Section 179 Expenses and report the total loss on Schedule E, Part II, column (h). If the TP did not claim the Section 179 Expense on Schedule E, Part II, column (i), consider the issue resolved. See (18) below if the TP also claimed the 179EX on column (i).

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

  6. Schedules K-1 should not include W/H. Only backup withholding (BWH) can be reported on a Schedule K-1. W/H amounts shown on a PTK-1 (Form 1065), SBK-1 (Form 1120-S) or TRK-1 (Form 1041) IRs may be the result of erroneously identified/transcribed Schedule K-1 data. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.16.1.1 (2), Withholding - Analysis, for further instructions.

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

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

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

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

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

    Example:

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

  9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

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

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

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

  10. If a 99MIS, PTK-1, SBK-1 or TRK-1 IR is present for the same TP, from the same payer AND for an identical money amount, take the following action:

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

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

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

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

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

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

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

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

    1. If there is an MFT 05 for the AUR tax year (20XX12) with a Return Posted indicator of "Y" (this denotes that a Schedule K-1 (Form 1041) was filed), pursue the fully U/R TRK-1 IR(s).

    2. If there is no MFT 05 for the AUR tax year with a Return Posted indicator of "Y" , consider the issue resolved.

      Note:

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

  13. INT is included on Schedule B, Part I, line 1. Pursue any U/R amounts. See IRM 4.19.3.8.3.1, Interest - Analysis, for further instructions.

    Note:

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

  14. DIV is included on Schedule B, Part II, line 5. Pursue any U/R amounts. See IRM 4.19.3.8.4.2, Dividends - Analysis, for further instructions.

    Note:

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

  15. STCG is reported on Schedule D, line 5. Pursue any U/R amounts including O/D losses. See IRM 4.19.3.8.4.5 (9), Capital Gain Distributions - Analysis, for further instructions.

    Note:

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

    Example:

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

  16. LTCG is reported on Schedule D, line 12, column (h). Pursue any U/R amounts including O/D losses. See IRM 4.19.3.8.4.5 (7), Capital Gain Distributions - Analysis, for further instructions.

    Note:

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

    Note:

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

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

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

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

    Note:

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

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

    2. If the TP does not report the payer name/EIN on the Schedule E (or Schedule E is not completed/present) AND attaches Form 8582≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

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

    4. See (18) above when the PTK-1 and/or SBK-1 IR(s) contain Section 179 Expenses (179EX).

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

    Note:

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

    1. If the TP reports passive income on column (d) or passive loss on column (c) AND attaches Form 8582, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    3. If the TP attaches a completed Form 6198 that matches the payer name and/or EIN ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  21. Pursue all fully U/R SBK-1 and PTK-1 IRs and/or their elements, regardless of the income type or dollar amount. See (12) above when there are fully U/R TRK-1 IRs.

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

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

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

  23. PARAGRAPH 24 automatically generates when STCG and/or LTCG is treated as ordinary income due to loss limitations. If the loss per return is less than $3,000 ($1,500 if MFS), toggle off PARAGRAPH 24 from the Summary screen.

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

    Note:

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

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

      Exception:

      Do not assess SE tax on ORINC, REAL, and OTREN if the payer is a LTD, LLC, LC, LLP, or LP. See IRM 4.19.3.15.1 (12), Self-Employment Tax, for further instructions and see Exhibit 4.19.3-9, Income Identify Codes, for applicable Income Identify Codes.

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

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

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

Agricultural Subsidies/Market Gain on CCC Loans/Commodity Credit Corporation (CCC) Loans Forfeited

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

    Note:

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

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

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

    2. See IRM 4.19.3.8.13.3, Commodity Credit Corporation (CCC) Loans Forfeited, regarding farmer's election for reporting CCC loan proceeds as income in the year of the sale of their commodity rather than the year they actually received the loan.

Agricultural Subsidies/Market Gain on CCC Loans - General
  1. Agricultural subsidies (including CCC certificates) are reported to IRS on Form 1099-G.

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

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

Agricultural Subsidies/Market Gain on CCC Loans - Analysis
  1. Compare the total of AGSUB and MRKGN amounts with entries on:

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

      Note:

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

    2. Schedule E, Part II. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

      Note:

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

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

    1. Schedule F, lines 8 or 43.

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

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

    4. Form 4835, line 6.

    5. Form 1040, line 21.

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

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

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

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

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

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

  7. If there are reported AGSUB and/or MRKGN on which the TP should have paid SE tax but did not, the SE tax must be computed or recomputed if the AGSUB and/or MRKGN is asterisked or a notice is sent for other issue(s). Include the reported AGSUB and/or MRKGN amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax.

    1. Send reported AGSUB and/or MRKGN IR elements on the notice when adjusting SE tax.

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

  8. 1099G IRs may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

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

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

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

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

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

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

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

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

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

    1. "DEBTS" - Debt satisfied.

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

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

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

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

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

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

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

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

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

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

  10. PARAGRAPH 102 automatically generates.

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

Patronage Dividends - General

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

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

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

    • "PTDIV" - Patronage Dividends

    • "NPAT" - non-Patronage Dividends

    • "PURA" - per Unit Retain Allocations

    • "REDEM" - Redemption

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

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

    1. Schedule F, lines 3a, 3b, 38a or 38b. If the 99PAT group amount is less than or equal to the amount reported on any of these lines, consider the IRs reported and mark the group with status code "R" .

      Note:

      If the 99PAT group amount is greater than line 3a or 38a, mark the group with status code "U" and use the amount on line 3b or 38b to determine the U/R.

    2. Form 4835, line 2a or 2b. If the 99PAT group amount is less than or equal to the amount reported on either line, consider the IRs reported and mark the group with status code "R" .

      Note:

      If the 99PAT group amount is greater than line 2a, mark the group with status code "U" and use the amount on line 2b to determine the U/R.

    3. Schedule E, Part I. If an amount is identified as farm rental AND matches within $1, consider the 99PAT IRs reported and mark the group with status code "R" .

      Note:

      Check property names on Schedule E, line 1a and 1b. If the income reported on this line matches the IR group amount(s) within $1, consider the 99PAT IRs reported and mark the group with status code "R" .

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

      Note:

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

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

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

  2. If Form 8903 is present, see IRM 4.19.3.9.9, Domestic Production Activity Deduction.

  3. Consider PTDIVs ≡ ≡ ≡ ≡ ≡ ≡ if there is a Form W-2 or WAGE IR present that shows the TP is incorporated (payer name must include CORP, INC, LC, LLC, PA, PC or SC) in a farming business, and paid wages to himself/herself (payer name and/or address is similar to or matches the TP's name and/or address). Do not consider PTDIV reported if W-2 and 99PAT IR are from the same payer.

PTDIV - Miscellaneous
  1. If a 99PAT IR amount is U/R, verify the Income Identify Code, so the system computes SE tax correctly (Income Identify Code "PF" , "SF" , "PB" , or "SB" as applicable). See Exhibit 4.19.3-9, Income Identify Codes. Delete the Income Identify Code if:

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

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

  2. If there are reported PTDIVs on which the TP should pay SE tax but did not, SE tax must be computed or recomputed if the 99PAT is asterisked or a notice is sent for another issue(s). See IRM 4.19.3.15.1, Self-Employment Tax.

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

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

Crop Insurance - General

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

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

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

Crop Insurance - Analysis
  1. Compare CROP amounts with entries on:

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

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

      Note:

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

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

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

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

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

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

      Note:

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

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

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

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

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

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

  2. If there is reported CROP on which the TP should have paid SE tax but did not, the SE tax must be computed or recomputed if CROP is asterisked or a notice is sent for another issue(s). Include the reported CROP amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax.

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

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

  3. PARAGRAPH 103 automatically generates when CROP is U/R.

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

Unemployment Compensation - General

  1. Unemployment compensation is a benefit paid to qualified individuals during periods of unemployment.

  2. Unemployment compensation is reported on Form 1099-G.

  3. Unemployment compensation displays on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "UNEMP" in the INCOME TYPE field.

Unemployment Compensation - Analysis
  1. Compare UNEMP amounts with entries on:

    1. Form 1040, line 19.

    2. Form 1040A, line 13.

    3. Form 1040EZ, line 3.

  2. Form 1040A, line 13 and Form 1040EZ, line 3 are designated for the reporting of UNEMP as well as Alaska Permanent Fund dividends. Consider any Alaska Permanent Fund dividend IRs when determining the status of the UNEMP IRs income, and the TP filed a Form 1040A or Form 1040EZ. If necessary, group Alaska Permanent Fund dividend IRs with UNEMP IRs to arrive at the correct U/R amount.

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

    1. Form 1040, line 7.

    2. Form 1040, line 21.

    3. Form 1040A, line 7.

    4. Form 1040EZ, line 1.

    Caution:

    If TP includes UNEMP as wages on line 7, Form 1040 or Form 1040A, see IRM 4.19.3.16.3 (5) and (14), Earned Income Credit.

  4. If the tax return indicates the UNEMP income was repaid and includes an amount, accept as reported. The repaid amount plus reported amount must equal the IR, otherwise pursue the difference.

    Caution:

    If the TP indicated a portion of the UNEMP was repaid in a year other than the current AUR tax year, do not consider that repayment amount. Send a Special Paragraph to advise the TP that repayments made in a subsequent year(s) may be deducted on Schedule A, as a miscellaneous deduction, in the year they were repaid.

  5. If the EIN begins with "66" and the payer information is in Spanish, this income is not subject to U.S. income tax, delete the IR(s).

  6. If supplemental unemployment benefits are received from a company financed fund, and the TP did not contribute to the fund, they are not considered UNEMP. They are reported on Form W-2 and are fully taxable wages, subject to W/H, and should be reported on the wage lines. See IRM 4.19.3.8.1, Wages - General, for further instructions.

UNEMP - Miscellaneous
  1. UNEMP (Form 1099-G) may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

  2. PARAGRAPH 67 automatically generates when UNEMP is U/R.

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

Social Security/Railroad Retirement Benefits (SS/RR) - General

  1. Social Security and Railroad Retirement Benefits may be partially taxable (by up to 85 percent) if the modified AGI plus fifty percent of the benefits is greater than the following adjusted base amounts:

    • $25,000 for FS 1, 4 or 5

    • $32,000 for FS 2

    • $25,000 for FS 3 or 6 (and the TP did NOT live with spouse any time during the AUR year)

    • $0 for FS 3 or 6 (and the TP lived with the spouse during the AUR year)

  2. These payments are reported by payers on either Form SSA-1099 (benefits received under Title II of the Social Security Act), or Form RRB-1099 (Tier 1 railroad retirement benefits treated as social security).

    Note:

    See IRM 4.19.3.8.10.5, Railroad Retirement Board (RRB) IRs, for information regarding the amounts reported by the Railroad Retirement Board on Form RRB-1099-R.

  3. Social Security and Railroad Retirement Benefits display on the Case Analysis screen by the literal "SS/RR" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "SS/RR" - taxable Social Security and Railroad Retirement Benefits.

    2. "WCOMP" - Workers' Compensation. Disregard WCOMP amounts. (The system automatically assigns status code "X" to WCOMP amounts.)

    3. "REPAY" - benefits that the TP repaid in the current AUR tax year. The system uses this amount to reduce the recomputed SS/RR amount as appropriate.

    4. "15PAY" - portion of SS/RR received in the AUR year for 2015 (for information only).

    5. "14PAY" - portion of SS/RR received in the AUR year for 2014 (for information only).

    6. "13PAY" - portion of SS/RR received in the AUR year for 2013 (for information only).

    7. "12PAY" - portion of SS/RR received in the AUR year for 2012 (for information only).

  4. Workers' Compensation payments made in place of Social Security and Railroad Retirement Benefits are considered as SS/RR when computing taxable benefits. If it appears that the TP reduced the gross SSA benefits (SS/RR element) by the amount of the WCOMP element:

    1. Pursue the discrepancy.

    2. Mark the WCOMP element with Send Indicator "S" .

    3. PARAGRAPH 100 automatically generates.

SS/RR - Analysis
  1. When screening SS/RR IRs, check the name line area of the IR(s) to ensure that the benefits are properly credited to the appropriate TP. Delete SS/RR amounts if the payee name line(s) indicates they are payments to a former spouse or dependent children, unless there is an indication the TP in question is one of the actual recipients.

  2. Compare the total of SS/RR amounts with entries on:

    1. Form 1040, line 20a (total benefits) and line 20b (taxable benefits).

    2. Form 1040A, line 14a (total benefits) and line 14b (taxable benefits).

    3. Form 1040, line 21. The amount must match the taxable SS/RR payments within $1 or be identified as Social Security/Railroad Retirement payments.

  3. When the TP is married filing separately (FS 3 or 6) and lived apart from their spouse for the entire year, they are instructed to enter a "D" on the dotted line next to Form 1040, line 20a (Form 1040A, line 14a). If a "D" is present (or a "Y" on an ELF return) on Form 1040, line 20a (Form 1040A, line 14a), enter an "N" in the TP LIVED WITH SPOUSE? field in the SSA RRB Changes window. If a "D" is not present:

    1. Assume the TP lived with his/her spouse and zero is the applicable base amount for FS 3 or 6.

    2. Ensure that the TP LIVED WITH SPOUSE? field is blank.

    3. PARAGRAPH 162 automatically generates.

      Note:

      If there are no SS/RR IR(s) present on the Case Analysis screen, and it appears that the TP did not report the proper taxable amount, because the "D" is not present, and there are no other U/R issues, close the case.

  4. On jointly filed returns, when one of the TPs is deceased, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " when:

    1. Form 1040, line 20a or 20b (Form 1040A, line 14a or 14b) is zero or blank, or

    2. Form 1040, line 20a (Form 1040A, line 14a) is equal to or less than the surviving spouse's SS/RR IR amount(s).

      Caution:

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

  5. The taxable amount of SS/RR payments is computed by the system based on the appropriate entries on the Adjusted Gross Income window and the SSA/RRB window. If the TP files a Schedule R, Credit for the Elderly or Disabled, the system requires you to access the SSA/RRB window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - SSA/RRB window.

    1. Screen SS/RR IR(s) after you analyze all other potentially discrepant income types. After any subsequent analysis that changes the TOTAL AGI CHANGE field, reselect the SSA/RRB window. (After computing the IRA deduction the system automatically recomputes SS/RR.) Recompute all changes to adjustments (SLID, Tuition and Fees, and/or DPAD) to income before selecting this window. See IRM 4.19.3.4.2 (3), Case Analysis Screen, for the proper sequence when these issues are present on the same case.

    2. Be alert for changes made during or after original processing when entering/verifying information in the SSA/RRB window. Send PARAGRAPH 97, (see IRM 4.19.3-7, CP PARAGRAPHS), for erroneous changes made during original processing.

  6. If Form 1040, line 20a or Form 1040A, line 14a is greater than the IR amount(s) and an adjustment to SS/RR is necessary, do not send the SS/RR IR(s) to the TP.

    Note:

    After computing the SS/RR, the GROUP TOTAL field on the Case Analysis screen displays the total SS/RR IR amount. Compare this amount to the amount on Form 1040, line 20a or Form 1040A, line 14a.

  7. Verify that the amount in the TAX EXEMPT INTEREST field of the SSA/RRB window is correct. See IRM 4.19.3.8.3.5 (1), Interest Miscellaneous, if the TP improperly excluded tax-exempt interest on Schedule B.

  8. If the repayment amounts exceed the SS/RR amounts, and the TP reports a taxable SS/RR amount, but fails to subtract any or all of his/her payments from the SS/RR amount, the system reduces the recomputed SS/RR amount as appropriate. This results in either a refund to the TP or a reduction to his/her tax.

  9. If there are no SS/RR IRs on the Case Analysis screen, the TP reports a gross amount on Form 1040, line 20a or Form 1040A, line 14a and the amount on Form 1040, line 20b or Form 1040A, line 14b is blank, zero or less than 85 percent of the gross amount, and there are other U/R issue(s):

    1. Create an IR for the gross amount reported on Form 1040, line 20a or Form 1040A, line 14a.

    2. Access the SSA/RRB window and input/verify the fields.

  10. If the TP reported SS/RR (larger than the IR amount(s)), and the IR shows a REPAY amount, the REPAY IR must be coded with IR Code "D" . Otherwise, the system uses 85 percent of the REPAY amount as an offset and recomputes the tax.

  11. When the system computes taxable SS/RR, it uses the amount the TP reported as benefits or the total of the IRs (less any REPAY amounts), whichever is greater. If the TP attached documentation stating the SS/RR amounts were repaid in the current AUR tax year and no corresponding IR is present showing the REPAY amount, you must create an IR so the system correctly computes the taxable portion.

    Caution:

    If the TP attached documentation stating the SS/RR amounts were repaid in a year other than the current AUR tax year, advise the TP the repayment amount may be deducted ONLY in the year it was repaid.

  12. Do not pursue SS/RR amounts if the TP provides a statement and/or documentation that the income is excludable because the payments are for disability due to injuries received from a terrorist attack or military action.

SS/RR Miscellaneous
  1. Taxpayers can compute taxable SS/RR benefits following the Lump-Sum Election (LSE) method. There is an LSE method indication if LSE is written next to Form 1040, line 20a (Form 1040A, line 14a), the box next to LSE ind is checked on the TRDB window, or an LSE worksheet is attached. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. The SS/RR IR amount(s) is reported on Form 1040, line 20a, or Form 1040A, line 14a AND

    2. The SS/RR IR displays one or more of the following 15 PAY, 14PAY, 13PAY or 12PAY

    Note:

    If either of the conditions above are not met, pursue discrepant SS/RR. Send PARAGRAPH 71, see IRM 4.19.3-7, CP PARAGRAPHS.

  2. Do not pursue potential U/R SS/RR benefits if there is an indication the TP is a resident of one of the following countries:

    • Canada

    • Egypt

    • Germany

    • Ireland

    • Israel

    • Italy

    • Japan

    • Romania

    • The United Kingdom

  3. Form SSA-1099 or Form RRB-1099 may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, and/or see IRM 4.19.3.16.1.2, Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous, for further instructions.

  4. PARAGRAPH 99 automatically generates when a change to modified AGI impacts the taxable amount of SS/RR.

  5. If SS/RR is adjusted, enter the taxable return amount in the RETURN field on the Summary screen.

Other Income (OTINC)- General

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

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

OTINC - Analysis
  1. Compare OTINC amounts with entries on:

    1. Schedule C, line 6.

    2. Schedule F, lines 8 or 43.

    3. Form 4835, line 6.

    Note:

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

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

    1. Schedule C or C-EZ, line 1

    2. Schedule F, lines 1a or 2

    Note:

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

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

    1. Form 1040, line 7.

    2. Form 1040A, line 7.

    3. Form 1040EZ, line 1.

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

      Note:

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

    5. Schedule D, see table below for line numbers - The TP may report the sale of timber, coal, easements, right-of-way (ROW), land damages, etc. on these lines. Consider the OTINC reported if the sales price matches the IR within $1.

