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4.19.3  IMF Automated Underreporter Program (Cont. 3)

4.19.3.7 
Analysis of Each Income Type

4.19.3.7.31  (09-30-2014)
Foreign Source Income

  1. Foreign source income is income derived from sources outside of the United States. Foreign source IRs are worked in AUR.

  2. U.S. TPs must report income from all sources, including those sources outside (foreign source) the U.S., unless the income is exempt from U.S. tax.

    1. This is true whether or not the TP received a Form(s) W-2 or a Form(s) 1099 from the foreign payer(s).

    2. This applies to earned income (such as wages and tips) and unearned income (interest, dividends, capital gains, pensions, rents, royalties, etc.).

    3. Under certain tax treaties, foreign governments supply the IRS with information regarding income U.S. TPs received from sources in their countries.

    4. This information is converted into applicable IRs (Form W-2 and Form 1099) depending on the type(s) of income.

4.19.3.7.32  (09-01-2012)
U.S. Citizens Living Abroad - General

  1. A U.S. citizen or resident alien's worldwide income is generally subject to U.S. income tax, regardless of where the TP is living.

  2. U.S. citizens and resident aliens living outside of the United States are generally allowed the same exemptions, deductions, and credits as those living in the United States. However, if the TP chooses to exclude foreign earned income and/or housing cost amounts, no deduction, exclusion, or credit is allowed for any exclusion, deduction, or credit that is associated with the amounts excluded.

    1. If the TP excludes Foreign Earned Income they must use Pub 972, Child Tax Credit, to compute their allowable ACTC.

    2. If the TP excluded his/her income on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, he/she cannot take a foreign tax credit (Form 1116, Foreign Tax Credit) on the same income.

4.19.3.7.32.1  (08-26-2016)
U. S. Citizens Living Abroad - Analysis

  1. When there is an apparent wage discrepancy, compare the amount on Form 2555, line 19 (Form 2555-EZ, line 17) with the entry for wages on the Form 1040. See IRM 4.19.3.7.1.1, Wages - Analysis.

    1. If the amount of reported wages shown on Form 1040 is equal to or larger than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the wages reported.

    2. If the amount of reported wages shown on Form 1040 is less than the amount shown on Form 2555, line 19 (Form 2555-EZ, line 17), consider the difference U/R. Send a Special Paragraph informing the TP that all income excluded as Foreign Earned Income must be included in total income first.

      Caution:

      Taxpayers may receive non-cash income in addition to awards, bonuses, commissions, etc., as allowances or reimbursements to cover expenses; all of these are considered earned income. This includes the fair market value of property or facilities provided for lodging, meals, use of car, cost of living, overseas differential, etc. These items are reported on lines 21 a - d and lines 22 a - g of Form 2555. Any amounts shown here may account for the U/R income.

  2. Wages received by employees of the United States government, or any of its agencies, working overseas do not qualify for the exclusion of foreign earned income under section 911 and if partially reported or not reported at all, should be pursued. These employees include:

    • Military personnel - including military personnel assigned to NATO or any other international organization.

    • State Department employees

    • IRS employees

    • DEA employees, etc.

  3. Amounts paid by the U.S. government or its agencies to persons who are not their employees may qualify for foreign earned income exclusion or deduction. If unsure, correspond with the TP for a clarification.

  4. When there is an apparent NEC discrepancy, compare the amount on lines 20a, 20b, and/or 23 of Form 2555 (line 17 of Form 2555-EZ) with the entry for NEC on the Form 1040. See IRM 4.19.3.7.6.1, NEC - Analysis.

    1. If the amount of NEC reported on Form 1040 is equal to or larger than the amount(s) shown on lines 20a, 20b, and/or 23 of Form 2555 or line 17 of Form 2555-EZ, consider NEC reported.

    2. If the amount of NEC reported on Form 1040 is less than the amount(s) shown on lines 20a, 20b and/or 23 of Form 2555 (line 17 of Form 2555-EZ) consider the difference U/R. Send a Special Paragraph as stated in (1) b) above.

      Caution:

      If the TP has received reimbursement for housing expenses compare any apparent U/R amount with the entry on line 34 of Form 2555. The amount shown here may account for the discrepancy.

  5. Taking the foreign earned income exclusion does not eliminate the requirement to pay SE tax on NEC type income. See IRM 4.19.3.14.1, Self-Employment Tax, for further instructions. As a general rule, self-employed persons who are subject to dual taxation will only be covered by the social security system of the country where they reside.

  6. The United States has entered into bilateral Social Security agreements with certain foreign countries to eliminate dual coverage and dual contributions to the social security system for the same work. A bilateral Social Security agreement generally makes sure that SS taxes (including SE tax) are only paid to one country. For a list of countries, see IRM 3.22.3.151.3, Correction Procedures - EC 209 Form 1040/1040NR.

