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4.19.3  IMF Automated Underreporter Program (Cont. 1)

4.19.3.7  (08-26-2016)
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 4.19.3.4, Analysis Procedures.

4.19.3.7.1  (09-04-2015)
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.

4.19.3.7.1.1  (08-26-2016)
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 2013 TY 2014 TY 2015
      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:

      If the TP reports wages on line 7 then subtracts the amount or a portion of the amount on line 21 and enters "Notice 2014 - 7" or "Medicare waiver" or "difficulty of care" on the dotted line portion of line 21, or if the TP includes a statement that the wages are nontaxable "Medicare waiver" or "difficulty of care" payments or excludable per "Notice 2014 - 7" , accept the wage IR as reported. These are nontaxable Medicare waiver payments (may also be referred to as In Home Support Services (IHSS) payments). The TP is entitled to claim any W/H on these payments.

    4. Schedule C or Schedule F - If wages are reported here, see IRM 4.19.3.7.1.3, 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 4.19.3.15.1.4, 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 4.19.3.15.1.1, 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.

4.19.3.7.1.2  (09-04-2015)
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 4.19.3.7.2.1, Dependent Care Benefits (DCB), for limitation of excludable income.

    4. "IOD" (Injury on Duty) or "LODI" (Line of Duty Injury) payments. See IRM 4.19.3.7.1.1 (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 4.19.3.7.1.5 (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 4.19.3.7.1.5 (4), Wages Miscellaneous.

    8. Exercised Employee Stock Options. See IRM 4.19.3.7.1.1 (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 4.19.3.14.7, 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.

4.19.3.7.1.3  (09-01-2012)
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 4.19.3.20.3.1.1 (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 4.19.3.14.1, Self-Employment Tax.

4.19.3.7.1.4  (11-20-2013)
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.

4.19.3.7.1.5  (08-26-2016)
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 4.19.3.11 (4), Standard Deduction, for further instructions.

  3. If wages are U/R, the system requires that you analyze W/H. See IRM 4.19.3.15.1, 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 4.19.3.14.1, 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 2013 TY 2014 TY 2015
      line 56 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 4.19.3.14.2 (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.

4.19.3.7.2  (09-01-2003)
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.

4.19.3.7.2.1  (08-16-2011)
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 4.19.3.13.2 (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 4.19.3.13.2 (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.

4.19.3.7.2.2  (08-26-2016)
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
    2013 $12,970
    2014 $13,190
    2015 $13,400
  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 4.19.3.3.2 (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 4.19.3.7.1.1 (1) Note, Wages - Analysis.

  12. PARAGRAPH 190 automatically generates when EPAB is U/R. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.7.3  (04-05-2005)
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.

4.19.3.7.3.1  (03-11-2011)
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.

4.19.3.7.3.2  (09-30-2014)
Original Issue Discount (OID)

  1. A 99OID IR reflects the original issue discount allocable to the tax year and 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 4.19.3.20.9, 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.

4.19.3.7.3.3  (09-30-2014)
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.

4.19.3.7.3.4  (08-26-2016)
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 2013 TY 2014 TY 2015
    Single and Head of Household $89,700 or more $91,000 or more $92,200 or more
    Married Filing Joint or Qualifying Widow(er) $142,050 or more $143,950 or more $145,750 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 2013 TY 2014 TY 2015
    Single and Head of Household $74,700 $76,000 $77,200
    Married Filing Joint or Qualifying Widow(er) $112,050 $113,950 $115,750
  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.

4.19.3.7.3.5  (09-01-2012)
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 4.19.3.7.17.1 (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 4.19.3.8.5, Early Withdrawal Penalty (EWPEN) - General, for further instructions.

    Caution:

    Taxpayers may net the EWPEN against the interest. See IRM 4.19.3.8.5.1 (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 4.19.3.4.3, Jointly Owned Income, for additional instructions on jointly owned income.

    4. See IRM 4.19.3.15.1, Withholding - General, for further instructions on W/H.

  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 4.19.3.14.1 (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.

4.19.3.7.4  (09-30-2014)
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.

4.19.3.7.4.1  (08-26-2016)
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 2013 TY 2014 TY 2015
      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.

4.19.3.7.4.2  (08-26-2016)
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 2013 TY 2014 TY 2015
    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.

4.19.3.7.4.3  (09-01-2012)
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 4.19.3.4.3, Jointly Owned Income, for further instructions on joint ownership.

    3. See IRM 4.19.3.15.1, 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 4.19.3.14.1 (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.

4.19.3.7.4.4  (12-22-2014)
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.

4.19.3.7.4.5  (08-26-2016)
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 2013 TY 2014 TY 2015
      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 4.19.3.12.2 (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.

4.19.3.7.5  (09-01-2003)
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.

4.19.3.7.5.1  (06-01-2015)
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 (13) 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.

4.19.3.7.6  (09-01-2003)
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.

4.19.3.7.6.1  (08-26-2016)
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:

      If there is UR NEC and the TP enters zero (0) on line 21 and enters "Notice 2014 - 7" on the dotted line for line 21 or includes a statement that the NEC is nontaxable Medicare waiver or difficulty of care payments or is excludable per "Notice 2014 - 7" , delete the issue.

    5. Schedule D, see table below for line numbers.

      Form /Schedule TY 2013 TY 2014 TY 2015
      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 4.19.3.20.3.23, 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 4.19.3.20.3.23, 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 ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.6.2  (08-26-2016)
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 approved Form 4361 or Form 4029. If the TP writes "Exempt Form 4361 or Form 4029" on Form 1040, see table below for line numbers, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      TY 2013 TY 2014 TY 2015
      line 56 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 4.19.3.7.18.2(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 4.19.3.14.1, 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 4.19.3.7.6.1 (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 2013 TY 2014 TY 2015
      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 4.19.3.7.6.1 is met, treat the U/R NEC from the partially reported IR as subject to SE tax and follow the instructions in IRM 4.19.3.7.6.1 (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 4.19.3.7.6.1 (11), NEC - Analysis.