      Form/Schedule TY 2014 TY 2015 TY 2016
      Schedule D Part I, lines 1a, 1b, 2, or 3, column (d) Part I, lines 1a, 1b, 2, or 3, column (d) Part I, lines 1a, 1b, 2, or 3, column (d)
      Schedule D Part II, line 8a, 8b, 9 or 10, column (d) Part II, line 8a, 8b, 9 or 10, column (d) Part II, line 8a, 8b, 9 or 10, column (d)
      Form 8949 Part I, line 1, column (d) or Part II, line 1 column (d) Part I, line 1, column (d) or Part II, line 1 column (d) Part I, line 1, column (d) or Part II, line 1 column (d)
    6. Form 8949, see table above for line numbers.

    7. Schedule E, Part I.

    8. Form 2106, line 7.

  4. The OTINC amount on a 99MIS IR represents the full value of Other Income. If the TP reports a lesser amount, consider the difference U/R, unless documentation is attached to the return (i.e., TP claimed fair market value).

  5. Accept OTINC as reported if:

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

      Exception:

      Do not consider OTINC reported if Form W-2 and 99MIS IR are from the same payer, the income is from the Alaska Permanent Fund Dividend, or identified as National Mortgage Settlement (NMS) and/or Independent Foreclosure Review (IFR).

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

      Exception:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ or the income is from the Alaska Permanent Fund Dividend, or identified as National Mortgage Settlement (NMS) and/or Independent Foreclosure Review (IFR).

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

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

  6. The value of medals and/or prizes and awards paid by the U.S Olympic Committee (USOC) to competitors after December 31, 2015 are tax exempt when the TP’s AGI is $1 million or less ($500,000 for married filing separately). TPs are instructed to include these amounts on Form 1040, line 21 and subtract the amount on the dotted line portion of line 36. If the IR is not reported and it can be determined the TP is an Olympian/Paralympian who meets the exclusion criteria, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

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

    1. Interest on any award.

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

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

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

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

    6. Damages for emotional distress received to satisfy a claim under antidiscrimination statutes e.g., Title VII of the Civil Rights Act of 1964, and comparable state statutes.

    7. Damages received for emotional distress due to a personal injury that is unrelated to a physical injury or sickness (e.g., employment discrimination or injury to reputation) but does not include damages not in excess of amount paid for medical care to treat emotional distress.

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

  3. The National Mortgage Settlement (NMS) and/or Independent Foreclosure Review (IFR) paid cash settlements to certain borrowers whose principal residence was involved in the foreclosure process.
    Consider the IR reported if the TP reports the payment(s) on the return AND indicates any of the following

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

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

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

    Example:

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

    Note:

    Beneficiaries of National Mortgage Settlement and Independent Foreclosure Review payments may treat the distribution(s) in the same manner as the decedent would have had the decedent lived and received the income.

  4. Gains from reimbursements for damages, casualty and theft, etc., are reported on Form 4684 and Form 4797.

  5. Any legal fees associated with the award/settlement are generally taken as a deduction on Schedule A.

    Exception:

    If the settlement involves: unlawful discrimination as defined in IRC 62(e) , a claim against the U.S. Government or a claim made under section 1862(b)(3)(A) of the Social Security Act, see (6) below.

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

    2. If the TP nets the amount for legal fees, pursue the deducted amount as U/R. If Schedule A is filed, include this amount in the GROSS JOB AND MISC EXPENSE field (line 24) of the Schedule A window in Return Value and send a Special Paragraph to inform the TP that legal fees are an itemized deduction that are reduced by 2 percent of AGI. If no Schedule A is filed, send a Special Paragraph to inform the TP they may now qualify for Itemized Deductions.

  6. Any legal expenses, up to the settlement included in gross income, from: an unlawful discrimination suit, a claim against the U.S. Government or a claim made under section 1862(b)(3)(A) of the Social Security Act, may be deducted as an adjustment to income on the dotted portion of line 36 on Form 1040. Any legal expenses over the amount of income are deductible as a miscellaneous itemized deduction subject to the 2 percent limit.

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

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

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

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

    1. Disallow the expenses.

    2. Adjust SE tax as appropriate.

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

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

  9. If OTINC is reported and the TP should have paid SE tax but did not, the SE tax must be computed or recomputed if OTINC is asterisked or a notice is sent for another issue(s). Include the reported OTINC amount in the PRIM REPRTD SE INC NOT ON SE and/or SEC REPRTD SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax.

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

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

  10. 99MIS IRs with OTINC amounts may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

Gambling Income - General

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

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

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

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

    1. Form 1040, line 7.

    2. Form 1040, line 21.

    3. Form 1040A, line 7.

    4. Form 1040EZ, line 1.

    5. Schedule C, Part I, lines 1 or 6 (or Schedule C-EZ, line 1), if payer or business activity indicates that it is the same income. See IRM 4.19.3.8.19.2 (11) and (12), Gambling Losses, for additional information.

    6. Schedule F, lines 8 or 43.

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

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

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

      Note:

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

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

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

  5. If the TP did not itemize his/her deductions, send PARAGRAPH 42. See IRM 4.19.3-7, CP PARAGRAPHS.

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

    Exception:

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

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

  3. The TP is eligible to itemize deductions when deductions on Schedule A exceed the applicable standard deduction amounts for their filing status. See IRM 4.19.3.12, Standard Deduction, for further information.

  4. Gambling losses are O/D if:

    1. They exceed gambling winnings.

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

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

    Exception:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ do not consider the gambling losses O/D. See (7) below.

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

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

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

    3. Send PARAGRAPH 144, see IRM 4.19.3-7, CP PARAGRAPHS.

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

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

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

    3. Send PARAGRAPH 42, see Exhibit 4.19.3-7, CP PARAGRAPHS.

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

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ consider the IR reported.

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

    2. Select the Schedule A window.

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

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

    5. Send PARAGRAPH 42, (see IRM 4.19.3-7, CP PARAGRAPHS.

      Caution:

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

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

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

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

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

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

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

    3. Adjust SE tax as appropriate.

    4. Send PARAGRAPH 144, see IRM 4.19.3-7, CP PARAGRAPHS.

  12. If it appears that gambling is not the primary source of income for the TP (example: the TP lists their occupation as other than "professional gambler" and/or reports significant earned income from non-gambling sources), use the MISC ADJUSTMENT/SCHEDULE C EXPENSE window to disallow the expenses and income claimed on Schedule C. Take the following action:

    1. Enter a zero (0) in the MISC ADJUSTMENT PER RETURN field.

    2. Enter the gambling income reported on Schedule C in the MISC ADJUSTMENT NOW field.

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

      Note:

      Expenses include total expenses and cost of goods sold.

    4. Enter the gambling income reported on Schedule C in the PRIM/SEC SCH C EXPENSE NOW field.

    5. Recalculate the SET window.

    6. Send PARAGRAPH 14, see IRM 4.19.3-7, CP PARAGRAPHS.

    7. Include a Special Paragraph on the notice using the following verbiage as an example: "The Miscellaneous Adjustment included in this notice reflects the changes made to your Schedule C."

  13. GAMBL IRs may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

Cancellation of Debt (DBTCN) - General

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

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

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

Cancellation of Debt (DBTCN) - Analysis
  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. An IR with a literal of DBTCN may also have an identifiable event code "A" , indicating Bankruptcy or "D" , indicating foreclosure in the IND field under the PAYER section of the IR. These IRs are system deleted.

    Caution:

    If the IRs are not system deleted mark with Status Code "D" or "N" .

  3. If a DBTCN IR is system deleted ("X" ) and you can determine based on a dollar match or as identified by payer that the IR is reported, DO NOT allow credit for the reported amount(s) against other DBTCN IRs.

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

    1. Form 1040, line 21.

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

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

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

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

    Exception:

    If the TP reports the full amount of the IR and then zeroes it out, request the TP either get a corrected statement from the payer or submit a completed Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment).

    Exception:

    If Form 982 is attached with an entry on line 2, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

  7. If the TP indicates the DBTCN is not taxable under "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ delete the issue.

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

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

  10. The Mortgage Forgiveness Debt Relief Act of 2007 (Pub. Law 110-142) created a new exclusion under sections 108(a)(1)(E) and 108(h) for discharged qualified principal residence indebtedness. This exclusion applies to qualified principal residence indebtedness that is discharged on or after January 1, 2007 and before January 1, 2017. This exclusion also applies to discharges on or after January 1, 2017, if pursuant to a written arrangement entered into before January 1, 2017. The maximum amount that can be treated as qualified principal residence indebtedness is $2 million ($1 million if MFS). Taxpayers must file Form 982 to claim this exclusion.

    Note:

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

  11. The Mortgage Forgiveness Debt Relief Act of 2007, generally allows a TP to exclude income from the discharge of debt on the TPs principal residence. Debt reduced through mortgage restructuring or loan modification programs qualify for the relief. The TP must file Form 982 to claim this exclusion.

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

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

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

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

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

  14. If the TP indicates that the income is not taxable because he/she is insolvent, (e.g., Form 982, Box 1b, is checked or on an attached statement), the TP MUST provide a statement showing the amount of his/her insolvency. If the TP does not provide a breakdown of his/her assets and liabilities, DO NOT consider him/her to be insolvent. If no statement is attached send a Special Paragraph to request a statement of assets and liabilities using the following verbiage as an example: "The Form 982 you attached to your return indicates you were insolvent. In order to be considered insolvent, you must provide a statement of your assets and liabilities immediately before the debt was cancelled. You are considered insolvent only when your liabilities exceed your assets."

    Reminder:

    If sending the Special Paragraph because the TP indicates income is not taxable because he/she is insolvent, but does not provide a breakdown of his/her assets and liabilities, "toggle off" PARAGRAPH 72.

  15. The TP is considered insolvent if the net liability amount(s) shown on the attached statement is GREATER than the total fair market value of assets immediately prior to the debt cancellation.

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

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

      Example:

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

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

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

  18. If the TP indicates that the cancellation or discharge of debt was due to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

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

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

Taxable Grants - General

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

    Exception:

    If there is an indication ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

    • The amount must match within $1, or

    • Must be identified as grant income

  2. If there is an indication ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

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

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

      Note:

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

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

Taxable Grants Miscellaneous
  1. 1099G IR(s) with GRANT amounts may reflect W/H. See IRM 4.19.3.16.1, Withholding - General, for further instructions.

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

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

Substitute Payments in Lieu of Dividends or Interest (PLDIV)

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

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

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

    • The amount must match within $1, or

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

  4. Send PARAGRAPH 41 when PLDIV are reported as interest or dividends. See IRM 4.19.3-7, CP PARAGRAPHS.

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

Securities Sales - General

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

  2. Securities sales income is reported on Form 1099-B and TPs are instructed to include these amounts on Schedule D /Form 8949, Sales and Other Dispositions of Capital Assets.

  3. Securities sales is identified on the Case Analysis screen by the literal "1099B" in the DOC TYPE field and the literal "STOCK" in the INCOME TYPE field. The 1099B IR also reflects the literal "BASIS" to reflect any cost basis reported by the payer, see IRM 4.19.3.8.23.1.1, Cost Basis - Analysis for additional information.

  4. There are four Category Codes for STOCK:

    • Category 31 contains 100 or fewer IRs with Schedule D filed.

    • Category 39 contains more than 100 IRs with Schedule D filed.

    • Category 61 contains 100 or fewer IRs with no Schedule D filed.

    • Category 79 contains more than 100 IRs with no Schedule D filed.

Securities Sales - Analysis
  1. ONLY screen STOCK IRs in Category 31, 39, 61 and 79. If the securities are asterisked in categories other than 31, 39, 61 and 79, the system marks the IRs with status code "X" . If appropriate, close the case with PC 2X.

    1. If the case is open in any other category, do not screen STOCK IRs.

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

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

  3. Do not pursue negative STOCK amounts on 1099B IR(s).

  4. Generally, 1099B STOCK IRs contain a CUSIP (Committee on Uniform Security Identification Procedures) number. This number is usually nine characters long, consisting of alpha and/or numeric characters. The CUSIP number identifies the issuer of the security and the type of security. Alpha characters in the 7th and/or 8th position(s) of the CUSIP number denote fixed income obligation securities. Do not pursue unreported STOCK IRs that contain alpha characters in the 7th and/or 8th positions of the CUSIP number AND the STOCK IR amount is divisible by 50 (i.e., the last two digits of the STOCK transaction amount ends in either "00" or "50" ). When the TP has reported these amounts, the IRs must be taken into consideration when determining the U/R amount.

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

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

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

  6. Compare STOCK amounts with entries on:

    Form/Schedule TY 2014 TY 2015 TY 2016
    Form 8949 Part II, line 1, column (d) (Long Term) Part II, line 1, column (d) (Long Term) Part II, line 1, column (d) (Long Term)
    Form 8949 Part I, line 1, column (d) (Short Term) Part I, line 1, column (d) (Short Term) Part I, line 1, column (d) (Short Term)
    Schedule D Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term) Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term) Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term)
    Schedule D Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term) Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term) Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term)
  7. Comparisons with the following entries must match within $1 or be CLEARLY IDENTIFIED as STOCK:

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

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

    3. Form 6252, Part I, line 5.

  8. If the TP reported STOCK on either Schedule C or Form 4797 and there is no indication that a mark-to-market election was made, see IRM 4.19.3.8.23.1.2, Day Trader Securities - Analysis.

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

    • sales date

    • money amount

    • item description (brokerage name or actual stock name)

    • income identify code

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

    1. Mark the STOCK element with status code "U" .

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

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

      Note:

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

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

      Note:

      The Adjusted Gross Income and COMPUTE SCHEDULE D LOSS windows automatically display when a status code "U" is entered the first time. It is not necessary to subsequently access these windows unless the field entries need to be changed.

    5. Input a status code "U" , "R" , or "N" and the reported amount, if applicable, for the STOCK elements.

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

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

    1. Group the IRs by payer and compare the total to the gross amounts reported by payer on Form 8949

      TY 2014 TY 2015 TY 2016
      Part I, line 1, column (d) (Short Term) Part I, line 1, column (d) (Short Term) Part I, line 1, column (d) (Short Term)
      Part II, line 1, column (d) (Long Term) Part II, line 1, column (d) (Long Term) Part II, line 1, column (d) (Long Term)
    2. Compare the group total to the total stock reported for that payer.

      Reminder:

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

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

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

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

    1. Group by income type income identify code (ST or SD) and compare the total to the gross amounts reported on Schedule D,

      TY 2014 TY 2015 TY 2016
      Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term) Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term) Part I, lines 1a, 1b, 2 or 3, column (d) (Short Term)
      Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term) Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term) Part II, lines 8a, 8b, 9 or 10, column (d) (Long Term)

      Note:

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

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

      Reminder:

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

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

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

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

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

    1. There are 1-4 STOCK IR(s) (per TP) containing the payer name/item description that corresponds with the payer name on a WAGES IR AND

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

      Note:

      See IRM 4.19.3.8.1.1 (13) and (14), Wages - Analysis, for additional information regarding exercising of employee stock options.

  15. PARAGRAPH 24 automatically generates when STOCK is treated as ordinary income due to loss limitations. If the loss per return is less than $3,000 ($1,500 if MFS), toggle off PARAGRAPH 24 from the Summary screen

Cost Basis - Analysis
  1. ONLY screen BASIS IRs in Category 31, 39, 61 and 79. If the cost basis element is asterisked in categories other than 31, 39, 61 and 79, the system marks the IRs with status code "X" . If appropriate, close the case with PC 2X. If the case is open in any other category, do not screen BASIS IRs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    5. Send PARAGRAPH 118, see IRM 4.19.3-7, CP PARAGRAPHS.

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

Securities Sales Miscellaneous
  1. STOCK amounts may be taxed on Schedule D at the applicable capital gain tax rate. See IRM 4.19.3.13.2, Sch D/8814/ECR Tax Window, for further instructions.

  2. In order for the system to compute the correct tax, the U/R STOCK amount(s) must contain an Income Identify Code. The Income Identify Code for STOCK IRs is defaulted to the appropriate Income Identify Code. The IR displays either a "ST" (Short Term Gain/Loss) or "SD" (Long Term Gain/Loss). Do not change the Income Identify Code during screening. See Exhibit 4.19.3-9, Income Identify Codes

  3. 1099B IR(s) with STOCK amounts may reflect W/H. If there is an indication that the securities account is jointly owned with someone other than the TP's spouse or the filing status is 3:

    Note:

    See IRM 4.19.3.5.3, Jointly Owned Income, for additional instructions on jointly owned income.

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

    2. Send PARAGRAPH 6, see IRM 4.19.3-7, CP PARAGRAPHS.

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

    4. See IRM 4.19.3.16.1, Withholding - General, for further instructions on W/H.

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

  5. If STOCKs are U/R enter, in the RETURN field of the Summary screen, the sum of Schedule D,

    TY 2014 TY 2015 TY 2016
    Part I, lines 1a, 1b, 2 and 3, column (d) and Part II, lines 8a, 8b, 9 and 10, column (d) Part I, lines 1a, 1b, 2 and 3, column (d) and Part II, lines 8a, 8b, 9 and 10, column (d) Part I, lines 1a, 1b, 2 and 3, column (d) and Part II, lines 8a, 8b, 9 and 10, column (d)

Bartering - General

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

    Example:

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

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

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

Bartering - Analysis
  1. Bartering income is reported on:

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

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

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

    1. Form 1040, line 21.

    2. Schedule D.

      Note:

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

    3. Form 8949.

    4. Schedule E, lines 3 or 4.

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

  3. BARTR is generally considered self-employment income. If there is reported BARTR on which the TP should have paid SE tax but did not, SE tax must be computed or recomputed if BARTR is asterisked or a notice is sent for another issue(s). Include the reported BARTR amount in the PRIM/SEC REPORTED SE INC NOT ON SE field(s) on the SE Tax window. See IRM 4.19.3.15.1, Self-Employment Tax.

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

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

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

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

  5. PARAGRAPH 126 automatically generates when BARTR is U/R.

  6. If BARTR is U/R, enter the return amount in the RETURN field on the Summary screen.

Real Estate Transactions - General

  1. Real estate transactions are the proceeds from the transfer (sale or exchange) of real estate.

  2. Real estate transactions are reported on Form 1099-S.

  3. Taxpayers can exclude up to $250,000 ($500,000 if married filing jointly) on the sale of their main home. Any gain in excess of the exclusion amount is reportable income.

  4. Real estate transactions are identified on the Case Analysis screen by the literal "1099S" in the DOC TYPE field and the literal "REAL" in the INCOME TYPE field.