  7. To establish exemption from U.S. SE tax, the TP must obtain a statement from the authorized official or agency of the foreign country containing the following information:

    • Name and address of TP

    • Taxpayer identification number

    • The fact that the self-employment earnings (or employment earnings in the case of employed clergymen) are covered by an agreement between that country and the United States and are subject to the taxes or contributions of that country's social security system and

    • The effective date of the agreement

    The TP must attach a copy of the statement to the tax return for each year exemption from SE tax is claimed. The TP must also enter "Exempt, see attached statement" on the line for SE tax on the return.

  8. ONLY foreign earned income may be excluded under Section 911. If the TP has not reported all non-earned income (i.e., interest, dividends, pensions, etc.), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. In addition to the foreign earned income exclusion, TPs may take a foreign housing exclusion or foreign housing deduction. They cannot take both the foreign housing exclusion and foreign housing deduction unless they are self-employed.

    1. If the housing cost exclusion is claimed, the amount from Form 2555, line 36, is added to the foreign earned income exclusion claimed on Form 2555, line 42.

    2. When the housing cost deduction is claimed, the TP will enter the amount from Form 2555, line 50, to the left of Form 1040, line 36. This amount should be used when entering an amount in the AGI window.

    3. If the TP has claimed the Foreign Earned Income Exclusion, the foreign housing cost exclusion, and the foreign housing deduction, disallow the housing deduction amount if the TP is not self-employed. See IRM 4.19.3.4.9, Miscellaneous, for further instructions on how to disallow the deduction. Send a Special Paragraph to inform the TP of the disallowance.

  10. When both the foreign earned income exclusion and foreign housing exclusion are present, the amount claimed on Form 1040, line 21, may exceed the amounts shown in the table below. Any amount identified on Form 1040, line 21 as coming from Form 2555 MUST be considered when calculating the MAGI and base tax. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the TP excludes income on Form 2555.

    TY 2013 TY 2014 TY 2015
    $97,600, ($195,200 if married filing jointly) $99,200, ($198,400 if married filing jointly) $100,800, ($201,600 if married filing jointly)
  11. Income excluded cannot be taken into account when figuring non-refundable credits. When entering earned income on Form 2441, Child and Dependent Care Expenses, TPs should be entering total earned income minus the foreign earned income exclusion amount. If all earned income is excluded on Form 2555 or Form 2555-EZ, then the credit cannot be taken. See IRM 4.19.3.13.2, Credit for Child and Dependent Care Expenses.

  12. Taxpayers can take a credit for taxes paid to a foreign government on foreign income by filing a Form 1116, Foreign Tax Credit. However, they cannot take this credit on income that is exempt from tax under the foreign earned income exclusion, the foreign housing cost exclusion or the possession exclusion, discussed later. If the TP has paid tax on both earned and certain unearned income, a separate Form 1116 must be filed for each category of income. Also if the TP is filing a Form 6251, Alternative Minimum Tax - Individuals, a separate Form 1116 must be filed notating "Alt Min" . Generally, TPs only use one form.

    1. To compute the Foreign Tax Credit, the TP should complete the top portion to indicate the category of income. If the tax was paid to only one country, then lines 1 - 6 in column A should contain entries as appropriate. If tax was paid to more than one country, then lines 1 - 6 in Columns B and C should be completed as appropriate.

    2. The TP is instructed to include gross foreign source income on line 3d of the Form 1116. Next, they should enter their gross income from all sources (i.e., wages, interest, dividends, etc.) on line 3e of Form 1116. However TPs SHOULD NOT include any excluded amounts here (Form 2555 amounts).

    3. If the TP has entered gross income minus excluded income on line 3e and has computed the rest of the form, allow the credit as shown on Form 1116, line 30.

    4. If the TP has entered gross income plus the excluded income on line 3e and has computed the rest of the form, disallow the excluded income amount and manually recompute the rest of the form. Enter the recomputed Form 1040, see table below for line number, amount in the recomputed side of the Form 1116 field on the Non-Refundable Credits window. Refer to IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Non-Refundable Credits, for further instructions.

      TY 2013 TY 2014 TY 2015
      line 47 line 48 line 48

4.19.3.7.32.2  (08-26-2016)
Foreign Earned Income Exclusion

  1. Taxpayers claiming the Foreign Earned Income Exclusion cannot claim EIC. See IRM 4.19.3.15.3, Earned Income Credit, for further instructions.

  2. The Foreign Earned Income Exclusion allows TPs to exclude some or all of the income, up to the amounts listed in the table below, they earned in a foreign country during a period in which their "tax home" is in a foreign country and they meet other qualifications (either the Bona Fide Residence Test or the Physical Presence Test). This exclusion is provided under Section 911 of the Internal Revenue Code (IRC).