  6. If the TP reports NEC income AND attaches a Form 8919, follow the instructions in IRM 4.19.3.7.6.1 (9) or (10) as appropriate, NEC - Analysis.

  7. 99MIS IRs may reflect W/H. See IRM 4.19.3.15.1, 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 4.19.3.14.7, 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.

4.19.3.7.7  (09-30-2014)
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.

4.19.3.7.7.1  (08-26-2016)
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 2013 TY 2014 TY 2015
      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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.7.2  (09-30-2014)
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 (MERCH reported on Schedule E) 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 4.19.3.14.1, 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.

4.19.3.7.8  (09-01-2003)
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.

4.19.3.7.8.1  (09-01-2012)
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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.7.8.2  (09-01-2013)
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 4.19.3.14.1, 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 4.19.3.14.1, 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 4.19.3.15.1, 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.

4.19.3.7.9  (09-01-2003)
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.

4.19.3.7.9.1  (09-01-2004)
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.

4.19.3.7.9.2  (09-01-2013)
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 4.19.3.14.1, 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 4.19.3.15.1, 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.

4.19.3.7.10  (01-23-2004)
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 4.19.3.13.6, Qualified Retirement Savings Contributions Credit, (QRSC), for more information.

4.19.3.7.10.1  (09-01-2004)
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 4.19.3.7.10.5 (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 4.19.3.7.10.8, Lump-Sum Distributions, for further instructions.

4.19.3.7.10.2  (09-01-2013)
Identifying Retirement Types

  1. The following references are for specific retirement types and MUST be used in conjunction with the general instructions in IRM 4.19.3.7.10.3, Retirement-Analysis, and IRM 4.19.3.7.10.4, Rollovers.

  2. See IRM 4.19.3.7.10.5, 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 4.19.3.7.10.6, 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 4.19.3.7.10.7, 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 4.19.3.7.10.8, Lump-Sum Distributions, when:

    1. Form 1099-R or IR shows COD code "A" .

    2. The IR contains ECG amounts.

  6. See IRM 4.19.3.7.10.9, 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.

4.19.3.7.10.3  (10-30-2015)
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 4.19.3.7.10.7 (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 4.19.3.7.10.8 (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 4.19.3.7.10.4 (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 case is an ELF, the zero literal will not appear.

  11. If there is an indication the Form 1099-R income is a military retirement distribution, see IRM 4.19.3.7.10.6.1, 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 4.19.3.20.1.26 (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 4.19.3.7.10.7 (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 4.19.3.7.10.7 (9), 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 4.19.3.14.3 (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 4.19.3.7.10.7 (9), IRA Distributions.

    2. If the payer is OPM, see IRM 4.19.3.7.10.3 (10), Retirement - Analysis.

    3. If payer is Railroad Retirement Board, see IRM 4.19.3.7.10.5 (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 4.19.3.7.10.4, 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 4.19.3.7.10.2, 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.

4.19.3.7.10.4  (10-05-2015)
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. 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.

  3. 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" .

  4. 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.

    Caution:

    Do not consider 1099R IRs which match Form 5498 RCONV amounts to be rolled over.

    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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. 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 4.19.3.15.1, 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 4.19.3.15.1, Withholding - General, for further instructions.

    2. It may be necessary to modify partially rolled over IRs. See IRM 4.19.3.14.3 (11) c, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for additional instruction.

  6. 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 4.19.3.14.3 (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. 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.

4.19.3.7.10.5  (09-04-2015)
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.

4.19.3.7.10.6  (09-01-2013)
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 4.19.3.20.1.26, Victims of Terrorist Attacks, or military action, see IRM 4.19.3.7.10.6.1, 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.

4.19.3.7.10.6.1  (12-15-2015)
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).

4.19.3.7.10.7  (02-12-2016)
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 4.19.3.14.4, 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 that were not included on this line. Please send us a revised Form 8606 if applicable. Refer to Pub 590, Individual Retirement Arrangements (IRAs)."

    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 4.19.3.14.3, 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 4.19.3.14.3, 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 4.19.3.7.10.3 (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 4.19.3.14.3, 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 4.19.3.7.10.8 (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 4.19.3.14.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs.

4.19.3.7.10.8  (08-26-2016)
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 2013 TY 2014 TY 2015
      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.

4.19.3.7.10.9  (09-01-2013)
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 4.19.3.14.3, 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.

4.19.3.7.10.10  (09-01-2008)
Retirement Miscellaneous

  1. 1099R IRs may be subject to an additional 10 percent or 25 percent tax. See IRM 4.19.3.14.3, 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 4.19.3.15.1, 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 4.19.3.14.3, 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.

4.19.3.7.11  (09-01-2003)
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.

4.19.3.7.11.1  (09-01-2013)
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 4.19.3.7.6.1 (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.

4.19.3.7.11.2  (09-01-2013)
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 4.19.3.14.1, 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 4.19.3.12.2, Sch D/8814/ECR Tax Window, for further instructions.

    3. See IRM 4.19.3.7.4.5, 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 4.19.3.7.4.5, Capital Gain Distributions - Analysis, to access the Schedule D window.

  5. 99MIS IR(s) may reflect W/H. See IRM 4.19.3.15.1, 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.

4.19.3.7.12  (11-07-2012)
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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡


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