Real Estate Transactions - Analysis
  1. ONLY screen REAL IR(s) in Category 65. If REAL is asterisked in categories other than 65, the system marks the IRs with status code "X" . If appropriate, close the case with PC 2X. If the case is open because of other income discrepancies, do not screen the non-asterisked REAL IRs.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Compare REAL amounts with entries on:

    1. Form 4797, Sale of Business Property, lines 1, 2(d), 10(d), 20 or attachments.

    2. Form 6252, Installment Sale Income, lines 5 or 21.

    3. Schedule D, see table below for line numbers, or attachments.

    4. Form 8949, see table below for line numbers.

      Form/Schedule TY 2014 TY 2015 TY 2016
      Schedule D Part I lines 1a, 1b, 2, or 3, column (d), sales price, or line 4, column (h), gain Part I lines 1a, 1b, 2, or 3, column (d), sales price, or line 4, column (h), gain Part I lines 1a, 1b, 2, or 3, column (d), sales price, or line 4, column (h), gain
      Schedule D Part II lines 8a, 8b, 9,10 (column (d), sales price, or line 11, column (h), gain Part II lines 8a, 8b, 9,10 (column (d), sales price, or line 11, column (h), gain Part II lines 8a, 8b, 9,10 (column (d), sales price, or line 11, column (h), gain
      Form 8949 Part I, line 1, column (d) Part I, line 1, column (d) Part I, line 1, column (d)
      Form 8949 Part II, line 1, column (d) Part II, line 1, column (d) Part II, line 1, column (d)
    5. Form 8824, Like-Kind Exchanges, line 15 or 16.

    6. An attachment to the return that includes purchase and sales price.

  5. If the amount reported per (4) above is equal to or greater than the REAL IR(s) amounts and is properly carried forward to page 1 of the Form 1040, consider the issue resolved. If the amount reported is less, or is not properly carried forward to page 1 of the Form 1040, consider the difference U/R.

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. If unable to identify REAL per (4) above, pursue the entire U/R real estate amount(s). Do not apply any exclusion amount.

Real Estate Transactions Miscellaneous
  1. If there is a Schedule C or C-EZ attached to the return and the principal business is listed as real estate broker, real estate sales, building, construction, or remodeling; or the principal business activity code indicates related business, i.e., 233200, 238160, 238900, 531210, etc., consider REAL amount(s) fully reported when:

    1. Gross Receipts on Schedule C or C-EZ are larger than the REAL amount(s),

    2. The TP reports the exact amount of the IR(s) on Schedule C, line 6, C-EZ, line 1, or

    3. The TP includes the REAL on an attachment.

  2. If U/R REAL should be reported on Schedule D:

    1. Input Income Identify Code "SD" if the U/R REAL amount(s) is determined to be a long term capital gain/loss, (Schedule D, Part II) or,

    2. Input Income Identify Code "ST" if the U/R REAL amount(s) is determined to be a short term capital gain/loss, (Schedule D, Part I) or,

      Note:

      Income Identify Code "SD" and "ST" allow the system to compute the Schedule D tax if applicable. See IRM 4.19.3.13.2, Sch D/8814/ECR Tax Window, for further instructions.

    3. PARAGRAPH 24 automatically generates. If the loss per return is less than $3,000 ($1,500 if MFS), toggle off PARAGRAPH 24 from the Summary

    4. See IRM 4.19.3.8.4.5 (9), Capital Gain Distributions - Analysis, for procedures to access the Schedule D window and U/R the capital gain income.

  3. If there is U/R Schedule D REAL income and the TP reports a capital loss on Form 1040, line 13:

    1. See IRM 4.19.3.8.4.5 (9), Capital Gain Distributions - Analysis, for procedures to access the Schedule D window and underreporting all Schedule D income.

    2. Enter a zero (0) in both fields on the COMPUTE SCHEDULE D LOSS window. This prevents the system from using losses in excess of $3,000 ($1,500 if MFS).

  4. PARAGRAPH 5 automatically generates when REAL is U/R.

  5. If REAL is U/R, enter the return amount in the RETURN field on the Summary screen.

Refund of Overpaid Mortgage Interest (ROMID) - General

  1. Refund of Overpaid Mortgage Interest Deduction (ROMID) is a refund of interest the TP paid to a lending institution. If the TP receives a refund in the same year he/she paid it, he/she must either:

    1. Reduce the mortgage interest deduction claimed on Schedules A, C, E, F, Form 4835, Form 8829, or

    2. Claim the refund amount on Form 1040, line 21.

  2. ROMID amounts are reported to IRS on Form(s) 1098, Box 3 and are displayed on the Information Return window and the Case Analysis screen with the DOC TYPE of "1098" and the INCOME TYPE of "ROMID" .

ROMID - Analysis
  1. Compare ROMID amount(s) with entries on:

    1. Form 1040, line 21. The amount must match within $1 or must be clearly identified as ROMID.

    2. Schedules A, C, E, F, Form 4835, or Form 8829 where it appears the TP netted (subtracted ROMID amount) the mortgage interest amount reported.

      Note:

      Use MORT IR amounts for reference even if they are system deleted.

  2. If the TP did not itemize deductions in the prior year, the ROMID may still be taxable if the TP claimed a mortgage interest deduction on Schedule(s) C, E, F or Form 4835 or Form 8829. Research may be done on IDRS using CC RTVUE to determine if these Schedules or Forms were filed by the TP and if a mortgage interest deduction was claimed. If the TP did not claim the mortgage deduction on his/her prior year return, do not pursue the ROMID issue.

  3. Consider the difference U/R if the ROMID cannot be identified, see (1) above.

  4. See IRM 4.19.3.11.2, Mortgage Interest Deduction and Points Paid, for instructions on screening mortgage interest (MORT) amounts.

  5. PARAGRAPH 123 automatically generates.

  6. If ROMID is U/R, enter the return amount in the RETURN field on the Summary screen.

Qualified Education Program Payments - General

  1. Qualified Education Program Payments consist of Qualified Tuition Program (QTP) or Coverdell Education Savings Accounts (CESA) and are reported to IRS on Form 1099-Q, Payments From Qualified Education Programs (Under Section 529 and 530). Amount indicators on the Form 1099-Q reflect Gross Distribution (Box 1); Earnings (Box 2); and QTB (Basis Box 3).

  2. Contributions to a CESA are identified by a Form 5498-ESA, Coverdell ESA Contribution Information, and are non-deductible. If the TP claims an IRA deduction and the amount matches a Form 5498-ESA contribution, disallow the deduction. PARAGRAPH 30 automatically generates.

  3. Qualified Education Program Payments are identified on the Case Analysis screen by the literal "1099Q" in the DOC TYPE field and the literals:

    • GRDIS - Gross Distribution

    • EARN - Gross Earnings

    • QTB - Qualified Tuition Basis

  4. Only EARN is pursued as U/R. GRDIS and QTB is for information only and is system deleted. Underreported EARN is treated as ordinary income and NOT as earned income for purposes of computing EIC, Child Care Credit, etc.

Qualified Education Program Payments - Analysis
  1. If there is an indication of a Trustee to Trustee transfer (Form 1099-Q, Box 4 is checked), the distribution is nontaxable. Do not pursue the issue.

  2. If a 5498E IR is present with the literal "EROLV" in the INCOME TYPE field, and has an amount that matches 1099Q GRDIS IR ≡ ≡ ≡ ≡ ≡ ≡ ≡ consider the distribution rolled over.

  3. If case is in Category 30 and EARN is being pursued, issue a CP 2501.

  4. If Earn is being pursued as a secondary issue (in category other than Category 30), issue a CP 2000.

  5. Only pursue net positive EARN amounts. When there are multiple 1099Q IR(s), combine positive EARN amounts with any negative EARN amounts. If the combined net EARN is negative, do not pursue the EARN issue. Input income status code "N" or "D" .

  6. 1099-Q IRs display a Distribution Type Indicator on the Case Analysis screen based on the information in Form 1099-Q Box 5:

    • IND "1" - Qualified Tuition Program (QTP) from a private educational institution

    • IND "2" - QTP from a State (or state agent/instrumentality)

    • IND "3" - Coverdell ESA

      Note:

      If the indicator is blank, the payer did not specify the type of distribution. Consider the IR valid and continue processing.

  7. Generally, QTP or CESA distributions are non-taxable if they are less than the designated beneficiary's qualified education expenses. The taxable amount is reported on Form 1040, line 21. Consider the Form 1099-Q distribution(s) reported when:

    1. The TP indicates the designated beneficiary's qualified education expenses ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ OR

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Note:

      A 10 percent additional tax may also apply. See IRM 4.19.3.15.5, 10 Percent Tax on Qualified Education Program Payments, for further instructions.

  8. If an EARN IR is marked U/R, also send the associated GRDIS IR element. The gross distribution amount is used by the taxpayer to calculate the taxable portion of the earnings. The distribution is not taxable if the paid expenses minus the expenses claimed for credits or tuition and fees deduction exceeds the gross distribution amount.

Qualified Education Program Payments - Miscellaneous
  1. PARAGRAPH 31 automatically generates when EARN is U/R.

  2. If EARN is U/R, enter the return amount in the RETURN field on the Summary screen. The CP 2000 displays the discrepancy as "Education Program Payments" .

Health Saving Accounts (HSA), Archer Medical Savings Account (AMSA) and Medicare Advantage MSA (MAMSA) Distributions - General

  1. Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA, is used to report the following distributions:

    1. Health Savings Account (HSA).

    2. Archer Medical Savings Accounts (AMSA).

    3. Medicare Advantage Medical Savings Account (MAMSA).

  2. HSA, AMSA and MAMSA distributions are identified on the Case Analysis screen by the literal "99-SA" in the DOC TYPE field and the following literals in the INCOME TYPE field:

    • "SAGD" - Gross distribution

    • "SAEEC" - Earnings on excess contributions

      Note:

      The amount of SAEEC is already included in the SAGD amount. Do not pursue the SAEEC amount.

  3. Taxpayers must complete Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section A to compute the correct amount of taxable "AMSA" distributions and Section B to compute the correct amount of taxable "MAMSA" distributions.

  4. Taxpayers must complete Form 8889, Health Savings Accounts, Part II, to compute the correct amount of "HSA" taxable distribution.

HSA, AMSA and MAMSA Distributions - Analysis
  1. 99-SA IRs display an Account Type Indicator on the Case Analysis screen based on the information in Form 1099-SA box 5. This indicator displays in the IND field on the Case Analysis screen and Information Return window(s):

    1. IND "1" - Health Savings Account (HSA)

    2. IND "2" - Archer Medical Savings Account (AMSA)

    3. IND "3" - Medicare Advantage MSA (MAMSA)

  2. If a 5498S (HSA, AMSA, or MAMSA) IR is present with either the literal SARLV or SAFMV only in the Income Type field, and it has an amount ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , consider the distribution to be rolled over. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. The system displays the Form 1099-SA distribution code at the bottom of the Case Analysis screen as DISTRIBUTION CD and in the DIST CD field of the Information Return window.

  4. Compare 99-SA SAGD amounts with:

    INDICATOR WITH THE ENTRY ON
    "1" (HSA) Form 8889, line 14a
    "2" (AMSA) Form 8853, line 6a
    "3" (MAMSA) Form 8853, line 10
    1. If the amount is less than the IR, pursue the difference.

    2. If the amount matches within $1 or is greater, consider the IR reported and see (9) and (10) below.

  5. Do not allow credit for amounts identified as HSA, AMSA or MAMSA on Form 1040 line 21 if there are no entries on Form 8889, line 14a or Form 8853 lines 6a or 10 or there is no Form 8889 or Form 8853 attached.

  6. Taxable HSA or AMSA distributions received prior to age 65, with a distribution code of 1 or 5 from Form 1099-SA are subject to an additional 20 percent tax. See IRM 4.19.3.15.4, 20 Percent Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions, for more information regarding the additional tax. If the distribution code on the IR is "0" , delete IR and create an IR to show the distribution code "1" to propose the additional 20 percent tax for AMSA or HSA.

    Exception:

    Do not pursue the additional 20 percent tax on HSA when the box on Form 8889, line 17 a is checked, or on AMSA when the box on Form 8853, line 9a is checked, or 50 percent tax on MAMSA when the box on Form 8853, line 13a, is checked. See IRM 4.19.3.15.4 (5), 20 Percent Tax on Archer Medical Savings Account (AMSA) Health Savings Account (HSA) Distributions.

  7. Taxable MAMSA distributions from Form 1099-SA are subject to an additional 50 percent tax.

    Note:

    If the TP did not address the additional 50 percent tax on MAMSA, manually determine the additional 50 percent tax and enter the amounts in the OTHER MISCELLANEOUS TAXES field of the Total Other Taxes window. Include a Special Paragraph using the following verbiage as an example: "The proposed increase to your tax includes an additional 50 percent tax on the distribution from your Medicare Advantage MSA account. The 50 percent tax does not apply to distributions made on or after the date that the account holder becomes deceased or disabled. If the distribution is exempt from the 50 percent tax, please provide us with a signed statement explaining why."

  8. The TP includes the additional taxes on Form 1040,

    TY 2014 TY 2015 TY 2016
    line 62 line 62 line 62

    See IRM 4.19.3.15.12, Miscellaneous Other Taxes, for further information.

  9. If the taxable HSA distributions are listed on Form 8889, line 16, but are not added to the TP's AGI, consider the Form 8889, line 16, amount as U/R and send PARAGRAPH80. See IRM 4.19.3-7, CP PARAGRAPHS.

    Note:

    If necessary create an IR for the taxable HSA distribution amount.

  10. If the taxable AMSA or MAMSA distributions are listed on Form 8853, line 8 or line 12, but are not added to the TP's AGI, consider the Form 8853, line 8 or line 12, amount as U/R and send PARAGRAPH 197. See IRM 4.19.3-7, CP PARAGRAPHS.

    1. If necessary create an IR for the taxable MSA distribution amount.

    2. See (7) above when pursuing taxable MAMSA and/or the additional 50 percent tax.

  11. If the TP reduces his/her gross medical expenses on Schedule A by the amount of the 99-SA IR instead of using Form 8853 or Form 8889, consider the 99-SA IR reported.

  12. PARAGRAPH 82 automatically generates when HSA is U/R and Form 8889 is not attached to the tax return.

  13. PARAGRAPH 55 automatically generates when AMSA or MAMSA is U/R and a Form 8853 is not attached to the tax return.

  14. PARAGRAPH 186 automatically generates when AMSA and/or MAMSA distributions are adjusted.

  15. PARAGRAPH 136 automatically generates when HSA distributions are adjusted.

Long Term Care Benefits (LTC) - General

  1. Long Term Care Benefits are reported on Form 1099-LTC, Long-Term Care and Accelerated Death Benefits.

  2. LTC is identified on the Case Analysis screen by the literal "99LTC" and the literal "LTCGB" (long term care gross benefits) or "LTCAB" (accelerated death benefits) in the INCOME TYPE field.

  3. Taxpayers must complete Form 8853, Archer MSAs Section C to compute the correct amount for LTC. The TP may write "LTC" on the dotted portion of Form 1040, line 21 to identify the income.

LTC - Analysis
  1. Form 1099-LTC contains the following information:

    • Box 1 - Gross long term care benefits paid

    • Box 2 - Accelerated death benefits paid

    • Box 3 - Payment Type

    • Box 4 - Qualified Contract

    • Box 5 - Illness Type

  2. 99LTC IRs display a Payment Type indicator on the Case Analysis screen, based on the information from Form 1099-LTC, Box 3:

    • "0" if the Per Diem and Reimbursement boxes are blank

    • "1" if the Per Diem box is checked

    • "2" if the Reimbursement box is checked

    • "3" if both boxes are checked

  3. 99LTC IRs display an Illness Type indicator on the Case Analysis screen, based on the information from Form 1099-LTC, Box 5:

    • "0" if the Chronically Ill and Terminally Ill boxes are blank

    • "1" if the Chronically Ill box is checked

    • "2" if the Terminally Ill box is checked

    • "3" if both boxes are checked

  4. 99LTC IRs displays the Payment Type and Illness Type as a two digit indicator:

    • The 1st digit indicator represents the Payment Type

    • The 2nd digit indicator represents the Illness Type

    Example:

    The 99LTC IR contains an indicator "21" . The "2" in the first position represents a Payment Type of "Reimbursement" and the "1" in the second position represents an Illness Type of "Chronically" .

  5. Taxpayers use Form 8853 to determine the taxable portion of either LTCGB or LTCAB paid on a per diem basis.

    Note:

    Taxpayers are instructed not to include per diem accelerated death benefits paid because the insured was terminally ill.

    1. Do not pursue unreported LTCGB or LTCAB when the payment indicator is "2" (reimbursement).

    2. Do not pursue unreported LTCAB when the illness indicator is "2" (terminally ill).

  6. Compare the LTCGB amount with the entry on Form 8853, line 17 and the LTCAB amount with the entry on Form 8853, line 19.

    1. If the amount is less than the IR, pursue the difference.

    2. If the amount matches within $1, consider the LTC IR reported.

  7. If LTCGB or LTCAB are listed on Form 8853, line 26, but are not added into the TP's AGI:

    1. Consider the Form 8853, line 26 amount U/R.

      Note:

      If necessary create an IR for the taxable LTCGB or LTCAB amount.

    2. Send PARAGRAPH 197 to explain the adjustment to the TP. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. If the TP reduces his/her gross medical expenses on Schedule A by the amount of the LTCGB or LTCAB IR element(s) instead of using Form 8853, consider the LTCGB or LTCAB reported.

  9. PARAGRAPH 55 automatically generates when LTCGB is U/R and Form 8853 is not attached to the tax return. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. PARAGRAPH 187 automatically generates when LTCGB or LTCAB are U/R. See IRM 4.19.3-7, CP PARAGRAPHS.

Reemployment Trade Adjustment Assistance (RTAA) Payments - General

  1. RTAA are payments received from a state agency under the Demonstration Project for Reemployment Trade Adjustments Assistance for older workers and must be included as income.

  2. RTAA payments are reported on Form 1099-G.

  3. RTAA payments are identified on the Case Analysis screen by the literal "1099G" in the DOC TYPE field and the literal "RTAA" in the INCOME TYPE field.

Reemployment Trade Adjustment Assistance (RTAA) Payments - Analysis
  1. Compare RTAA amounts with entries on Form 1040, line 21 or an attachment to the return.

    • The amount must match within $1, or

    • Must be identified as RTAA payments

  2. PARAGRAPH 132 automatically generates when RTAA is U/R. See IRM 4.19.3-7, CP PARAGRAPHS.

Foreign Source Income

  1. Foreign source income is income derived from sources outside of the United States. Foreign source IRs are worked in AUR.