    TY 2013 TY 2014 TY 2015
    $97,600, ($195,200 if married filing jointly) $99,200, ($198,400 if married filing jointly) $100,800, ($201,600 if married filing jointly)
  3. For this purpose, foreign earned income is compensation for personal services performed in a foreign country, such as:

    • Salaries and wages

    • Commissions

    • Bonuses

    • Professional fees

    • Tips

  4. Foreign unearned income that cannot be excluded is:

    • Dividends

    • Interest

    • Capital Gains

    • Gambling Winnings

    • Alimony

    • Social Security Benefits

    • Pensions and annuities

  5. Variable income that may or may not be excluded is:

    • Business profits

    • Royalties

    • Rents

  6. Taxpayers who excluded foreign earned income on Form 2555, must calculate their base tax at the same tax rate as if they did not exclude income. Follow AUR system prompts to update the FOREIGN EARNED INCOME/HOUSING field of the Adjusted Gross Income window when the TP excludes income on Form 2555. Include a Special Paragraph using the following verbiage as an example: "Please recompute your Foreign Earned Income Tax Worksheet, using our proposed unreported income. Please return the completed worksheet with your response."

  7. If the TP excludes income on Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, you must manually calculate the new base tax. Bona Fide residents of American Samoa are not subject to the higher tax rate for excluding income. Enter the manually derived new base tax in the MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the TP used the Schedule D tax method) or the MANUAL SCH J TAX field in the Schedule J Tax window.

  8. When the TP’s response includes the Foreign Earned Income Tax worksheet, it may be necessary to manually override the system derived base tax. If applicable, enter the manually derived new base tax in the:

    1. MANUAL SCHEDULE D TAX field in the Schedule D/8814 Tax window (if the TP used the Schedule D tax method) or

    2. MANUAL SCH J TAX field in the Schedule J Tax window.

4.19.3.7.33  (08-26-2016)
Resident/Non-Resident Aliens (R/NR)/(Dual Status)

  1. Under U.S. tax laws, resident aliens are generally taxed in the same manner as U.S. citizens. Accordingly a resident alien's income is taxed from all sources, both within and outside the United States. Non-resident aliens, however, are generally taxed only on their income from sources within the United States.

  2. Special rules apply to the taxing of income of non-resident aliens. This depends on whether the income is from investments or from business activities, such as the performance of personal services in the United States.

  3. Under U.S. tax laws, lawful permanent residents (green card holders) are considered resident aliens until that status under the immigration laws is either taken away or is administratively or judicially determined to have been abandoned. Social security benefits paid to a green card holder are not subject to 30 percent withholding. The Social Security Administration (SSA) may erroneously withhold tax from the Social Security benefits paid to green card holders because they have a foreign address. The withholding is refundable by the SSA or IRS. The SSA will refund erroneously withheld taxes if the refund can be processed during the same calendar year that the taxes were withheld. Cases for which the SSA was unable to issue a timely refund or cases that were not identified during initial processing could surface in AUR. If the return includes all of the following, do not pursue apparent O/C W/H discrepancies:

    1. A copy of the Form SSA-1042S, Social Security Benefit Statement.

    2. A copy of the "green card" .

    3. A signed statement that indicates the TP is a permanent U.S. Resident/Green Card holder; the SSA taxes were withheld erroneously; his/her green card status has not been revoked; and no benefits were claimed for the tax year as a non-resident alien under an existing income tax treaty.

    Exception:

    The copy of the green card and signed statement requirements in (b) and (c) above do not apply to bona fide residents of American Samoa.

    Note:

    If the TP filed a complete return, the W/H should have been allowed during initial processing.

4.19.3.7.34  (09-01-2009)
Form 1040NR (U.S. Nonresident Alien Income Tax Return) Filers

  1. These cases require special handling, refer to the lead.

4.19.3.8  (09-01-2013)
Adjustments to Income

  1. The following sections contain instructions for recalculating adjustment action(s) taken on the TP's individual tax return.

  2. Screen adjustment(s) that are worked through a computation window after analyzing all other potentially discrepant income types. When subsequent analysis changes the total AGI field, reselect the windows.

4.19.3.8.1  (09-01-2008)
Educator Expenses

  1. Educators who work at least 900 hours during a school year as a teacher, instructor, counselor, principal, or aide, may deduct up to $250 of qualified out-of-pocket expenses for books and classroom supplies.

  2. The deduction is reported on:

    1. Form 1040, line 23 or

    2. Form 1040A line 16.

  3. The deduction is available for those in public or private elementary or secondary schools (including kindergarten). Educators must reduce qualifying expenses by any non taxable earnings received from Coverdell ESAs, Qualified Tuition Programs or education savings bonds.