  2. U.S. TPs must report income from all sources, including those sources outside (foreign source) the U.S., unless the income is exempt from U.S. tax.

    1. This is true whether or not the TP received a Form(s) W-2 or a Form(s) 1099 from the foreign payer(s).

    2. This applies to earned income (such as wages and tips) and unearned income (interest, dividends, capital gains, pensions, rents, royalties, etc.).

    3. Under certain tax treaties, foreign governments supply the IRS with information regarding income U.S. TPs received from sources in their countries.

    4. This information is converted into applicable IRs (Form W-2 and Form 1099) depending on the type(s) of income.

U.S. Citizens Living Abroad - General

  1. A U.S. citizen or resident alien's worldwide income is generally subject to U.S. income tax, regardless of where the TP is living.

  2. U.S. citizens and resident aliens living outside of the United States are generally allowed the same exemptions, deductions, and credits as those living in the United States. However, if the TP chooses to exclude his/her foreign earned income and/or housing cost amounts, no deduction, exclusion, or credit is allowed for any exclusion, deduction, or credit that is associated with the amounts excluded.

  3. If the TP excludes his/her foreign earned income the additional child tax credit may not be allowed. See the table below.

    TY 2014 TY 2015 TY 2016
    The TP must use Pub 972, Child Tax Credit, to compute their allowable additional child tax credit. The TP cannot claim the additional child tax credit. The TP cannot claim the additional child tax credit.
  4. If the TP excludes his/her income on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, he/she cannot take a foreign tax credit (Form 1116, Foreign Tax Credit) for the foreign taxes paid on the same excluded income.

U. S. Citizens Living Abroad - Analysis
  1. When there is an apparent wage discrepancy, compare the amount on Form 2555, line 19 (Form 2555-EZ, line 17) with the entry for wages on the Form 1040. See IRM 4.19.3.8.1.1, Wages - Analysis.

    1. If the amount of reported wages shown on Form 1040 is equal to or larger than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the wages reported.

    2. If the amount of reported wages shown on Form 1040 is less than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the difference U/R. Send a Special Paragraph informing the TP that all income excluded as Foreign Earned Income must be included in total income first.

      Caution:

      Taxpayers may receive non-cash income in addition to awards, bonuses, commissions, etc., as allowances or reimbursements to cover expenses; all of these are considered earned income. This includes the fair market value of property or facilities provided for lodging, meals, use of car, cost of living, overseas differential, etc. These items are reported on lines 21 a - d and lines 22 a - g of Form 2555. Any amounts shown here may account for the U/R income.

  2. Wages received by employees of the United States government, or any of its agencies, working overseas do not qualify for the exclusion of foreign earned income under section 911 and if partially reported or not reported at all, should be pursued. These employees include:

    • Military personnel - including military personnel assigned to NATO or any other international organization.

    • State Department employees

    • IRS employees

    • DEA employees, etc.

  3. Amounts paid by the U.S. government or its agencies to persons who are not their employees may qualify for foreign earned income exclusion or deduction. If unsure, correspond with the TP for a clarification.

  4. When there is an apparent NEC discrepancy, compare the amount on lines 20a, 20b, and/or 23 of Form 2555 (line 17 of Form 2555-EZ) with the entry for NEC on the Form 1040. See IRM 4.19.3.8.6.1, NEC - Analysis.

    1. If the amount of NEC reported on Form 1040 is equal to or larger than the amount(s) shown on lines 20a, 20b, and/or 23 of Form 2555 or line 17 of Form 2555-EZ, consider NEC reported.

    2. If the amount of NEC reported on Form 1040 is less than the amount(s) shown on lines 20a, 20b and/or 23 of Form 2555 (line 17 of Form 2555-EZ) consider the difference U/R. Send a Special Paragraph as stated in (1) b) above.

      Caution:

      If the TP has received reimbursement for housing expenses compare any apparent U/R amount with the entry on line 34 of Form 2555. The amount shown here may account for the discrepancy.

  5. Taking the foreign earned income exclusion does not eliminate the requirement to pay SE tax on NEC type income. See IRM 4.19.3.15.1, Self-Employment Tax, for further instructions. As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside.

  6. The United States has entered into bilateral Social Security agreements with certain foreign countries to eliminate dual coverage and dual contributions to the social security system for the same work. A bilateral Social Security agreement generally makes sure that SS taxes (including SE tax) are only paid to one country. For a list of countries, see IRM 3.22.3.151.3, Correction Procedures - EC 209 Form 1040/1040NR.

  7. To establish exemption from U.S. SE tax, the TP must obtain a statement from the authorized official or agency of the foreign country containing the following information:

    • Name and address of TP

    • Taxpayer identification number

    • The fact that the self-employment earnings (or employment earnings in the case of employed clergymen) are covered by an agreement between that country and the United States and are subject to the taxes or contributions of that country's social security system and

    • The effective date of the agreement

    The TP must attach a copy of the statement to the tax return for each year exemption from SE tax is claimed. The TP must also enter "Exempt, see attached statement" on the line for SE tax on the return.

  8. ONLY foreign earned income may be excluded under Section 911. If the TP has not reported all non-earned income (i.e., interest, dividends, pensions, etc.), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. In addition to the foreign earned income exclusion, TPs may take a foreign housing exclusion or foreign housing deduction. They cannot take both the foreign housing exclusion and foreign housing deduction unless they are self-employed.

    1. If the housing cost exclusion is claimed, the amount from Form 2555, line 36, is added to the foreign earned income exclusion claimed on Form 2555, line 42.

    2. When the housing cost deduction is claimed, the TP will enter the amount from Form 2555, line 50, to the left of Form 1040, line 36. This amount should be used when entering an amount in the AGI window.

    3. If the TP has claimed the Foreign Earned Income Exclusion, the foreign housing cost exclusion, and the foreign housing deduction, disallow the housing deduction amount if the TP is not self-employed. See IRM 4.19.3.5.9, Miscellaneous, for further instructions on how to disallow the deduction. Send a Special Paragraph to inform the TP of the disallowance.

  10. When both the foreign earned income exclusion and foreign housing exclusion are present, the amount claimed on Form 1040, line 21, may exceed the amounts shown in the table below. Any amount identified on Form 1040, line 21 as coming from Form 2555 MUST be considered when calculating the MAGI and base tax. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the TP excludes income on Form 2555.

    TY 2014 TY 2015 TY 2016
    $99,200, ($198,400 if married filing jointly) $100,800, ($201,600 if married filing jointly) $101,300, ($202,600 if married filing jointly)
  11. Income excluded cannot be taken into account when figuring non-refundable credits. When entering earned income on Form 2441, Child and Dependent Care Expenses, TPs should be entering total earned income minus the foreign earned income exclusion amount. If all earned income is excluded on Form 2555 or Form 2555-EZ, then the credit cannot be taken. See IRM 4.19.3.14.2, Credit for Child and Dependent Care Expenses.

  12. Taxpayers can take a credit for taxes paid to a foreign government on foreign income by filing a Form 1116, Foreign Tax Credit. However, they cannot take this credit on income that is exempt from tax under the foreign earned income exclusion, the foreign housing cost exclusion or the possession exclusion, discussed later. If the TP has paid tax on both earned and certain unearned income, a separate Form 1116 must be filed for each category of income. Also if the TP is filing a Form 6251, Alternative Minimum Tax - Individuals, a separate Form 1116 must be filed notating "Alt Min" . Generally, TPs only use one form.

    1. To compute the Foreign Tax Credit, the TP should complete the top portion to indicate the category of income. If the tax was paid to only one country, then lines 1 - 6 in column A should contain entries as appropriate. If tax was paid to more than one country, then lines 1 - 6 in Columns B and C should be completed as appropriate.

    2. The TP is instructed to include gross foreign source income on line 3d of the Form 1116. Next, they should enter their gross income from all sources (i.e., wages, interest, dividends, etc.) on line 3e of Form 1116. However TPs SHOULD NOT include any excluded amounts here (Form 2555 amounts).

    3. If the TP has entered gross income minus excluded income on line 3e and has computed the rest of the form, allow the credit as shown on Form 1116, line 30.

    4. If the TP has entered gross income plus the excluded income on line 3e and has computed the rest of the form, disallow the excluded income amount and manually recompute the rest of the form. Enter the recomputed Form 1040, see table below for line number, amount in the recomputed side of the Form 1116 field on the Non-Refundable Credits window. Refer to IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Non-Refundable Credits, for further instructions.

      TY 2014 TY 2015 TY 2016
      line 48 line 48 line 48
Foreign Earned Income Exclusion
  1. Taxpayers claiming the foreign earned income exclusion cannot claim the earned income credit. See IRM 4.19.3.16.3, Earned Income Credit, for further instructions.

  2. The foreign earned income exclusion allows TPs to exclude all of their earned income for personal services performed in a foreign country or countries, up to the amounts listed in the table below, during a period in which their "tax home" is in a foreign country and they meet other requirements (either the bona fide residence test or the physical presence test). This exclusion is provided under section 911 of the Internal Revenue Code (IRC).

    TY 2014 TY 2015 TY 2016
    $99,200, ($198,400 if married filing jointly) $100,800, ($201,600 if married filing jointly) $101,300, ($202,600 if married filing jointly)
  3. For this purpose, foreign earned income is compensation for personal services performed in a foreign country, such as:

    • Salaries and wages

    • Commissions

    • Bonuses

    • Professional fees

    • Tips

  4. Foreign unearned income that cannot be excluded is:

    • Dividends

    • Interest

    • Capital Gains

    • Gambling Winnings

    • Alimony

    • Social Security Benefits

    • Pensions and annuities

  5. Variable income that may or may not be excluded is:

    • Business profits

    • Royalties

    • Rents

  6. Taxpayers who excluded foreign earned income on Form 2555, must calculate their base tax at the same tax rate as if they did not exclude income. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the TP excludes income on Form 2555. Include a Special Paragraph using the following verbiage as an example: "Please recompute your Foreign Earned Income Tax Worksheet, using our proposed unreported income. Please return the completed worksheet with your response."

  7. If the TP excludes income on Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, you must manually calculate the new base tax. Bona fide residents of American Samoa are not subject to the higher tax rate for excluding earned income. Enter the manually derived new base tax in the MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the TP used the Schedule D tax method) or the MANUAL SCH J TAX field in the Schedule J Tax window.

  8. When the TP’s response includes the Foreign Earned Income Tax worksheet, it may be necessary to manually override the system derived base tax. If applicable, enter the manually derived new base tax in the:

    1. MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the TP used the Schedule D tax method) or

    2. MANUAL SCH J TAX field in the Schedule J Tax window.

Resident/Non-Resident Aliens (R/NR)/(Dual Status)

  1. Under U.S. tax laws, resident aliens are generally taxed in the same manner as U.S. citizens. Accordingly a resident alien's income is taxed from all sources, both within and outside the United States. Non-resident aliens, however, are generally taxed only on their income from sources within the United States.

  2. Special rules apply to the taxing of income of non-resident aliens. This depends on whether the income is from investments or from business activities, such as the performance of personal services in the United States.

  3. Under U.S. tax laws, lawful permanent residents (green card holders) are considered resident aliens until that status under the immigration laws is either taken away or is administratively or judicially determined to have been abandoned. Social security benefits paid to a lawful permanent resident/green card holder are not subject to 30 percent withholding, unless the TP claims benefits for the tax year under an income tax treaty as a nonresident alien. The Social Security Administration (SSA) may erroneously withhold tax from the Social Security benefits paid to green card holders because they have a foreign address. The withholding is refundable by the SSA or IRS. The SSA will refund erroneously withheld taxes if the refund can be processed during the same calendar year that the taxes were withheld. Cases for which the SSA was unable to issue a timely refund or cases that were not identified during initial processing could surface in AUR. If the return includes all of the following, do not pursue apparent O/C W/H discrepancies:

    1. A copy of the Form SSA-1042S, Social Security Benefit Statement.

    2. A copy of the "green card" .

    3. A signed statement that indicates the TP is a U.S. lawful permanent resident/green card holder; the SSA taxes were withheld erroneously; his/her green card status has not been revoked nor administratively or judicially determined to have been abandoned; and he/she did not claim benefits for the tax year as a non-resident alien under an existing income tax treaty.

      Note:

      A U.S. lawful permanent resident who is also a resident of a treaty country (i.e. a dual resident) can claim to be treated as a resident of the treaty country under the "tie-breaker rules" of a treaty and claim treaty benefits as a nonresident alien of the United States. If such individuals elect to claim treaty benefits, they will be treated as nonresident aliens for purposes of computing their U.S. tax liability and for purposes of withholding. Nonresident aliens are subject to withholding on their social security benefits, unless they are exempt from tax under a treaty. See Pub 915, Social Security Benefits and Equivalent Railroad Retirement Benefits.

    Exception:

    The copy of the green card and signed statement requirements in (b) and (c) above do not apply to bona fide residents of American Samoa.

    Note:

    If the TP filed a complete return, the W/H should have been allowed during initial processing.

Form 1040NR (U.S. Nonresident Alien Income Tax Return) Filers

  1. These cases require special handling, refer to the lead.

Adjustments to Income

  1. The following sections contain instructions for recalculating adjustment action(s) taken on the TP's individual tax return.

  2. Screen adjustment(s) that are worked through a computation window after analyzing all other potentially discrepant income types. When subsequent analysis changes the total AGI field, reselect the windows.

Educator Expenses

  1. Educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide, may deduct up to $250 of qualified out-of-pocket expenses for books and classroom supplies.

  2. The deduction is reported on:

    1. Form 1040, line 23 or

    2. Form 1040A line 16.

  3. The deduction is available for those in public or private elementary or secondary schools (including kindergarten). Educators must reduce qualifying expenses by any non taxable earnings received from Coverdell ESAs, Qualified Tuition Programs or education savings bonds.

Health Savings Account (HSA) or Archer Medical Savings Account (AMSA) Deduction

  1. Generally contributions made to an Archer Medical Savings Account (AMSA) or Health Savings Account (HSA) are deductible if they are made by the TP.

  2. AMSA and HSA contributions are reported on Form 5498-SA.

  3. AMSA and HSA contributions are identified on the Case Analysis screen by the literal "5498S" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    • "SACON" - Contribution

    • "SACC" - Current Contribution

    • "SAFC" - Future Contribution

    • "SARLV" - Rollover (system deleted)

    • "SAFMV" - Fair Market Value (system deleted)

  4. The 5498S IRs display a Type Indicator on the Case Analysis screen based on the information in Form 5498-SA box 6:

    1. IND "1" - Health Savings Account (HSA)

    2. IND "2" - Archer Medical Savings Account (AMSA)

    3. IND "3" - Medicare Advantage MSA (MAMSA)

  5. The TP claims the allowable AMSA contribution/deduction on the dotted portion of Form 1040, line 36, and notates "MSA" . The TP must complete Form 8853, Medical Savings Accounts and Long-term Care Insurance Contracts, Part I to calculate the amount entered on Form 1040, line 36.

  6. The TP claims the allowable HSA contribution/deduction on Form 1040, line 25. The TP must complete Form 8889, Health Savings Accounts (HSAs), Part I to calculate the amount entered on Form 1040, line 25.

  7. AMSA deductions must be substantiated. Substantiation is a 5498S IR with an AMSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    Note:

    The TP cannot deduct employer contributions to an AMSA, which are reflected as an "R" coded amount in box 12 of Form W-2.

    1. If no AMSA IR(s) is present, create a AMSA IR with a dollar amount of zero (0) and enter "2" in the PGR/COD IND field of the Create Information Return window.

    2. PARAGRAPH 185 automatically generates when the AMSA amount is reduced/disallowed because the amount of AMSA does not match the amount claimed by the TP or due to no substantiation. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. HSA deductions on Form 1040, line 25 must be substantiated. Substantiation is a 5498S IR with a HSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    Note:

    The TP cannot deduct employer contributions to an HSA, which are reflected as a "W" coded amount in box 12 of Form W-2.

    1. If no HSA IR(s) is present, create an HSA IR with a dollar amount of zero (0) and enter "1" in the PGR/COD IND field of the Create Information Return window.

    2. PARAGRAPH 135 automatically generates when the HSA amount is reduced/disallowed because the amount of HSA does not match the amount claimed by the TP or due to no substantiation. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. A CP 2000 is issued for the deduction only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if the HSA/AMSA contribution was not fully claimed.

  10. If HSA/AMSA contribution/deduction and SS/RR are issues on the same case, compute the SS/RR after screening the HSA/AMSA issue.

  11. If the HSA/AMSA is U/R, enter the return amount in the RETURN field on the Summary screen.

Simplified Employee Pension (SEP)/Qualified Plan (KEOGH)/SIMPLE - General

  1. SEP/SIMPLE (Savings Incentive Match Plan for Employees) contributions are reported to IRS on Form 5498.

  2. SEP/SIMPLE contributions are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "SEP" - the amount the TP contributed to his/her SEP account.

    2. "SIMPL" - the amount the TP contributed to his/her SIMPLE account.

    3. "FMV" - the fair market value of a SEP account. Disregard the FMV literal and amount. The system automatically assigns status code "X" to FMV amounts on 5498 IRs.

    4. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the TP.

    5. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the TP. Life insurance is not included in the CONTR amount on 5498 IRs. The system automatically assigns status code "X" to life insurance amounts on 5498 IRs.

  3. Sole Proprietors deduct SIMPLE contributions they make for common-law employees on Form 1040, Schedule C and Schedule F. Partnerships deduct them on Form 1065 and Corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation. Sole Proprietors and partners deduct SIMPLE contributions for themselves on line 28 of Form 1040. A SIMPLE is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. ALL contributions under a SIMPLE IRA plan MUST be made to SIMPLE IRAs, not to any other type of IRA.

  4. Compensation for the purpose of a SIMPLE IRA generally includes:

    • Wages, tips, and other pay from their employer that is subject to W/H.

    • Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457(b)) plans, SEP plans, and SIMPLE plans.

SEP/KEOGH/SIMPLE - Analysis
  1. SEP/Qualified (Keogh)/SIMPLE plans allow sole-proprietors and small business owners to make contributions to a retirement plan for both themselves and their employees.

    1. Taxpayers deduct SEP/Keogh/SIMPLE contributions for their employees as an expense on Schedule C or F.

    2. Taxpayers deduct SEP/Keogh/SIMPLE contributions for themselves on Form 1040, line 28.

  2. Only pursue SEP/Keogh/SIMPLE U/R issues when contributions are paid to themselves and the TP deducts an amount on Form 1040, line 28 and the TP does not report net earnings subject to SE tax (i.e., Schedule C, F or SE is not present).

    Note:

    Taxpayers who report partnership income from Form 1065 Schedule K-1 are entitled to deduct SEP/Keogh contributions provided that the partnership income is included on Schedule SE and/or the applicable SE tax has been reported.