4.19.3.8.2  (09-01-2012)
Health Savings Account (HSA) or Archer Medical Savings Account (AMSA) Deduction

  1. Generally contributions made to an Archer Medical Savings Account (AMSA) or Health Savings Account (HSA) are deductible if they are made by the TP.

  2. AMSA and HSA contributions are reported on Form 5498-SA.

  3. AMSA and HSA contributions are identified on the Case Analysis screen by the literal "5498S" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    • "SACON" - Contribution

    • "SACC" - Current Contribution

    • "SAFC" - Future Contribution

    • "SARLV" - Rollover (system deleted)

    • "SAFMV" - Fair Market Value (system deleted)

  4. The 5498S IRs display a Type Indicator on the Case Analysis screen based on the information in Form 5498-SA box 6:

    1. IND "1" - Health Savings Account (HSA)

    2. IND "2" - Archer Medical Savings Account (AMSA)

    3. IND "3" - Medicare Advantage MSA (MAMSA)

  5. The TP claims the allowable AMSA contribution/deduction on the dotted portion of Form 1040, line 36, and notates "MSA" . The TP must complete Form 8853, Medical Savings Accounts and Long-term Care Insurance Contracts, Part I to calculate the amount entered on Form 1040, line 36.

  6. The TP claims the allowable HSA contribution/deduction on Form 1040, line 25. The TP must complete Form 8889, Health Savings Accounts (HSAs), Part I to calculate the amount entered on Form 1040, line 25.

  7. AMSA deductions must be substantiated. Substantiation is a 5498S IR with an AMSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    1. If no AMSA IR(s) is present, create a AMSA IR with a dollar amount of zero (0) and enter "2" in the PGR/COD IND field of the Create Information Return window.

    2. PARAGRAPH 185 automatically generates when the AMSA amount is reduced/disallowed because the amount of AMSA does not match the amount claimed by the TP or due to no substantiation. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. HSA deductions on Form 1040, line 25 must be substantiated. Substantiation is a 5498S IR with a HSA amount (SACON, SACC and/or SAFC) or an attachment to the tax return (e.g., Form 5498-SA or a bank statement).

    1. If no HSA IR(s) is present, create an HSA IR with a dollar amount of zero (0) and enter "1" in the PGR/COD IND field of the Create Information Return window.

    2. PARAGRAPH 135 automatically generates when the HSA amount is reduced/disallowed because the amount of HSA does not match the amount claimed by the TP or due to no substantiation. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. A CP 2000 is issued for the deduction only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if the HSA/AMSA contribution was not fully claimed.

  10. If HSA/AMSA contribution/deduction and SS/RR are issues on the same case, compute the SS/RR after screening the HSA/AMSA issue.

  11. If the HSA/AMSA is U/R, enter the return amount in the RETURN field on the Summary screen.

4.19.3.8.3  (09-01-2006)
Simplified Employee Pension (SEP)/Qualified Plan (KEOGH)/SIMPLE - General

  1. SEP/SIMPLE (Savings Incentive Match Plan for Employees) contributions are reported to IRS on Form 5498.

  2. SEP/SIMPLE contributions are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "SEP" - the amount the TP contributed to his/her SEP account.

    2. "SIMPL" - the amount the TP contributed to his/her SIMPLE account.

    3. "FMV" - the fair market value of a SEP account. Disregard the FMV literal and amount. The system automatically assigns status code "X" to FMV amounts on 5498 IRs.

    4. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the TP.

    5. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the TP. Life insurance is not included in the CONTR amount on 5498 IRs. The system automatically assigns status code "X" to life insurance amounts on 5498 IRs.

  3. Sole Proprietors deduct SIMPLE contributions they make for common-law employees on Form 1040, Schedule C and Schedule F. Partnerships deduct them on Form 1065 and Corporations deduct them on Form 1120, U.S. Corporation Income Tax Return, or Form 1120-S, U.S. Income Tax Return for an S Corporation. Sole Proprietors and partners deduct SIMPLE contributions for themselves on line 28 of Form 1040. A SIMPLE is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. ALL contributions under a SIMPLE IRA plan MUST be made to SIMPLE IRAs, not to any other type of IRA.

  4. Compensation for the purpose of a SIMPLE IRA generally includes:

    • Wages, tips, and other pay from their employer that is subject to W/H.

    • Deferred amounts elected under any 401(k) plans, 403(b) plans, government (section 457(b)) plans, SEP plans, and SIMPLE plans.

4.19.3.8.3.1  (01-27-2015)
SEP/KEOGH/SIMPLE - Analysis

  1. SEP/Qualified (Keogh)/SIMPLE plans allow sole-proprietors and small business owners to make contributions to a retirement plan for both themselves and their employees.