    1. Manually select the SEP Adjustment window.

    2. If necessary, create a 5498 SEP IR for zero (0) in order to gain access to the window.

    3. The system computes the allowable SEP/Keogh/SIMPLE deduction based on the entries in the SEP Adjustment window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - SEP Adjustment window.

      Reminder:

      When pursuing SEP deduction, the SEP Adjustment window must be selected in the proper case analysis sequence as described in IRM 4.19.3.4.2 (3), Case Analysis Screen. If the SEP Adjustment window is selected out of order, a message displays describing the proper sequence.

      Note:

      If the SEP/Keogh/SIMPLE deduction is not fully disallowed, ungroup the IR(s) and mark them with status code "N" or "D" .

  3. If the TP does not report self employment income AND the SEP/Keogh/SIMPLE deduction corresponds to a 5498 CONTR IR(s), consider that the TP reported their IRA deduction on the wrong line.

  4. Payers identify only SEP and SIMPLE contributions on Form 5498. If 5498 IR is not present and the TP is self-employed (Schedule C, F or SE is present), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the filing status is 2 and only one spouse reports self-employment income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. If, after reviewing the return and any supporting documentation, the SEP deduction appears large, unusual or questionable, consult with the team leader. If necessary, consult with an Exam representative to decide the appropriate action(s) to take (i.e., continue processing, refer to Exam, etc.). If Exam selects the case follow normal Exam referral procedures.

  7. PARAGRAPH 146 automatically generates when SEP/Keogh/SIMPLE deductions are disallowed (the SEP per return is reduced to zero). See IRM 4.19.3-7, CP PARAGRAPHS.

  8. If SEP/Keogh/SIMPLE is U/R enter the return amount in the RETURN field on the Summary screen.

  9. For Responses, see IRM 4.19.3.9.6.3, Traditional IRA, or SEP Deduction - Responses.

Self-Employed Health Insurance Deduction (SEHID)

  1. A TP may be able to deduct up to 100 percent of the amount paid for health insurance on Form 1040, line 29.

  2. PARAGRAPH 147 automatically generates when there is an amount on Form 1040, line 29, and due to U/R processing there is a change to self-employment income or SE tax. See IRM 4.19.3-7, CP PARAGRAPHS.

SEHID - Responses
  1. If the TP responds that the SEHID needs to be adjusted AND provides the total amount he/she paid for health insurance coverage, take the following action:

    1. Compare the amount the TP paid for his/her health insurance coverage with the revised business profit and any other earned income (including wages from S Corporation), minus deductions claimed on Form 1040, lines 27 and 28, as filed or adjusted due to U/R processing.

    2. The smaller of the two amounts is the new SEHID.

    3. Compare the new SEHID to the amount originally claimed. If the SEHID changed, use the Misc Adjust/Sch C Exp window to reflect the difference.

    4. Advise the TP of the change to SEHID with an appropriate paragraph.

  2. If the TP does not provide the amount he/she paid for self-employed health insurance coverage, correspond for this information.

Early Withdrawal Penalty (EWPEN) - General

  1. Early withdrawal penalty is a reduction of interest income due to premature withdrawal of capital on a time savings account. This penalty can exceed the amount of interest paid.

  2. Early withdrawal penalty is reported on Form 1099-INT.

  3. Early withdrawal penalty is identified on the Case Analysis screen by the literal "99INT" in the DOC TYPE field and the literal "EWPEN" in the INCOME TYPE field.

EWPEN - Analysis
  1. Delete 99INT IRs when:

    1. There is an EWPEN amount but no INT amount, or

    2. There are EWPEN and W/H amounts, but no INT amount.

  2. Group all EWPEN amounts and compare the total with entries on:

    1. Form 1040, line 30.

    2. Schedule A, as an interest expense deduction.

    3. Schedule C, Part II, line 16b if a deposit arrangement is entered into as part of a trade or business.

    4. Schedule B, Part I.

  3. The TP may reduce the interest reported on Schedule B by the EWPEN amount and report the difference. The TP might also reduce the interest income by the amount of EWPEN and report the net amount on Form 1040EZ, line 2 or Form 1040 or Form 1040A, line 8a. Consider the EWPEN fully claimed.

  4. If the interest reported on the return matches the 99INT IR(s) and the TP claims more early withdrawal penalty than EWPEN amounts shown on the 99INT IR(s),

    Note:

    If none of the 99INT IR(s) contain EWPEN, create a 99INT IR for zero (0) amount of EWPEN.

    1. Disallow the O/D amount.

    2. Mark the reported 99INT IR(s) with "S" .

  5. Allow any O/D EWPEN when the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. If the TP has not claimed the full amount of early withdrawal penalty, based on the EWPEN amounts shown on the 99INT IR(s), allow the balance unless:

    1. It can be clearly determined that the TP netted the EWPEN, see (3) above.

    2. The IR(s) show the income is jointly owned with someone other than the spouse or the filing status is 3, mark the EWPEN with status code "N" , send the IR elements and send PARAGRAPH74. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. If a 99INT IR contains both INT and EWPEN, consider each income type separately.

  8. If the TP incorrectly claims the 10 percent early distribution tax as EWPEN, disallow that portion of the deduction. Send PARAGRAPH 168, see IRM 4.19.3-7, CP PARAGRAPHS.

  9. If the TP reports EWPEN on Form 1040, line 30, or on Schedule B and also subtracted the EWPEN from interest reported on the return, this is a duplicate deduction.

    1. Consider the amount of EWPEN O/D.

    2. To arrive at the amount to input in the REPORTED AMOUNT field, subtract the double excluded amount from the IR amount.

    3. Send PARAGRAPH 122, see IRM 4.19.3-7, CP PARAGRAPHS.

  10. Enter the return amount in the RETURN field on the Summary screen.

    1. PARAGRAPH 8 automatically generates when EWPEN is U/C. See IRM 4.19.3-7, CP PARAGRAPHS.

    2. PARAGRAPH 75 automatically generates when EWPEN is O/D. See IRM 4.19.3-7, CP PARAGRAPHS.

Traditional IRA and Coverdell ESA - General

  1. IRA contributions are reported to the IRS on Form 5498 and are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "CONTR" - the amount the TP contributed to his/her IRA account.

    2. "FMV" - the fair market value of an IRA account. Disregard the FMV literal and amount. The system automatically assigns status code "X" to FMV amounts on 5498 IRs.

    3. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the TP.

    4. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the TP. Life insurance is not included in the CONTR amount on 5498 IRs. The system automatically assigns status code "X" to life insurance amounts on 5498 IRs.

    5. "RCONT" - Roth IRA Contribution. This amount cannot be claimed as a deduction by the TP.

    6. "RCONV" - Roth IRA conversions from a Traditional IRA. This amount cannot be claimed as a deduction by the TP.

      Note:

      Contributions to a Roth IRA (RCONT) or Roth IRA Conversions from a Traditional IRA (RCONV) cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the RCONT or RCONV element with Send Indicator "S" .

  2. Contributions to a Coverdell ESA (CESA) are reported on Form 5498-ESA and are identified on the Case Analysis screen by the literal "5498E" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    1. "ESA" - The amount contributed to the CESA.

    2. "EROLV" - Rollover amount. The system automatically assigns status code "X" to this income type.

    Note:

    Contributions to a CESA cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the ESA element with Send Indicator "S" .

  3. PARAGRAPH 30 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

IRA Deduction - Analysis
  1. The TP(s) may claim the allowable IRA deduction on Form 1040, line 32 or Form 1040A, line 17. The maximum allowable IRA deduction is the lesser (before phaseout limit, see (2) below) of:

    1. Taxable compensation for purposes of establishing an IRA include: wages, salaries, tips, professional fees, bonuses and other amounts received from providing personal services, taxable alimony, separate maintenance payments and NET earnings (profit) from self-employment income.

    2. Military personnel have the option of including nontaxable combat pay, along with any taxable compensation, when calculating the allowable IRA deduction.

    TY 2014 TY 2015 TY 2016
    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly. $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly. $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly.
    When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse. When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse. When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse.

    An IRA contribution can be made ONLY if the TP has taxable compensation (as defined in a and b above). In the case of a married couple filing a joint return, up to amounts listed below can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation.

    TY 2014 TY 2015 TY 2016
    $5,500 ($6,500 if 50 or older) $5,500 ($6,500 if 50 or older) $5,500 ($6,500 if 50 or older)
  2. When the TP is covered by a qualified pension plan, the IRA deduction begins to decrease (phaseout) when the Modified AGI (MAGI) exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2014 TY 2015 TY 2016
    1 or 4 $60,000 - $70,000 $61,000 - $71,000 $61,000 - $71,000
    2 or 5 $96,000 - $116,000 $98,000 - $118,000 $98,000 - $118,000
    3 or 6 $0 - $10,000 $0 - $10,000 $0 - $10,000
  3. When the TP is NOT covered by a qualified pension plan, but the spouse IS covered, the IRA deduction begins to decrease (phaseout) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2014 TY 2015 TY 2016
    2 or 5 $181,000 - $191,000 $183,000 - $193,000 $184,000 - $194,000
    3 or 6 $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040, line 32, or Form 1040A, line 17), the TP is treated as filing status 1 (no spouse)
    $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040 , line 32, or Form 1040A , line 17), the TP is treated as filing status 1 (no spouse)
    $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040 , line 32, or Form 1040A , line 17), the TP is treated as filing status 1 (no spouse)
  4. Consider the TP covered by a qualified pension plan if:

    Reminder:

    Consider the IR more accurate than the ELF payer document.

    1. The Form W-2 is attached and the retirement plan box is checked, or

    2. Form W-2, Box 12 has a code "D" , "E" ," F" , or "S" with a corresponding contribution amount. See Exhibit 4.19.3-8, Form W-2 - Box 12 Codes, or

    3. The TP reports an unidentified wage amount (no Form W-2 is attached, nor corresponding WAGE IR) or,

    4. The Form W-2 is not attached to the return and the IND field on the WAGE IR is other than blank and/or contains the literal "DC" , or

    5. An attached Form W-2 or WAGE IR is from a federal, state or local government, including any political subdivision. Reservist wages are NOT covered by a pension plan.

    6. The TP is FS 3 or 6 and there is no indication that the TP lived apart from the spouse (also enter a "Y" in the LIVED WITH SPOUSE field on the IRA window if either spouse is covered by a pension plan).

    7. The TP takes a deduction for a Keogh, SIMPLE Plan or SEP on Form 1040, line 28.

      Exception:

      Section 457 Plans are NOT considered as coverage for calculations of IRA contributions. If only the Deferred Compensation box is checked and only code "G" appears in Box 12 of the Form W-2, or there are other indications that the TP has only Deferred Compensation in a Section 457 Plan, Do NOT consider the TP covered by a pension plan. An "H" code in Box 12 of Form W-2 identifies 501(c)(18) Pension Plans. The TP is instructed to report his/her allowable deduction on the dotted portion of line 36 of Form 1040. However, the entry is often misplaced and entered on line 32 of Form 1040. If there is an indication that the TP has a 501(c)(18) pension plan, allow the deduction.

    8. The TP is a postal worker. The U.S. Postal Service has a Thrift Savings Plan.

  5. IRA deductions must be substantiated. Substantiation is a 5498 IR with a CONTR amount or an attachment to the tax return (e.g., a Form 5498 or a bank statement).

    1. If no CONTR IR(s) is present, create a CONTR IR with a dollar amount of zero (0). See IRM 4.19.3.14.6, Qualified Retirement Savings Contributions Credit (QRSC), for additional information.

    2. If there is no substantiating IR(s), but a Form 5498 or statement for the same amount is attached to the return, create IR(s) for the attached Form 5498/statement amount(s) for the applicable TP(s).

    3. PARAGRAPH 70 automatically generates when the CONTR U/R is due to the TP claiming a deduction that is larger than the 5498 IR(s). See IRM 4.19.3-7, CP PARAGRAPHS.

  6. If the TP deducts an amount equal to the Deferred Compensation shown on Form W-2, take the following action:

    1. If the TP included the Deferred Compensation as income (i.e., Form 1040 or Form 1040A, line 7 or Form 1040, line 21), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the Deferred Compensation was not included as income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send PARAGRAPH 157, see IRM 4.19.3-7, CP PARAGRAPHS.

  7. If the TP reports Self Employment income and the IRA deduction corresponds to a 5498 SEP/SIMPL IR(s), consider that the TP reported the SEP/KEOGH/SIMPLE on the wrong line.

  8. The TP may make contributions to an IRA during the AUR tax year or by the due date of the return (not including extensions).

  9. Contributions may not be made to a traditional IRA during or after the year in which the TP reaches age 70 1/2. If the age for the primary and/or secondary TP on the Case Analysis screen is 71 or older, enter a zero (0) in the PRIMARY and/or SECONDARY COMPENSATION field(s) as applicable. This suppresses any deduction from being computed and disallows any previously taken deduction for the applicable TP.

    Note:

    A TP over the age of 70 1/2 can continue to make contributions to a spousal IRA until the year the spouse reaches age 70 1/2.

  10. Screen IRA IR(s) after all other potentially discrepant income types are analyzed. Any subsequent analysis that changes the TOTAL AGI CHANGE field must always be followed by reselecting the IRA window. See (13) below when SS/RR, SLID, Tuition and Fees, and/or DPAD are also issues on the same case.

  11. The system computes the allowable IRA deduction based on the appropriate entries in the Adjusted Gross Income window and the IRA window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Adjusted Gross Income (AGI) window and IRA Contributions.

    Caution:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

  12. A net loss from self-employment income cannot be subtracted from salaries, wages, etc., when figuring total compensation. If U/R self-employment income (Income Identify Codes of "PB" , "PF" , "SB" , and "SF" )

    1. Is not present on the Case Analysis screen do not consider any net loss from self-employment income when determining the amount to enter in the PRIMARY and/or SECONDARY COMPENSATION field(s) in the IRA window.

    2. Is present on the Case Analysis screen and a net loss from self-employment income is reported on the return, input/verify the PRIMARY/SECONDARY REPORTED SE INCOME field(s) in the SE Tax window.

  13. If IRA contributions, SS/RR, SLID, Tuition and Fees and/or DPAD are issues on the same case, then:

    1. Compute the SS/RR by selecting the SSA/RRB window.

    2. Compute the IRA contribution by selecting the IRA window.

      Note:

      After the IRA is computed, the system automatically recomputes the SSA/RRB window.

    3. Recompute the SLID.

    4. Recompute Tuition and Fees.

    5. Recompute DPAD LAST.

      Note:

      See IRM 4.19.3.4.2 (3), Case Analysis Screen, for the proper window sequence when these issues are present on the same case.

IRA Deduction Miscellaneous
  1. An IRA AUR issue exists when:

    1. The TP claims a larger IRA deduction amount than is substantiated.

    2. The TP claims an IRA deduction amount larger than the allowable amount.

      Note:

      PARAGRAPH 53 automatically generates when the TP is claiming more deduction than allowed based on age/filing status or taxable compensation (including non-taxable combat pay). See IRM 4.19.3-7, CP PARAGRAPHS. See IRM 4.19.3.9.6.1 (1) Notes, IRA Deduction - Analysis, for additional information regarding taxable compensation.

    3. The TP is covered by a pension plan and changes to AGI cause a change to the allowable IRA deduction amount (decreased or reduced to zero). PARAGRAPH 95 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      If a 5498 ROLVR IR is asterisked as a part of the computer identified discrepancy, the IRA deduction the TP claimed MUST be screened before closing the case PC 2X. When there is an asterisked 5498 ROLVR IR, it indicates an IRA contribution discrepancy and the system will not give the message to check the Income Comparison screen.

  2. There may be a rollover amount present on the IRA IR(s). This amount cannot be claimed as a deduction by the TP. PARAGRAPH 81 automatically generates when the U/R amount equals the IR(s) rollover amount(s). See IRM 4.19.3-7, CP PARAGRAPHS.

  3. A CP 2000 is issued for the deduction only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if the IRA/SEP contribution was not fully claimed.

  4. When the IRA deduction is an issue, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate.

  5. If there is U/R income above tolerance, the IRA deduction needs to be recomputed if the following conditions apply:

    1. The TP takes an IRA deduction on Form 1040, line 32 or on Form 1040A, line 17, and

    2. The TP is covered by a qualified pension plan. See IRM 4.19.3.9.6.1 (6), IRA Deduction - Analysis, for further instructions.

  6. If the IRA is O/D, enter the return amount in the RETURN field on the Summary screen.

Traditional IRA, or SEP Deduction - Responses
  1. If an Adjusted Contribution Rate OTHER THAN 25 percent applies, enter this rate in the PRIMARY AND SECONDARY CONTRIBUTION RATE field in the SEP Adjustment window. The system computes the allowable deduction based on this entry.

  2. If the TP responded with information about an additional IRA deduction amount(s) that was not taken originally, use the IRA window to compute the allowable IRA deduction amount(s).

  3. When the IRA deduction is an issue, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate.

  4. If the IRA deduction was disallowed in screening because of an indication the TP(s) had reached an age of 70 1/2, and it is now found that the TP(s) age is less than 70 1/2, enter the correct amounts in the PRIMARY and/or SECONDARY COMPENSATION fields as applicable on the IRA window. The system computes the correct deduction.

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ an employer's pension plan (even though the "pension plan" box is checked on the Form W-2), UNLESS

    • the attached Form W-2 shows the TP contributed to a pension plan (i.e., Box 1 Wages are less than SSWAG by the Box 12 amount and code D, E or F is present) OR

    • the WAGES IR shows the TP contributed to a pension plan (i.e., WAGES are less than SSWAG and the WAGES IR contains literal "DC" ).

  6. Section 457 plans (Code G) and 501(c)(18) plans (Code H) are not considered pension plans for determining allowable IRA contributions. See IRM 4.19.3.9.6.1 (4) g Exception, IRA Deduction - Analysis, for further information.

  7. Members of Reserve Components of the Armed Services are not active participants unless they serve on active duty over 90 days. Refer to Notice 87-16, 1987-1 C. B. 446.

  8. If accepting the TP explanation for IRA deduction, check the Retirement Saving Credit window to ensure entries are correct per the TP response.

  9. Accept the TP's response when documentation provided supports the contribution was intended for the AUR tax year in question and was made on or before April 15th of the subsequent year.

  10. The TP's response indicates the contribution was based on a rollover. Do not accept the TP explanation and advise the TP that rollover(s) cannot be used as a deduction and refer to Pub 590-A, Individual Retirement Arrangements (IRAs), for additional information.

  11. Taxpayers who contribute to a Roth IRA may recharacterize those contributions to a traditional IRA before the due date of the tax return. Those contributions are treated as having been made to the second IRA. If the TP indicates overclaimed IRA deduction was due to Roth IRA contributions that were recharacterized:

    1. Create a CONTR IR for the amount of the recharacterized contribution (whether or not there is a matching Form 5498 RCONT).