    1. Taxpayers deduct SEP/Keogh/SIMPLE contributions for their employees as an expense on Schedule C or F.

    2. Taxpayers deduct SEP/Keogh/SIMPLE contributions for themselves on Form 1040, line 28.

  2. Only pursue SEP/Keogh/SIMPLE U/R issues when contributions are paid to themselves and the TP deducts an amount on Form 1040, line 28 and the TP does not report net earnings subject to SE tax (i.e., Schedule C, F or SE is not present).

    Note:

    Taxpayers who report partnership income from Form 1065 Schedule K-1 are entitled to deduct SEP/Keogh contributions provided that the partnership income is included on Schedule SE and/or the applicable SE tax has been reported.

    1. Manually select the SEP Adjustment window.

    2. If necessary, create a 5498 SEP IR for zero (0) in order to gain access to the window.

    3. The system computes the allowable SEP/Keogh/SIMPLE deduction based on the entries in the SEP Adjustment window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - SEP Adjustment window.

      Reminder:

      When pursuing SEP deduction, the SEP Adjustment window must be selected in the proper case analysis sequence as described in IRM 4.19.3.3.2 (3), Case Analysis Screen. If the SEP Adjustment window is selected out of order, a message displays describing the proper sequence.

      Note:

      If the SEP/Keogh/SIMPLE deduction is not fully disallowed, ungroup the IR(s) and mark them with status code "N" or "D" .

  3. If the TP does not report self employment income AND the SEP/Keogh/SIMPLE deduction corresponds to a 5498 CONTR IR(s), consider that the TP reported their IRA deduction on the wrong line.

  4. Payers identify only SEP and SIMPLE contributions on Form 5498. If 5498 IR is not present and the TP is self-employed (Schedule C, F or SE is present), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. If the filing status is 2 and only one spouse reports self-employment income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. If, after reviewing the return and any supporting documentation, the SEP deduction appears large, unusual or questionable, consult with the team leader. If necessary, consult with an Exam representative to decide the appropriate action(s) to take (i.e., continue processing, refer to Exam, etc.). If Exam selects the case follow normal Exam referral procedures.

  7. PARAGRAPH 146 automatically generates when SEP/Keogh/SIMPLE deductions are disallowed (the SEP per return is reduced to zero). See IRM 4.19.3-7, CP PARAGRAPHS.

  8. If SEP/Keogh/SIMPLE is U/R enter the return amount in the RETURN field on the Summary screen.

  9. For Responses, see IRM 4.19.3.8.6.3, Traditional IRA, or SEP Deduction - Responses.

4.19.3.8.4  (09-01-2004)
Self-Employed Health Insurance Deduction (SEHID)

  1. A TP may be able to deduct up to 100 percent of the amount paid for health insurance on Form 1040, line 29.

  2. PARAGRAPH 147 automatically generates when there is an amount on Form 1040, line 29, and due to U/R processing there is a change to self-employment income or SE tax. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.4.1  (09-30-2014)
SEHID - Responses

  1. If the TP responds that the SEHID needs to be adjusted AND provides the total amount he/she paid for health insurance coverage, take the following action:

    1. Compare the amount the TP paid for his/her health insurance coverage with the revised business profit and any other earned income (including wages from S Corporation), minus deductions claimed on Form 1040, lines 27 and 28, as filed or adjusted due to U/R processing.

    2. The smaller of the two amounts is the new SEHID.

    3. Compare the new SEHID to the amount originally claimed. If the SEHID changed, use the Misc Adjust/Sch C Exp window to reflect the difference.

    4. Advise the TP of the change to SEHID with an appropriate paragraph.

  2. If the TP does not provide the amount he/she paid for self-employed health insurance coverage, correspond for this information.

4.19.3.8.5  (09-01-2003)
Early Withdrawal Penalty (EWPEN) - General

  1. Early withdrawal penalty is a reduction of interest income due to premature withdrawal of capital on a time savings account. This penalty can exceed the amount of interest paid.

  2. Early withdrawal penalty is reported on Form 1099-INT.

  3. Early withdrawal penalty is identified on the Case Analysis screen by the literal "99INT" in the DOC TYPE field and the literal "EWPEN" in the INCOME TYPE field.

4.19.3.8.5.1  (09-30-2014)
EWPEN - Analysis

  1. Delete 99INT IRs when:

    1. There is an EWPEN amount but no INT amount, or

    2. There are EWPEN and W/H amounts, but no INT amount.

  2. Group all EWPEN amounts and compare the total with entries on:

    1. Form 1040, line 30.

    2. Schedule A, as an interest expense deduction.

    3. Schedule C, Part II, line 16b if a deposit arrangement is entered into as part of a trade or business.

    4. Schedule B, Part I.

  3. The TP may reduce the interest reported on Schedule B by the EWPEN amount and report the difference. The TP might also reduce the interest income by the amount of EWPEN and report the net amount on Form 1040EZ, line 2 or Form 1040 or Form 1040A, line 8a. Consider the EWPEN fully claimed.

  4. If the interest reported on the return matches the 99INT IR(s) and the TP claims more early withdrawal penalty than EWPEN amounts shown on the 99INT IR(s),

    Note:

    If none of the 99INT IR(s) contain EWPEN, create a 99INT IR for zero (0) amount of EWPEN.

    1. Disallow the O/D amount.

    2. Mark the reported 99INT IR(s) with "S" .

  5. Allow any O/D EWPEN when the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. If the TP has not claimed the full amount of early withdrawal penalty, based on the EWPEN amounts shown on the 99INT IR(s), allow the balance unless:

    1. It can be clearly determined that the TP netted the EWPEN, see (3) above.

    2. The IR(s) show the income is jointly owned with someone other than the spouse or the filing status is 3, mark the EWPEN with status code "N" , send the IR elements and send PARAGRAPH74. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. If a 99INT IR contains both INT and EWPEN, consider each income type separately.

  8. If the TP incorrectly claims the 10 percent early distribution tax as EWPEN, disallow that portion of the deduction. Send PARAGRAPH 168, see IRM 4.19.3-7, CP PARAGRAPHS.

  9. If the TP reports EWPEN on Form 1040, line 30, or on Schedule B and also subtracted the EWPEN from interest reported on the return, this is a duplicate deduction.

    1. Consider the amount of EWPEN O/D.

    2. To arrive at the amount to input in the REPORTED AMOUNT field, subtract the double excluded amount from the IR amount.

    3. Send PARAGRAPH 122, see IRM 4.19.3-7, CP PARAGRAPHS.

  10. Enter the return amount in the RETURN field on the Summary screen.

    1. PARAGRAPH 8 automatically generates when EWPEN is U/C. See IRM 4.19.3-7, CP PARAGRAPHS.

    2. PARAGRAPH 75 automatically generates when EWPEN is O/D. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.6  (09-01-2010)
Traditional IRA and Coverdell ESA - General

  1. IRA contributions are reported to the IRS on Form 5498 and are identified on the Case Analysis screen by the literal "5498" in the DOC TYPE field and one of the following literals in the INCOME TYPE field.

    1. "CONTR" - the amount the TP contributed to his/her IRA account.

    2. "FMV" - the fair market value of an IRA account. Disregard the FMV literal and amount. The system automatically assigns status code "X" to FMV amounts on 5498 IRs.

    3. "ROLVR" - rollover. This amount cannot be claimed as a deduction by the TP.

    4. "LFINS" - life insurance. This amount cannot be claimed as a deduction by the TP. Life insurance is not included in the CONTR amount on 5498 IRs. The system automatically assigns status code "X" to life insurance amounts on 5498 IRs.

    5. "RCONT" - Roth IRA Contribution. This amount cannot be claimed as a deduction by the TP.

    6. "RCONV" - Roth IRA conversions from a Traditional IRA. This amount cannot be claimed as a deduction by the TP.

      Note:

      Contributions to a Roth IRA (RCONT) or Roth IRA Conversions from a Traditional IRA (RCONV) cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the RCONT or RCONV element with Send Indicator "S" .

  2. Contributions to a Coverdell ESA (CESA) are reported on Form 5498-ESA and are identified on the Case Analysis screen by the literal "5498E" in the DOC TYPE field and one of the following literals in the INCOME TYPE field:

    1. "ESA" - The amount contributed to the CESA.

    2. "EROLV" - Rollover amount. The system automatically assigns status code "X" to this income type.

    Note:

    Contributions to a CESA cannot be claimed as a deduction on the return. Pursue the discrepancy. Mark the CESA element with Send Indicator "S" .

  3. PARAGRAPH 30 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.8.6.1  (08-26-2016)
IRA Deduction - Analysis

  1. The TP(s) may claim the allowable IRA deduction on Form 1040, line 32 or Form 1040A, line 17. The maximum allowable IRA deduction is the lesser (before phaseout limit, see (2) below) of:

    1. Taxable compensation for purposes of establishing an IRA include: wages, salaries, tips, professional fees, bonuses and other amounts received from providing personal services, taxable alimony, separate maintenance payments and NET earnings (profit) from self-employment income.

    2. Military personnel have the option of including nontaxable combat pay, along with any taxable compensation, when calculating the allowable IRA deduction.

    TY 2013 TY 2014 TY 2015
    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $5,500 ($6,500 if 50 or older) or taxable compensation (including non-taxable combat pay) for filing status single, head of household, or married filing separately.

    Note:

    If a CONTR IR is present for more than $5,500, check the PRIMARY/SECONDARY AGE fields on the Case Analysis screen. If the fields are blank, research the affected TP’s age and update the field(s) accordingly.