    2. Verify the appropriate entries in the IRA window.

Student Loan Interest Deduction (SLID) - General

  1. Student Loan Interest Deduction (SLID) is reported to the IRS on Form 1098-E, Student Loan Interest Statement.

  2. SLID is identified on the Case Analysis screen by the literal "1098E" in the DOC TYPE field and "SLID" in the INCOME TYPE field.

SLID - Analysis
  1. The amount of SLID the TP may claim cannot exceed $2,500, and begins to decrease (phase-out) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Exception:

    SLID cannot be claimed for Married filing separately (FS 3 or FS 6) or if the TP can be claimed as a dependent on someone else's tax return.

    Filing status TY 2014 TY 2015 TY 2016
    1, 4 or 5 $65,000 - $80,000 $65,000 - $80,000 $65,000 - $80,000
    2 $130,000 - $160,000 $130,000 - $160,000 $130,000 - $160,000
    3 or 6 TP cannot claim a SLID deduction TP cannot claim a SLID deduction TP cannot claim a SLID deduction

    Reminder:

    Always disallow claimed SLID amounts for filing status 3 or 6. If necessary, create an IR for zero (0).

  2. SLID amounts reported on the return are substantiated when 1098E IRs (or similar payer statement attached to the return) amounts are equal to or exceed the deduction claimed. Payers are not required to file Form 1098-E if they received less than ≡ ≡ from an individual during a tax year. SLID amounts of ≡ ≡ ≡ ≡ or more must be substantiated with either a:

    • 1098E IR with a SLID amount, or

    • Similar payer statement attached to the return

  3. Use the following chart to determine O/D SLID amounts:

    If the total of all 1098E IR(s) (or attached payer statements are): AND Then
    Equal to or greater than the amount of SLID claimed on the tax return. ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Note:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

    Less than the amount of SLID claimed on the tax return. The SLID claimed on the tax return is less than $600 Allow the deduction. Mark the IR(s) with "R" , "N" , or "D" . Do not create an IR.

    Exception:

    If, due to additional U/R income, the proposed new MAGI is equal to or greater than the upper limit amounts listed in (1) above, disallow the deduction. If no SLID IRs are present, create an IR for zero (0), mark the SLID IR with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Less than the amount of SLID claimed on the tax return The SLID claimed on the tax return is $600 or more. ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction. If no SLID IRs are present, create a SLID IR for zero (0).

    Exception:

    If the O/D SLID amount is less than ≡ ≡ ≡ ≡ AND the new proposed MAGI (including other U/R income) is less than the upper limit amounts listed in (1) above, do not pursue the issue.

    Note:

    If SLID, Tuition and Fees and/or DPAD are issues on the same case, see IRM 4.19.3.4.2 (3), Case Analysis Screen, for the proper window sequence.

SLID Miscellaneous
  1. A SLID AUR issue exists when the TP claims a larger SLID amount than is substantiated. Send PARAGRAPH 22, see IRM 4.19.3-7, CP PARAGRAPHS.

  2. A CP 2000 is issued for the discrepant SLID only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if SLID was not fully claimed.

  3. PARAGRAPH 23 automatically generates when an increase to the MAGI causes a decrease in the allowable SLID amount and/or when SLID is disallowed because the TP is filing status 3 or 6, or can be claimed as a dependent on someone else's return. See IRM 4.19.3-7, CP PARAGRAPHS.

  4. If SLID is O/D, enter the return amount in the RETURN field on the Summary screen.

SLID - Responses
  1. The TP explanation is acceptable when he/she provides Form 1098-E or similar payer statement, for the amount claimed on the return.

  2. If Form 1098-E, or similar payer statement, is for somebody other than the primary or secondary TP, accept the explanation when TP states the student was enrolled at least half-time in a degree program and all of the following apply:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Tuition and Fees Deduction (TUTFE)

  1. Taxpayers who paid tuition and fees expenses to an accredited educational institution (college, university or vocational school) for an eligible student may be eligible to deduct up to $4,000.

  2. Tuition and Fees Deduction is reported on Form 1098-T, Tuition Statement.

  3. Tuition and Fees is identified on the Case Analysis screen by the literal "1098T" in the DOC TYPE field and "TUTFE" in the INCOME TYPE field.

  4. The Tuition and Fees Deduction is claimed on:

    1. Form 1040, line 34 or

    2. Form 1040A, line 19.

  5. Taxpayers can claim Tuition and Fees deduction if they meet the following conditions:

    1. They paid qualified tuition and fees for themselves, their spouses or dependents.

    2. Their filing status is any status except Married Filing Separately (FS 3 or 6).

    3. They cannot be claimed as a dependent on someone else's tax return.

    4. They are not claiming Education Credits for the same student. See (15) below.

  6. The amount of Tuition an Fees the TP may claim begins to decrease (phase-out) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2014 TY 2015 TY 2016
    1, 4, or 5 $65,000 - $80,000 $65,000 - $80,000 $65,000 - $80,000
    2 $130,000 - $160,000 $130,000 - $160,000 $130,000 - $160,000
    3 or 6 TP cannot claim a Tuition and Fees deduction TP cannot claim a Tuition and Fees deduction TP cannot claim a Tuition and Fees deduction
  7. If, due to U/R income, the TP's MAGI now exceeds the amounts listed in (6) above, use the TUITION AND FEES DEDUCTION window to adjust/disallow the amount of Tuition and Fees deduction claimed. Send PARAGRAPH 110. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. The instructions in (9) - (14) below apply only if there are other issues being pursued. DO NOT issue a notice solely for unsubstantiated Tuition and Fees deduction unless the case is in Category 68 or 69.

  9. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and there is no 1098T IR present, take the following action:

    1. Create an IR for zero (0).

    2. Enter status code "U" , the AGI window displays.

    3. Input/Verify the entries in the AGI window.

    4. >F12<, the Tuition and Fees Deduction window displays.

    5. Input/Verify the entries in the Tuition and Fees Deduction window.

    6. >F12<.

    7. PARAGRAPH 112 automatically generates when tuition and fees deduction is not substantiated, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  10. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code "U" , the AGI window displays.

    2. Input/Verify the entries in the AGI window.

    3. >F12<, the Tuition and Fees Deduction window displays.

    4. Input/Verify the entries in the Tuition and Fees Deduction window using the 1098T amount in the TUITION AND FEES DEDUCTION field.

    5. >F12<.

    6. Send PARAGRAPH 112, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

  11. If the Tuition and Fees claimed on the Form 8917 is for a dependent, determine if the child has been claimed for Child Tax Credit, Child Care Credit, EIC and/or Additional Child Tax Credit. If the child has NOT been claimed for one of these credits, see (12) - (14) below for additional instructions. If child has been claimed for any of these credits, take the following actions:

    Note:

    If the dependent is claimed for EIC purposes, look at the child's year of birth to determine if the child is eligible (old enough to be attending a post secondary education institute) before disallowing the deduction.

    1. Create an IR for zero (0).

    2. Enter status code "U" , the AGI window displays.

    3. Input/verify the entries in the AGI window.

    4. >F12<, the Tuition and Fees Deduction window displays.

    5. Input/verify the entries in the Tuition and Fees Deduction window.

    6. >F12<.

    7. Send a Special Paragraph using the following verbiage as an example: "The Tuition and Fees deduction can only be claimed for qualified education expenses paid to a post-secondary educational institution. Based on the information provided on your return we have disallowed the Tuition and Fees deduction claimed for your dependent."

  12. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ adjust only if there is a change to AGI that would cause the credit to be phased out or eliminated. Create an IR for the amount of the Tuition and Fees claimed and work through the applicable windows.

  13. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and NO 1098T is present take the following actions:

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. Create an IR for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Enter status code "U" , the AGI window displays.

    3. Input/Verify the entries in the AGI window.

    4. >F12<, the Tuition and Fees Deduction window displays.

    5. Input/Verify the entries in the Tuition and Fees Deduction window.

    6. >F12<.

  14. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code "U" , the AGI window displays.

    2. Input/Verify the entries in the AGI window.

    3. >F12<, the Tuition and Fees Deduction window displays.

    4. Input/Verify the entries in the Tuition and Fees Deduction window.

    5. >F12<.

    6. PARAGRAPH 112 automatically generates, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

  15. If the TP erroneously claims both the Education Credit and the Tuition and Fees deduction AND the Form 8917, Tuition and Fees Deduction, indicates that the credits were for the same student, disallow Tuition and Fees. Send PARAGRAPH 111, see IRM 4.19.3-7, CP PARAGRAPHS.

  16. If Form 8917 is not attached to the return, disallow the Tuition and Fees deduction and send PARAGRAPH 111. See IRM 4.19.3-7, CP PARAGRAPHS.

  17. If Tuition and Fees and/or DPAD are issues on the same case, compute Tuition and Fees BEFORE DPAD. See IRM 4.19.3.4.2 (3), Case Analysis Screen, for the proper window sequence.

TUTFE - Responses
  1. If the TP responds with a completed Form 8917 claiming Tuition and Fees deduction for the first time, take the following action:

    IF THEN
    1098T IR is present Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the 1098T IR amount, unless the TP has attached an explanation of the additional expenses.

    The TP provides a copy of Form 1098-T or similar documentation Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

    1098T IR is NOT present or the TP does not provide a copy of Form 1098-T or similar documentation Do not allow the deduction. Correspond with the TP for a copy of the Form 1098-T.
    1. Attempt to call the TP for the requested documentation. See IRM 4.19.3.21.2.4.1, Out Calls - Calling the Taxpayer, for additional information on Out Calls.

    2. Request verification for the amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

Domestic Production Activity Deduction (DPAD)

  1. Taxpayers use Form 8903 to figure their domestic production activities deduction (DPAD). The deduction is claimed on Form 1040, line 35. Adjustments to the deduction are made based on changes to AGI.

    Note:

    If the TP has claimed a deduction for DPAD and there are no IRs containing the DPAD element, create a 99PAT IR with a DPAD element for zero (0) to access the DPAD window.

  2. The deduction is limited to 9 percent of the lesser of the TP’s:

    Exception:

    If the DPAD is oil related, the deduction is reduced by 3 percent.

    1. Qualified Production Activities.

    2. AGI figured without the DPAD.

    Note:

    The deduction is further limited to 50 percent of the Form W-2 wages the TP pays to their employees.

  3. The Domestic Production Activity Deduction window must be selected in the proper cases analysis sequence as described in IRM 4.19.3.4.2 (3), Case Analysis Screen.

  4. If Form 8903 is not present, group DPAD elements from all available 99PAT IR’s and:

    1. Update the group with status code "R" .

    2. Mark each DPAD element with Send Indicator "S" .

    3. Include a Special Paragraph using the following verbiage as an example: "Our records indicate that you have a domestic production activities deduction from cooperatives as shown on Form 1099-PATR, box 6. If you are eligible to claim this deduction, please provide us with a completed Form 8903, Domestic Production Activities Deduction" .

  5. Input/verify the appropriate amounts in the Domestic Production Activity Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Domestic Production Activity Deduction window.

  6. If the DPAD element is discrepant, enter the return amount in the RETURN field on the Summary screen. Include a Special Paragraph using the following verbiage as an example: "Our records indicate that you have a domestic production activities deduction from cooperatives as shown on Form 1099-PATR, box 6. We used this information to revise your Form 8903, Domestic Production Activities Deduction."

  7. PARAGRAPH 133 automatically generates when an adjustment is made to the DPAD. See IRM 4.19.3-7, CP PARAGRAPHS.

Return Value Screen

  1. The Return Value screen is used to verify and input the amounts from the tax return. It also performs calculations necessary to determine the correct tax increase or decrease. The AUR system is updated with the amounts from the originally processed tax return. Any subsequent adjustments to the TP's return must be considered when verifying and entering amounts on the Return Value screen and windows.

    Note:

    An AGI and/or TXI mismatch could be due to a TP and/or processing error. AUR is responsible for issuing a notice (CP 2000) to correct these types of errors.

  2. Using the information from the original return, and amounts computed in Case Analysis, the system displays the appropriate windows and also performs the necessary calculations. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Return Value Screen.

    Note:

    Each window in Case Analysis MUST be accessed in the appropriate sequence before the Return Value screen is selected and calculations are completed.

  3. Input/verify the filing status per return. Be sure to take into account any changes to filing status. If the filing status (FS) displayed does not match the FS shown on the return or the information provided by the TP, input the correct FS prior to performing calculations.

    Note:

    It may be necessary to update the filing status prior to performing Case Analysis functions such as: CREATE IR and MODIFY IR.

  4. Input/verify the EXEMPTIONS PER RETURN and EXEMPTIONS NOW fields. Be sure to take into account any changes to exemptions. Correct entries in these fields will allow the CP 2000 to reflect any disallowed dependent issues from original processing, as well as changes to exemptions based on TP responses.

    Note:

    When the EXEMPTIONS NOW field reflects a change from the EXEMPTIONS PER RETURN field in the Return Value screen, the system automatically enters the TC 887 change in the Assessment window.

    Caution:

    Whenever Return Value is accessed after corrections have been made to exemptions, it will be necessary to re-enter the corrections.

  5. Exemption deduction begins to phaseout when the AGI reaches the following amounts:

    Filing status TY 2014 TY 2015 TY 2016
    1 $254,200 $258,250 $259,400
    2 or 6 $305,050 $309,900 $311,300
    3 $152,525 $154,950 $155,650
    4 $279,650 $284,050 $285,350
  6. Input/verify the AGI PER RET field. This must be the amount reported on the original return, as adjusted by Error Resolution function, or a subsequent adjustment.

    Note:

    The Misc Adjust/Sch C Exp window may be used to adjust the AGI when the TP adjusts his/her Schedule C, D, E, F and/or any other allowable schedule or form during the response phase.

  7. If the TP writes "CCF" (Capital Construction Fund) on the dotted portion of Form 1040, line 43, and deducts an amount from the taxable income, include the amount in both the MISC TXI ADJ PER RETURN and the MISC TXI ADJ NOW fields.

    Note:

    If the TP responds to the CP 2000/CP 2501 with either a new CCF amount or a change to the previously claimed CCF amount, enter the revised CCF amount in the MISC TXI ADJ NOW field. Include a Special Paragraph explaining that the revised CCF amount is accounted for in the taxable income shown on the notice.

  8. If the AGI per return and AGI on Return Value match, but the TXI per return does not match the TXI PER RET field, the TP/processing error may involve the Standard Deduction, Schedule A, and/or exemptions. Verify the Filing Status, Number of Exemptions, and Schedule A window fields. Be sure these fields account for any initial processing error or adjustments due to a subsequent filing of a Form 1040X by the TP.

  9. When the TXI per return does not match the TXI COMPUTED PER RET field, the message "TXI differs from original return. Send appropriate paragraph." displays. This situation can be caused by:

    1. The standard deduction for TPs that can be claimed as a dependent on someone else's return changes the TXI per return due to U/R earned income. SeeIRM 4.19.3.12 (4), Standard Deduction, for further instructions.

    2. The TXI PER RETURN shows zero (0) and the TXI RECOMPUTED PER RETURN is negative. PARAGRAPH 94 automatically generates when the new or original TXI is negative. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      If these conditions do not apply, verify that the Schedule A window entries are accurate.

  10. Input/verify the BASE TAX PER RET field. The base tax is the amount of tax assessed prior to credits and other taxes. This amount may need to reflect any changes, math errors, subsequent adjustments (e.g., TC 290, 291, 300, 301). The base tax per return plus or minus the credits and other taxes per return MUST equal the tax assessed ≡ ≡ ≡ ≡ ≡ ≡ .

    Caution:

    Ensure that the entry in the BASE TAX PER RETURN field does not include Form 4972 tax, nor any O/C W/H adjusted as a TC 290 RC 051.

  11. If the total TAX PER RET field on Return Value does not match the total tax on the return but there is both an AGI match and a TXI match (between the return and Return Value), the processing error may involve credits or other taxes. Access, verify, and correct window entries in Case Analysis and/or Return Value as appropriate. If necessary, perform IDRS research (i.e., CC RTVUE) to complete the Return Value screen.

  12. If a TP or initial processing error is identified that results in U/R income and/or prepayment credits being adjusted, and no corresponding IRs are present, send a Special Paragraph to explain the adjustment to the TP.

  13. When amounts per return on the CP 2000 are different from those shown on the original return because of a processing change (Math Error Code present), amended return, or other adjustment, and:

    1. The TP is aware of the adjustment, send PARAGRAPH 158. See IRM 4.19.3-7, CP PARAGRAPHS.

    2. The tax change was ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the TP was not notified, send PARAGRAPH 125. See IRM 4.19.3-7, CP PARAGRAPHS.

  14. By using the >F12< key, the windows display in a sequence determined by the system. If a necessary window does not display, it may be selected from the menu and information input in the appropriate fields. If a window is selected from the menu, it displays by using the >F12< key only AFTER Return Value is committed and exited.

    Example:

    If forms/schedules are not attached to the original return (they are filed with a Form 1040X) or are not transcribed, the applicable windows must be manually selected.

  15. The Return Value screen must be committed before a CP 2000/CP 2501 Notice is issued. It is necessary that each window is accessed in the appropriate sequence before all calculations are completed. When Return Value is committed, the system verifies that the base tax per return plus or minus the credits and other taxes per return equals the tax assessed. If there is a discrepancy ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , an error message displays. "TAX PER RETURN NOT EQUAL TO TAX ASSESSED. REWORK CASE." If this message appears, take the appropriate following action(s).

    1. If no changes were made to the original return, verify the amounts displayed in the PER RETURN fields of the Credits and Other Taxes windows.

    2. In the BASE TAX PER RETURN field input the amount from: Form 1040, line 44; Form 1040A, line 28, or Form 1040EZ, line 10.

    3. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

      Note:

      If Form 8919 is attached see IRM 4.19.3.8.6.1 (10), NEC - Analysis.

  16. If a subsequent adjustment has been made to the tax return, use the following manual calculation to determine the base tax per return:

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract other taxes per return and any subsequent adjustments. See (10) above.

    3. Add credits per return and any subsequent adjustments. See (10) above.

    4. Enter the result in the BASE TAX PER RETURN field.

    5. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  17. If changes were made due to a math error and an error correction notice was issued, determine the reason for the issuance of the notice. Also verify the amounts displayed in the PER RETURN fields of the Credits and Other Taxes windows. Include any applicable changes made by Error Resolution function. Use the following manual calculation to determine the base tax per return:

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract the other taxes per return or as corrected.