    $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly. $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly. $11,000 ($12,000 if only one is 50 or older or $13,000 if both are 50 or older) or taxable compensation (including non-taxable combat pay) for filing status married filing jointly.
    When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse. When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse. When a spousal IRA is present, the IRA contributions are divided between the TPs, any way they choose, as long as the contributions do not exceed $5,500 ($6,500 if age 50 or over) for any one spouse.

    An IRA contribution can be made ONLY if the TP has taxable compensation (as defined in a and b above). In the case of a married couple filing a joint return, up to amounts listed below can be contributed to IRAs (other than SIMPLE IRAs) on behalf of each spouse, even if one spouse has little or no compensation.

    TY 2013 TY 2014 TY 2015
    $5,500 ($6,500 if 50 or older) $5,500 ($6,500 if 50 or older) $5,500 ($6,500 if 50 or older)
  2. When the TP is covered by a qualified pension plan, the IRA deduction begins to decrease (phaseout) when the Modified AGI (MAGI) exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2013 TY 2014 TY 2015
    1 or 4 $59,000 - $69,000 $60,000 - $70,000 $61,000 - $71,000
    2 or 5 $95,000 - $115,000 $96,000 - $116,000 $98,000 - $118,000
    3 or 6 $0 - $10,000 $0 - $10,000 $0 - $10,000
  3. When the TP is NOT covered by a qualified pension plan, but the spouse IS covered, the IRA deduction begins to decrease (phaseout) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2013 TY 2014 TY 2015
    2 or 5 $178,000 - $188,000 $181,000 - $191,000 $183,000 - $193,000
    3 or 6 $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040, line 32, or Form 1040A, line 17), the TP is treated as filing status 1 (no spouse)
    $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040 , line 32, or Form 1040A , line 17), the TP is treated as filing status 1 (no spouse)
    $0 - $10,000
    If the TP did not live with his/her spouse ("D" entered next to Form 1040 , line 32, or Form 1040A , line 17), the TP is treated as filing status 1 (no spouse)
  4. Consider the TP covered by a qualified pension plan if:

    Reminder:

    Consider the IR more accurate than the ELF payer document.

    1. The Form W-2 is attached and the retirement plan box is checked, or

    2. Form W-2, Box 12 has a code "D" , "E" ," F" , or "S" with a corresponding contribution amount. See Exhibit 4.19.3-8, Form W-2 - Box 12 Codes, or

    3. The TP reports an unidentified wage amount (no Form W-2 is attached, nor corresponding WAGE IR) or,

    4. The Form W-2 is not attached to the return and the IND field on the WAGE IR is other than blank and/or contains the literal "DC" , or

    5. An attached Form W-2 or WAGE IR is from a federal, state or local government, including any political subdivision. Reservist wages are NOT covered by a pension plan.

    6. The TP is FS 3 or 6 and there is no indication that the TP lived apart from the spouse (also enter a "Y" in the LIVED WITH SPOUSE field on the IRA window if either spouse is covered by a pension plan).

    7. The TP takes a deduction for a Keogh, SIMPLE Plan or SEP on Form 1040, line 28.

      Exception:

      Section 457 Plans are NOT considered as coverage for calculations of IRA contributions. If only the Deferred Compensation box is checked and only code "G" appears in Box 12 of the Form W-2, or there are other indications that the TP has only Deferred Compensation in a Section 457 Plan, Do NOT consider the TP covered by a pension plan. An "H" code in Box 12 of Form W-2 identifies 501(c)(18) Pension Plans. The TP is instructed to report his/her allowable deduction on the dotted portion of line 36 of Form 1040. However, the entry is often misplaced and entered on line 32 of Form 1040. If there is an indication that the TP has a 501(c)(18) pension plan, allow the deduction.

    8. The TP is a postal worker. The U.S. Postal Service has a Thrift Savings Plan.

  5. IRA deductions must be substantiated. Substantiation is a 5498 IR with a CONTR amount or an attachment to the tax return (e.g., a Form 5498 or a bank statement).

    1. If no CONTR IR(s) is present, create a CONTR IR with a dollar amount of zero (0). See IRM 4.19.3.13.6, Qualified Retirement Savings Contributions Credit (QRSC), for additional information.

    2. If there is no substantiating IR(s), but a Form 5498 or statement for the same amount is attached to the return, create IR(s) for the attached Form 5498/statement amount(s) for the applicable TP(s).

    3. PARAGRAPH 70 automatically generates when the CONTR U/R is due to the TP claiming a deduction that is larger than the 5498 IR(s). See IRM 4.19.3-7, CP PARAGRAPHS.

  6. If the TP deducts an amount equal to the Deferred Compensation shown on Form W-2, take the following action:

    1. If the TP included the Deferred Compensation as income (i.e., Form 1040 or Form 1040A, line 7 or Form 1040, line 21), ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    2. If the Deferred Compensation was not included as income, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Send PARAGRAPH 157, see IRM 4.19.3-7, CP PARAGRAPHS.