    3. Add the credits per return or as corrected.

    4. Enter the result in the BASE TAX PER RTN field.

    5. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  18. If changes have been made due to a math error and an error correction notice was NOT issued use the following manual calculation to determine the base tax per return. Also verify the per return amounts in the credits and other taxes window.

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract the other taxes per return using the TP's figures.

    3. Add the credits per return using the TP's figures.

    4. Enter the result in the BASE TAX PER RETURN field.

    5. If SE TAX, TIP TAX, or Lump Sum, is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  19. Determine the correct tax based on the TP's filing status and taxable income per return. The taxable income per return must include changes made by error resolution and any subsequent adjustments.

  20. Input the correct net operating loss (NOL). See IRM 4.19.3.5.9 (3), Miscellaneous.

  21. A Parameter Value window displays when certain calculation window(s) are selected that should not be used with the tax form that was originally filed.

    Example:

    If the Schedule A, EIC, Alternative Minimum Tax, Credit for the Elderly or Disabled, and/or Child Care Credit window(s) are selected and the TP originally filed a Form 1040EZ, a Parameter Value window displays; enter "Y" to continue or select CANCEL if the calculation window is not being used. If the Schedule A is selected and the TP originally filed a Form 1040A, a Parameter Value window displays; enter "Y" to continue or select CANCEL if the calculation window is not being used.

  22. Certain conditions require a Manual Interest computation. See IRM 4.19.3.4.3.2 (6), Freeze Codes, IRM 4.19.3.17.10, Manually Computed Interest for the CP 2000, and IRM 20.2.5.6.1, Reasons to Manually Compute Interest, for additional information. The system alerts the tax examiner with a message when the conditions are present. When issuing a CP 2000 and the system displays the message that manual interest conditions exist, ensure that the case is worked to completion, prior to entering IPC "MI" .

    Reminder:

    During screening, cases that require manual interest are closed with PC 27.

    .

    1. Return Value must be completed and committed.

      Note:

      If the Return Value screen reflects a refund, and there is no "I-" freeze code present input zero (0) in the MANUAL INTEREST field and continue processing. Do not input IPC "MI" . If there is a "-I" or "I-" freeze on the account see IRM 4.19.3.4.3.2, Freeze Codes, for additional information.

    2. On the Notice Summary screen, all RETURN fields must be updated and all non-automatic paragraphs must be accounted for. The Notice Summary screen must be committed.

    3. Input IPC "MI" .

  23. Cases with IPC "MI" are batched in BT 61 (Manual Interest batch) for a Manual Interest computation. If the case is in BT 61 (Manual Interest batch) follow the instructions in IRM 4.19.3.17.10, Manually Computed Interest for the CP 2000, otherwise, leave the MANUAL INTEREST field blank.

Changes to Itemized Deductions

  1. These instructions are for changes to Form 1040, Schedule A caused by AUR processing.

Schedule A Window

  1. When there are changes to AGI, the system computes the change to Medical and Dental Expenses, Casualty and Theft Losses, and/or Miscellaneous Expenses as applicable. Input/verify the appropriate amounts in the Schedule A window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Schedule A Deductions. The following input fields require entering the amounts from:

    1. Schedule A, line 1, gross Medical and Dental Expenses.

    2. Form 4684, Casualties and Thefts, line 16, gross Casualty and Theft Loss.

    3. Schedule A, line 24, gross Job and Misc Expense.

    Note:

    If the TP chose to itemize deductions even though the amount was less than the standard deduction, check the ELECT TO ITEMIZE box.

  2. When TPs use dollars and cents on Schedule A, rounding errors can occur because the system records only dollar amounts. Ensure that any rounding errors are not added to the corrected TXI. Make the appropriate changes in the Schedule A window.

  3. If the TP's AGI per return is greater than the amounts listed below; add the amounts reported on Schedule A, lines 4, 9, 15, 19, 20, 27, and 28 and enter the sum in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

    Filing status TY 2014 TY 2015 TY 2016
    1 $254,200 $258,250 $259,400
    2 $305,050 $309,900 $311,300
    3 $152,525 $154,950 $155,650
    4 $279,650 $284,050 $285,350
  4. If the TP's AGI per return is equal to or less than the amounts listed in (3) above, enter the Schedule A, line 29 amount in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

  5. The Schedule A change displays on the Summary screen in the MEDICAL DEDUCTION, MORTGAGE INTEREST DEDUCTION, CASUALTY LOSS DEDUCTION, and MISCELLANEOUS DEDUCTION INCREASE or DECREASE field(s) as appropriate. The TOTAL INCREASE/DECREASE field includes only the actual change to the Schedule A.

  6. If the TP's Schedule A charitable contributions (line 19) were limited to 50 percent of the AGI, during original processing and the AGI is increased due to U/R processing, send PARAGRAPH148. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. See IRM 4.19.3.8.19.2, Gambling Losses, for information on Gambling Losses.

  8. PARAGRAPH 10 automatically generates when Medical and Dental Expenses are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. PARAGRAPH 21 automatically generates when Casualty and Theft Losses are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. PARAGRAPH 7 automatically generates when Miscellaneous Deductions are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  11. PARAGRAPH 9 automatically generates when the standard deduction exceeds the itemized deductions. The system also alerts the tax examiner with a message indicating the Schedule A changes have been limited to the standard deduction. See IRM 4.19.3-7, CP PARAGRAPHS.

  12. PARAGRAPH 54 automatically generates when itemized deductions are limited based on the TP's new AGI. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  13. PARAGRAPH 33 automatically generates if there is an indication that the TP claimed the General Sales Tax on Schedule A, line 5. See IRM 4.19.3-7, CP PARAGRAPHS.

Schedule A - Responses
  1. If the TP's response indicates a NEW Schedule A (the TP used the Standard Deduction during original filing) or a revision to an existing Schedule A (e.g. a notice was issued for unreported gambling income and the TP responds with additional gambling losses on Schedule A, line 28), select the Schedule A window.

    1. For a NEW Schedule A, follow the system prompts and input all appropriate fields in the Schedule A window. Enter a zero (0) in the TOTAL DEDUCTION fields.

    2. For a revision to an existing Schedule A, input the updated amount(s) in the appropriate field(s) in the Schedule A window. DO NOT update the TOTAL DEDUCTION field.

    3. Compare the recomputed Total Itemized Deductions amount to the new or revised Schedule A, line 29. If these amounts differ, recheck entries in the window for accuracy. If the difference is due to a TP error in calculating the new Schedule A, inform him/her of the error with a Special Paragraph.

    4. The changes due to revising Schedule A reflect in the INCREASE/DECREASE field of the Summary screen. Since there is no field in the Summary screen that displays an "overall change to Schedule A" , send PARAGRAPH 114. See IRM 4.19.3-7, CP PARAGRAPHS.

Mortgage Interest Deduction and Points Paid

  1. Screen Mortgage Interest (MORT) ONLY in Categories 01, 36, or 67. If MORT is asterisked in categories other than "01" , "36" , or "67" mark the IR(s) with status code "D" or "N" (unless they have been system deleted with status code "X" ). If appropriate, close the case with PC 2X. If the case is open for any other category, do not screen MORT.

  2. Deductible MORT and/or points paid (PTSPD), for purposes of the AUR Program, is interest paid to a lender for a loan obligation secured by a qualified residence. This includes up to two personal residences, which could include a house, condominium, motor/mobile home, house boat, or house trailer that contains a sleeping space, toilet and cooking facilities. Deductible MORT may be paid on an acquisition or home equity loan.

  3. Mortgage interest payments are reported on Form 1098, Mortgage Interest Statement.

  4. Mortgage interest and/or Points Paid are identified on the Case Analysis screen by the literal "1098" in the DOC TYPE field and the literal "MORT" and "PTSPD" in the INCOME TYPE field. Income Identity Code "MA" displays.

MORT - Analysis
  1. Mortgage Interest is a deduction used to reduce AGI and/or TXI and becomes an AUR issue when the TP deducts more mortgage interest than is shown on the MORT IR(s).

  2. Mortgage interest of $600 or more must be substantiated with either:

    • Form 1098 with a MORT and/or PTSPD amount, or

    • A similar payer statement attached to the return

  3. Lenders/Payers are not required to file a Form 1098 for amounts less than $600. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Example:

    The MORT IR is for $7,000 and the TP reports $8,000 mortgage interest on Schedule A, line 10 and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Taxpayers who own shares in a cooperative (co-op) may not receive individual Form 1098 statements. The Form 1098 is issued to the cooperative and then each TP is allocated mortgage interest based on the number of shares owned. Whenever there is an indication that the mortgage interest claimed is derived from a co-op (e.g., attachments list the name of the property and include such terms as "shares" or "SHS" , etc. or may indicate a percentage of total shares),

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. Compare MORT and/or PTSPD amounts with mortgage interest amount(s) claimed by the TP on the following schedules or forms. If mortgage interest is claimed on schedules/forms other than Schedule A, modify the IR(s) in question to show the applicable Income Identity Code.

    1. Schedule A, line 10 (Income Identify Code "MA" ). Do not use Schedule A, line 12 when determining O/D MORT.

    2. Schedule C, line 16a (Income Identify Code "PB" or "SB" ).

    3. Schedule E, line 12 (Income Identify Code "ME" ).

      Note:

      TPs with more than three rental properties file as many Schedules E as are needed to report all rental income, but are instructed to complete lines 23a - 26 on only one Schedule E. If multiple Schedules E were filed it may be necessary to compare MORT and/or PTSPD amounts to the total on Schedule E, line 23c.

    4. Schedule F, line 21a (Income Identify Code "PF" or "SF" ).

    5. Form 4835, line 19a (Income Identify Code "ME" ).

    6. Form 8829, line 10 (Income Identify Code "PB" or "SB" ).

  6. If mortgage interest is claimed on the return and there are no MORT IRs present, create an IR for zero (0) and pursue the reported amount.

  7. If MORT is marked with a status code "U" , the Income Identify Code is MA, and the system determines a Schedule A was not filed, a warning message displays, "Verify Schedule A was used" . Determine if a Schedule A was filed.

    1. If a Schedule A is attached and the line 29 amount is greater than the standard deduction, verify the fields in the Schedule A window.

    2. If Schedule A is attached and was not used (line 29 amount is less than the standard deduction), either mark the MORT IR(s) as reported or change the Income Identify Code as applicable.

    3. If Schedule A was not filed or the line 29 amount is less than the standard deduction and the Income Identify Code remains MA you must access the Schedule A window in Return Value. IF THE SCHEDULE A WINDOW IS NOT ACCESSED AN INCORRECT NOTICE MAY BE SENT TO THE TP.

  8. MORT and/or PTSPD is O/D when the sum of mortgage interest and points paid (Form 1098, boxes 1 and 2) is less than the sum of mortgage interest and/or points paid on the return.

    1. If the TP attaches a breakdown of Schedule A, line 10, and includes closing and/or settlement statement (e.g., "Discount Points" , "Loan Discount" , "Points" , etc.), allow the deduction. Do not allow the TP to deduct fees paid for appraisal, inspection, title or attorneys.

    2. Consider MORT O/D when the TP has claimed the full MORT IR(s) on Form 1040, Schedule A and has also claimed a credit identified as Form 8396, Mortgage Interest Credit, on Form 1040, see table below for line number. The O/D amount from Form 1040, Schedule A is the credit shown on Form 1040, see table below for line number.

      TY 2014 TY 2015 TY 2016
      line 54 line 54 line 54
  9. When TPs rent a portion of their own residence, they may deduct only a portion of the expenses on Schedule E. They may indicate a percentage of personal use. Taxpayers generally report the entire mortgage interest amount on Schedule E, line 12, then reduce the overall expenses by the percentage of personal use. The balance of the mortgage interest is then claimed on Schedule A, line 10.

    1. Math verify the rental income on Schedule E, minus all the expenses and depreciation to determine whether the overall income/loss claimed is reduced. If the overall expenses were reduced and the balance of the mortgage interest is claimed on Schedule A, consider the MORT discrepancy resolved.

      Example:

      The MORT IR is for $10,000. The TP claims $10,000 on Schedule E, line 12 and $5,000 on Schedule A, line 10. Verifying the Schedule E expenses shows that the overall expenses (including mortgage interest) claimed were reduced by 50 percent. The TP allocated the entire $10,000 mortgage interest between Schedule E and Schedule A ($5,000 on each schedule). The system identified MORT discrepancy is resolved.

    2. The TP may not indicate a percentage of personal use but may still reduce the net profit/loss. Always math verify the rental income less all the expenses and depreciation to determine whether the TP is claiming the full MORT amount before determining the U/R amount.

    Note:

    The TP's rental losses may be limited. When the overall loss is other than the math verified amount, determine if the TP filed Form 8582, Passive Activity Loss Limitations. If the loss was limited, the mortgage interest claimed on Schedule E, line 12 for that property is the amount that is applied against the MORT IR.

  10. When the mortgage account is jointly owned, the lender issues a single Form 1098 to the primary holder of the loan. Since any mortgage interest claimed by the secondary holder of the loan is not substantiated by a MORT IR, the system considers the MORT claimed potentially O/D. If the TP reports mortgage interest for which there is no corresponding MORT IR and indicates joint ownership, consider the MORT discrepancy resolved when:

    1. Form 1098 or other payer statement is attached, showing the mortgage interest claimed is from a jointly held account, or

    2. The TP provides the name and SSN or the name and address of the co-owner of the loan.

    Note:

    If the TP is the primary and deducts a portion of the MORT IR, do not apply the balance of the MORT against mortgage interest claimed on any other schedule/form.

    Caution:

    If there is an indication of a percentage of ownership, determine the correct amount of mortgage interest deducted.

  11. When comparing MORT IR(s) to amounts claimed on the return, always try to associate specific MORT IR amounts to specific Schedules/Forms (in the case of Schedule E, to specific properties). If unable to determine the specific schedule on which the mortgage interest was O/D (e.g., the O/D amount does not match any schedule/forms mortgage interest, or the name or address on the IR does not offer an indication as to which schedule/form), group all MORT IRs and compare the total and offset it against the mortgage interest amount reported on the following schedules in the order shown.

    1. Schedule C.

    2. Schedule E.

    3. Schedule F.

    4. Form 4835.

    5. Form 8829. If the TP files Schedule C and is deducting expenses for business use of a home, all deductible mortgage interest should be reported on Form 8829, Expenses for Business Use of Your Home, line 10. The TP should show, on line 7 of Form 8829, the percentage of his/her home used for business. To determine the allowable business part of the mortgage interest (and how mortgage interest should be allocated between Schedule A and Schedule C), multiply the percentage used for business by the amount on line 10 of Form 8829. The remainder is deductible on Schedule A, lines 10 and 11. No portion of the business part is an allowable deduction on Schedule A. If the amount of interest deducted on Schedule A is limited, any excess should be entered on Form 8829, line 16.

      Note:

      Mortgage interest on Schedule A and Form 8829 should equal Form 1098. However, TPs often take the allowable percentage deduction on Form 8829 and the full deduction on Schedule A. Follow the allocation procedures above to determine the O/D MORT and send PARAGRAPH169. See IRM 4.19.3-7, CP PARAGRAPHS.

    6. Schedule A (limit the O/D amount to the line 10 amount).

      Example:

      IR total is $25,000. The TP claims mortgage interest on Schedule C of $10,000, Schedule E of $10,000, and Schedule A of $9,000. The O/D MORT is $4,000, with Income Identity Code of "MA" . Changes to these schedules/forms may also result in changes to other forms (e.g., Form 2441), schedules, and computations (e.g., SE tax). See the appropriate sections of the IRM.

    7. When allocating MORT, send PARAGRAPH 121. See IRM 4.19.3-7, CP PARAGRAPHS.

  12. DO NOT pursue MORT IR(s) that are not fully claimed.

  13. Do not pursue MORT/PTSPD when the system assigns a status code "X" .

  14. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Points Paid deductions claimed on Schedule A, line 12.

  15. Issue a notice if the total MORT ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  16. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡

MORT - Miscellaneous
  1. If there is an O/D Schedule A mortgage interest, ALWAYS enter the mortgage interest amount from Schedule A, line 10 in the MORTGAGE INTEREST PER RETURN field in the Schedule A window on the Return Value screen.

  2. When pursuing O/D mortgage interest from Schedule(s) C, E, F, and/or Form 4835, enter the total mortgage interest amount from these schedule(s) or form(s) in the REPORTED field on the Summary screen.

  3. If there are mortgage interest amounts for both TPs on a joint return and it is not possible to allocate the MORT IR(s) between schedules, refer to the lead.

  4. When a change to mortgage interest claimed on Schedule C and/or F results in a change to SE tax send PARAGRAPH 161. See IRM 4.19.3-7, CP PARAGRAPHS.

  5. See IRM 4.19.3.8.26, Refund of Overpaid Mortgage Interest Deduction (ROMID) - General, for instructions when there is ROMID on the IR.

  6. PARAGRAPH 40 automatically generates when MORT is O/D. Include all valid MORT IR elements (both reported and discrepant) on the notice. See IRM 4.19.3-7, CP PARAGRAPHS.

Mortgage Insurance Premiums (MIP)

  1. Mortgage insurance premiums (MIP) are reported on Form 1098 and are identified on the Case Analysis screen by the literal "MIP" in the INCOME TYPE field.

  2. Eligible TPs deduct qualified mortgage insurance premiums on Schedule A, line 13. Since MIP can only be claimed on Schedule A, no Income Identify Code is required.

  3. MIP of $600 or more must be substantiated with either:

    • Form 1098 with a MIP amount, or

    • A similar lender/payer statement attached to the return.

  4. Lenders/Payers are not required to file a Form 1098 for amounts less than $600. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. The qualified mortgage insurance premiums begin to phase-out when the AGI is greater than $100,000 ($50,000 for FS3). Taxpayers cannot claim a mortgage insurance premium deduction when their AGI is greater than $109,000 ($54,500 for FS3). When the TP has limited the qualified MIP deduction on line 13 based on the phase-out, follow the instructions in (7) or (8) below.

  6. If the TP claimed a MIP deduction on Schedule A, line 13 in categories other than 01, 36, or 67:

    If AND Then
    No MIP IR is present The TP is NOT subject to the phase-out per the amounts in (5) above
    1. Create an IR for the amount claimed.

    2. Mark the IR with a status code "R" .

    The amount reported is equal to the MIP IR The TP is NOT subject to the phase-out per the amounts in (5) above Mark the IR with a status code "R" .
    The amount reported does not match the MIP IR - including discrepancy due to the $1 rounding The TP is NOT subject to the phase-out per the amounts in (5) above
    1. Create an IR for the amount claimed.

    2. Mark the IR with a status code "R" .

    3. Delete the original MIP IR.

    The amount reported is equal to or less than the MIP IR. The TP is subject to a phase-out per the amounts in (5) above.
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    The amount reported is more than the MIP IR, including discrepancy due to $1 rounding. The TP is subject to a phase-out per the amounts in (5) above.
    1. Create an IR for the amount claimed.

    2. Mark the IR with status code "R" .

    3. Delete the original MIP IR.

    4. Allow the system to refigure the MIP deduction.

    5. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    1. DO NOT ALLOW ADDITIONAL MIP DURING SCREENING.

    2. If pursuing MIP, mark original MIP IR with a Send indicator "S" .

  7. If the TP claimed a MIP deduction on Schedule A, line 13 in categories 01, 36, or 67:

    If And Then
    No MIP IR is present Allow the system to refigure the MIP deduction. When pursuing MIP because there is no MIP IR, Paragraph 73 automatically generates.

    Exception:

    If the TP claims less than $600, create an IR for the amount claimed and mark with a status code "R" .

    The amount reported is more than the MIP IR due to $1 rounding.
    1. Create an IR for the amount claimed.

    2. Mark the created IR with status code "R" .

    3. Delete the original MIP IR.

    The amount reported is equal to or more than the MIP IR.
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    The amount reported is less than the MIP IR. The TP is not subject to a phase-out per the amounts in (5) above.
    1. Create an IR for the amount claimed.

    2. Mark the created IR with status code "R" .

    3. Delete the original MIP IR.

    The amount reported is less than the MIP IR. The TP is subject to a phase-out per the amounts in (5) above.
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    1. DO NOT ALLOW ADDITIONAL MIP DURING SCREENING.

    2. If pursuing MIP, mark original MIP IR with a Send indicator "S" .

  8. PARAGRAPH 78 automatically generates when the Mortgage Insurance Premium deductions are adjusted due to AGI. See IRM 4.19.3-7, CP PARAGRAPHS. If pursuing MIP due to lack of substantiation, toggle off PARAGRAPH 78 in the Summary screen.

MIP - Responses
  1. Home owners insurance premiums and hazard insurance premiums are not deductible as MIP. If the TP claimed these amounts as MIP, disallow the deduction and send the TP a Special Paragraph using the following verbiage as an example: "Mortgage Insurance Premiums must be connected to your home acquisition debt and the insurance contract must have been issued after 2006. Form 1098, Mortgage Interest Statement, should reflect the interest and Mortgage Insurance Premiums paid during the year. Mortgage Insurance Premiums may qualify as deductible interest paid. Refer to Pub 936, Home Mortgage Interest Deduction. Pub 936 is available at www.irs.gov or by calling 1-800-829-3676."

  2. Use the table below to evaluate the TP's response.

    If And Then
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  3. Accept the TP's explanation when:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Standard Deduction

  1. The standard deduction is for TPs who do not itemize deductions on Form 1040, Schedule A. The amount of the standard deduction depends on filing status and whether the TP is 65 years old or older or blind. The following are the basic standard deduction amounts:

    Filing Status TY 2014 TY 2015 TY 2016
    1, 3, or 6 $6,200 $6,300 $6,300
    2 or 5 $12,400 $12,600 $12,600
    4 $9,100 $9,250 $9,300
  2. If Form 1040, Box 39a on page 2; or Form 1040A, Box 23a is checked, input/verify the appropriate entries in the AGE/BLIND COUNT field of the Return Value screen.

  3. Enter a "Y" in the FS3 ITEMIZED/DUAL STATUS ALIEN/IE field when:

    1. The filing status is 3 and the TP has itemized deductions, or

    2. The box on Schedule A, line 30, is checked or

      Note:

      Manually access the Schedule A window, input/verify the entries.

    3. Form 1040, Box 39b (or Form 1040A, Box 23b) is checked.

    Note:

    If Form 1040, Box 39b or Form 1040A, Box 23b is checked, the TP's standard deduction is zero. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Standard Deduction.

  4. If the TP is claimed as a dependent on another person's tax return, the standard deduction is limited to the greater of

    TY 2014 TY 2015 TY 2016
    $1,000 $1,050 $1,050


    or the individual's earned income for the year plus

    TY 2014 TY 2015 TY 2016
    $350 $350 $350


    The standard deduction and TXI per return for this type of individual may change due to U/R issues. The system computes the changed TXI per return, if applicable.

    1. Input/verify "Y" in the TP CLAIMED ON ANOTHER'S RETURN? field of the Return Value screen.

    2. Enter the earned income in the PRIMARY and/or SECONDARY EARNED INCOME field(s) as applicable.

      Note:

      Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services performed. It also includes any amount received as a scholarship that must be included in income. Generally earned income is the total of wages, Schedule C gain/loss, and Schedule F gain/loss.

    3. The system automatically subtracts Form 1040, line 27 from the amount in b above and adds any U/R earned income to compute the correct standard deduction.

      Note:

      Be sure that all nontaxable earned income is included in the calculations as is appropriate.

    4. If the TP's itemized deductions or earned income is larger than the appropriate standard deduction amount for his/her filing status, the TXI per return does not change.

    5. If the TP's itemized deductions or earned income (plus the amount listed in the 1st table below) is less than the amount listed in the 2nd table in f below and remains less than the amount listed in the 2nd table in f below, the TXI per return does not change.

    6. If the TP's itemized deductions or recomputed earned income (plus the amount listed in the 1st table below) is equal to or greater than the amount listed in the 2nd table below, but less than the standard deduction amount for his/her filing status, and there is no U/R unearned income, the system alerts you that the case is below tolerance. Close the case using PC 22.

      TY 2014 TY 2015 TY 2016
      $350 $350 $350
      TY 2014 TY 2015 TY 2016
      $1,000 $1,050 $1,050
  5. PARAGRAPH 149 automatically generates when the recomputed TXI is different from the TXI on the Tax Account screen. See IRM 4.19.3-7, CP PARAGRAPHS.

Recomputation of Tax

  1. There are several tax rates for ordinary income as shown on the table below. Capital gains may be taxed at different rates, but no higher than 28 percent, even though the TP may have other income taxed at the higher rates. See IRM 4.19.3.8.4.5 (7), Capital Gain Distributions - Analysis.

    Tax Year Tax Rate Percentages
    2014 10, 15, 25, 28, 33, 35 and 39.6
    2015 10, 15, 25, 28, 33, 35, and 39.6
    2016 10, 15, 25, 28, 33, 35, and 39.6
  2. The system automatically computes the tax if the TP uses the tax tables and/or, the tax rate schedules. If the TP uses the Schedule D computation, Schedule J computation, Form 8615, or Form 8814, Parents' Election To Report Child's Interest and Dividends, the system computes the tax after the necessary information is entered in the applicable windows. See IRM 4.19.3.13.1, 8615 Window, IRM 4.19.3.13.2, Sch D/8814/ECR Tax Window, and/or IRM 4.19.3.13.3, Schedule J (Farm Income Averaging), for further information.

  3. If there is no Schedule D and capital gains are listed on the Form 1040, line 13 (or Form 1040A, line 10), seeIRM 4.19.3.13.2 (1), Sch D/8814/ECR Tax Window, for further instruction.

8615 Window

  1. A part of some children's investment income may be subject to tax at their parent's rate. This tax is computed on Form 8615, Tax for Certain Children Who Have Unearned Income. If data is present in the 8615 Tax window, it displays in Return Value. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Form 8615 Tax.

  2. A child with investment income over the amounts listed in the table below may use the Form 8615 to compute his/her tax. Investment income includes any income other than earned income.

    TY 2014 TY 2015 TY 2016
    $2,000 $2,100 $2,100
  3. The system uses the U/R income which does not have an Income Identify Code of "PE" , "SE" , "PF" , "SF" , "PB" , "SB" , or "MA" , to compute the investment income. (Be sure to enter ONLY the investment income reported on the return in the CHILD'S INVESTMENT INCOME field on the Form 8615 Tax window.)

  4. When the tax tables or tax rate schedules were used to figure both the child’s and the parent’s tax, input/verify the appropriate entries in the 8615 TAX window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Form 8615 Tax.

  5. If there is an indication that the child or the parents used the Qualified Dividend and Capital Gain worksheet, Schedule D or Schedule J (Farm Income Averaging) tax method to figure their tax, input/verify the appropriate entries in the 8615 Tax window. Issue a CP 2501 Notice and send PARAGRAPH 59. See IRM 4.19.3-7, CP PARAGRAPHS.

    1. When the recomputed Form 8615 is received, update the 8615 Tax window as appropriate.

    2. If necessary, enter the amount from the recomputed Form 8615, line 18 in the MANUAL CHILD'S INVESTMENT TAX field.

  6. The computed 8615 tax displays in the CORRECTED TAX field of the Return Value screen.

Sch D/8814/ECR Tax Window

  1. If there is no Schedule D and qualifying dividends are listed on Form 1040 or Form 1040A, line 9b and/or capital gains are listed on the Form 1040, line 13 (or Form 1040A, line 10):

    1. Access the Sch D/8814/ECR Tax window.

    2. Enter/verify the qualifying dividends from Form 1040 or Form 1040A, line 9b in the QUALIFIED DIVIDENDS field, even if there is no corresponding IR(s) showing the amount of QDIV.

    3. Enter the capital gain amount from Form 1040, line 13 (or Form 1040A, line 10) in the LONG TERM GAIN(LOSS) field.

  2. If Schedule D or Form 8814 is attached and/or the TP indicates "ECR" on the dotted portion of Form 1040, line 44 or Form 1040A, line 28, input/verify the amounts in the Sch D/8814/ECR Tax window.

  3. When the TP owes tax from recapture of an education credit, the tax owed is included with the base tax and the TP indicates "ECR" and the amount on the dotted portion of Form 1040, line 44 or Form 1040A, line 28.

  4. If Form 4952, Investment Interest Expense Deduction, is attached, an adjustment to the Schedule D, long term gain amount may be necessary. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Schedule D Loss/Form 8814 Tax.

  5. The system computes the tax using the Schedule D computation only if applicable.

  6. PARAGRAPH 150 automatically generates when the recomputed tax is based on the Schedule D tax computation. See IRM 4.19.3-7, CP PARAGRAPHS.

Schedule J (Farm Income Averaging)

  1. Taxpayers who receive income from farming may choose to figure their base tax using Schedule J, Farm Income Averaging. These cases require special handling, refer to the lead.

Net Tax Increase/No Net Tax Increase/Tax Decrease Notices

  1. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) changed the definition of net tax deficiency to include a decrease to EIC. A notice must be issued if there is a proposed EIC decrease and the case meets balance due tolerance.

  2. The Community Renewal Tax Relief Act of 2000 (CRTRA) changed the definition of net tax deficiency to include a decrease to Additional Child Tax Credit (ACTC). A notice must be issued if there is a proposed decrease to ACTC and the case meets balance due tolerance.

  3. AUR defines the net tax change as basic income tax change, minus change to non-refundable credits, plus change to other taxes, plus or minus changes to EIC, Additional Child Tax Credit (ACTC), American Opportunity Credit (AOC), and/or Premium Tax Credit (PTC).

    1. Net tax increase is defined as a net tax change greater than zero (0). A majority of AUR cases have a net tax increase.

    2. No tax increase is defined as a net tax change of zero (0).

      Note:

      The TP's TXI remains negative even after the addition of U/R income.

    3. Net tax decrease is defined as a net tax change less than zero (0).

Non-Refundable Credits

  1. The AUR program will not verify the eligibility/qualification issues relating to Non-refundable Credits claimed on the tax return. As a general rule, Non-refundable Credits allowed during original processing and/or after review by another program (i.e., Exam, CI, etc.) are considered valid.

  2. When the TP does not claim a Non-refundable Credit, AUR will:

    1. INCLUDE the credit(s) as part of the processing of the case when eligibility/qualification issues are already included on the tax return AND U/R income now entitles the TP to the credit(s).

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. AUR is responsible for adjusting the Non-refundable Credits that are AGI dependent based on U/R income.

Changes to Credits

  1. When a CP 2000 is issued and there are credits (see table below for Form and line numbers) input/verify the amount(s) in the Non-refundable Credit window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Non-refundable Credits.

    Form TY 2014 TY 2015 TY 2016
    1040 lines 48 through 54 lines 48 through 54 lines 48 through 54
    1040A lines 31 through 35 lines 31 through 35 lines 31 through 35
  2. ALWAYS check the tax return for the presence of non-refundable credits when verifying entries on the Non-refundable Credit window, WHETHER OR NOT THEY ARE BEING ADJUSTED DUE TO U/R PROCESSING.

  3. If the non-refundable credits are not entered, the TP will receive an incorrect CP 2000.

Credit for Child and Dependent Care Expenses

  1. Form 2441, Credit for Child and Dependent Care Expenses, may be recomputed when:

    • The original AGI is less than $43,000, or

    • The earned income changes, or

      Note:

      Earned income is defined as wages, salaries, tips, other employee compensation and net earnings from self-employment. Earned income also includes the amount on Schedule SE, line 3 minus any deduction on Form 1040, line 27. A net self-employment loss reduces earned income. Statutory employee earned income (may be indicated by Form W-2, Box 13 being checked) is the amount shown on Schedule C, line 31. The spouse is also considered to have earned income, if the spouse is a full time student or is disabled. His/her earned income for each month or part of a month is considered to be at least $250 ($500 if more than one qualifying person is cared for).

    • The AGI changes, and/or

    • The Dependent Care Benefits (DCB) change. See IRM 4.19.3.8.2.1, Dependent Care Benefits (DCB), for further instructions on DCB.

  2. The person who qualifies the TP for the credit for child and dependent care expenses is any of the following:

    • A qualifying child under the age of 13 whom the TP can claim as a dependent.

    • A disabled person physically or mentally incapable of caring for himself/herself regardless of age, whom the TP can claim as a dependent (or could claim as dependent except that the person had gross income of the amount listed in the table below or more or filed a joint return) provided that the person lived with the TP for more than one-half of the tax year.

      TY 2014 TY 2015 TY 2016
      $3,950 $4,000 $4,050
    • A disabled person physically or mentally incapable of caring for himself/herself, whom the TP could claim as a dependent had it not been that another TP can claim the TP (or the spouse if the TP files a joint return) as a dependent on his or her return and lived with the TP for more than one-half of the tax year.

    • The TP’s spouse physically or mentally incapable of caring for himself/herself, and lived with the TP for more than one-half of the tax year.

  3. If the original AGI is less than $43,000, the credit may decrease if the AGI percentage changes. The credit remains the same as filed or previously adjusted if the original AGI is $43,000 or more, or if addition of the U/R amount does not cause the AGI percentage to change.

  4. The system computes the correct amount of credit for child and dependent care expenses. Input/verify the appropriate amounts in the Child Care Credit window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child Care Credit.

    Caution:

    When Math Error Codes are present that indicate the number of exemptions was changed additional research may be necessary to verify the number of qualifying children.

  5. Taxpayers sometimes enter an incorrect amount on Form 2441, line 3. This most frequently occurs when DCB is an issue and Part III of the Child Care Credit was incorrectly calculated or was incomplete. When entering QUALIFYING EXPENSES on the Child Care Credit window, use the following procedures to determine the correct entry:

    1. Review the TP's entries in Part III, lines 12 through 31 of Form 2441. Prepare a mock Form 2441 to correct any errors and/or complete any omitted entries.

    2. Carry the line 31 amount to line 3, Part II of Form 2441. This amount is also entered in the QUALIFYING EXPENSES field on the Child Care Credit window.

      Note:

      See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child care Credit, to determine the correct entry on Form 2441, line 3.

    3. Send PARAGRAPH 66 when Child Care Credit is adjusted due to DCB impact on the Qualifying Expenses. See IRM 4.19.3-7, CP PARAGRAPHS.

  6. PARAGRAPH 48 automatically generates when an adjustment is made that impacts Child Care Credit. If the change to Child Care Credit is due to DCB, "toggle off" Paragraph 48 in the Summary screen. See IRM 4.19.3-7, CP PARAGRAPHS.

Credit for the Elderly or Disabled

  1. Manually access the Credit for the Elderly or the Disabled window and recompute Schedule R, Credit for the Elderly or the Disabled when:

    1. The AGI increases, and/or

    2. The nontaxable portion of SS/RR benefits or pension/annuity/disability benefits either changes or was not originally reported on Schedule R, line 13a and/or 13b.

      Note:

      Do not adjust the nontaxable pension amount on Schedule R, line 13b unless that TP provides a new line 13b.

  2. The system computes the correct amount of credit for the elderly.

  3. Input the appropriate entries in the Credit for the Elderly or Disabled window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Credit for the Elderly.

  4. PARAGRAPH 13 automatically generates when an adjustment is made to the credit for the elderly. See IRM 4.19.3-7, CP PARAGRAPHS.

Child Tax Credit

  1. The Child Tax Credit may be claimed by TPs who have a qualifying child. The credit may be as much as $1,000 for each qualifying child.

  2. Taxpayers who claim a qualifying child may be eligible to claim an Additional Child Tax Credit. See IRM 4.19.3.16.4, Additional Child Tax Credit (ACTC), for further information.

  3. To claim a Child Tax Credit, the TP must have a base tax larger than zero (0) and have a qualifying child. A qualifying child, for purposes of claiming the Child Tax Credit, is a child who:

    1. Is the TP’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example: grandchild, niece, or nephew) AND

    2. Is under age 17 at the end of the current AUR tax year; AND

    3. Did not provide over one-half of their own support for the current AUR tax year, AND

    4. Lived with the TP for more than half of the year AND

    5. Does not file a joint return for the year or files it only to claim a refund of W/H or estimated tax paid AND

    6. Is a United States citizen, U.S. national or resident alien.

      Note:

      For each qualifying child, the TP must place a "check mark" in the box on Form 1040 or Form 1040A, line 6c, column (4).

  4. The amount of allowable Child Tax Credit begins to decrease when the TP's modified AGI exceeds:

    • $75,000 for filing status - Single, Head of Household and Qualifying Widow(er)

    • $110,000 for filing status - Married Filing Jointly

    • $55,000 for filing status - Married Filing Separately

  5. The system computes the correct amount of Child Tax Credit. Input/verify the appropriate amounts in the CHILD TAX CREDIT window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child Tax Credit.

    Note:

    The child tax credit may be limited because other credits have already reduced the TP's tax liability.

  6. Due to U/R income, TPs who were previously ineligible to claim Child Tax Credit, may now qualify for the credit.

  7. When the TP does not claim a Child Tax Credit, AUR will:

    1. INCLUDE the credit as part of the processing of the case when eligibility/qualification issues are already included on the tax return AND U/R income now entitles the TP to the credit.

      Example:

      A box on Form 1040 or Form 1040A, line 6c, column 4, was checked to indicate a dependent claimed is a qualifying child for Child Tax Credit. The base tax per return was zero and Child Tax Credit was not claimed. The issue of Child Tax Credit is addressed as part of the Case Analysis processing.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Example:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