  7. If the TP reports Self Employment income and the IRA deduction corresponds to a 5498 SEP/SIMPL IR(s), consider that the TP reported the SEP/KEOGH/SIMPLE on the wrong line.

  8. The TP may make contributions to an IRA during the AUR tax year or by the due date of the return (not including extensions).

  9. Contributions may not be made to a traditional IRA during or after the year in which the TP reaches age 70 1/2. If the age for the primary and/or secondary TP on the Case Analysis screen is 71 or older, enter a zero (0) in the PRIMARY and/or SECONDARY COMPENSATION field(s) as applicable. This suppresses any deduction from being computed and disallows any previously taken deduction for the applicable TP.

    Note:

    A TP over the age of 70 1/2 can continue to make contributions to a spousal IRA until the year the spouse reaches age 70 1/2.

  10. Screen IRA IR(s) after all other potentially discrepant income types are analyzed. Any subsequent analysis that changes the TOTAL AGI CHANGE field must always be followed by reselecting the IRA window. See (13) below when SS/RR, SLID, Tuition and Fees, and/or DPAD are also issues on the same case.

  11. The system computes the allowable IRA deduction based on the appropriate entries in the Adjusted Gross Income window and the IRA window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Adjusted Gross Income (AGI) window and IRA Contributions.

    Caution:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

  12. A net loss from self-employment income cannot be subtracted from salaries, wages, etc., when figuring total compensation. If U/R self-employment income (Income Identify Codes of "PB" , "PF" , "SB" , and "SF" )

    1. Is not present on the Case Analysis screen do not consider any net loss from self-employment income when determining the amount to enter in the PRIMARY and/or SECONDARY COMPENSATION field(s) in the IRA window.

    2. Is present on the Case Analysis screen and a net loss from self-employment income is reported on the return, input/verify the PRIMARY/SECONDARY REPORTED SE INCOME field(s) in the SE Tax window.

  13. If IRA contributions, SS/RR, SLID, Tuition and Fees and/or DPAD are issues on the same case, then:

    1. Compute the SS/RR by selecting the SSA/RRB window.

    2. Compute the IRA contribution by selecting the IRA window.

      Note:

      After the IRA is computed, the system automatically recomputes the SSA/RRB window.

    3. Recompute the SLID.

    4. Recompute Tuition and Fees.

    5. Recompute DPAD LAST.

      Note:

      See IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence when these issues are present on the same case.

4.19.3.8.6.2  (09-01-2012)
IRA Deduction Miscellaneous

  1. An IRA AUR issue exists when:

    1. The TP claims a larger IRA deduction amount than is substantiated.

    2. The TP claims an IRA deduction amount larger than the allowable amount.

      Note:

      PARAGRAPH 53 automatically generates when the TP is claiming more deduction than allowed based on age/filing status or taxable compensation (including non-taxable combat pay). See IRM 4.19.3-7, CP PARAGRAPHS. See IRM 4.19.3.8.6.1 (1) Notes, IRA Deduction - Analysis, for additional information regarding taxable compensation.

    3. The TP is covered by a pension plan and changes to AGI cause a change to the allowable IRA deduction amount (decreased or reduced to zero). PARAGRAPH 95 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      If a 5498 ROLVR IR is asterisked as a part of the computer identified discrepancy, the IRA deduction the TP claimed MUST be screened before closing the case PC 2X. When there is an asterisked 5498 ROLVR IR, it indicates an IRA contribution discrepancy and the system will not give the message to check the Income Comparison screen.

  2. There may be a rollover amount present on the IRA IR(s). This amount cannot be claimed as a deduction by the TP. PARAGRAPH 81 automatically generates when the U/R amount equals the IR(s) rollover amount(s). See IRM 4.19.3-7, CP PARAGRAPHS.

  3. A CP 2000 is issued for the deduction only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if the IRA/SEP contribution was not fully claimed.

  4. When the IRA deduction is an issue, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate.

  5. If there is U/R income above tolerance, the IRA deduction needs to be recomputed if the following conditions apply:

    1. The TP takes an IRA deduction on Form 1040, line 32 or on Form 1040A, line 17, and

    2. The TP is covered by a qualified pension plan. See IRM 4.19.3.8.6.1 (6), IRA Deduction - Analysis, for further instructions.

  6. If the IRA is O/D, enter the return amount in the RETURN field on the Summary screen.

4.19.3.8.6.3  (09-30-2014)
Traditional IRA, or SEP Deduction - Responses

  1. If an Adjusted Contribution Rate OTHER THAN 25 percent applies, enter this rate in the PRIMARY AND SECONDARY CONTRIBUTION RATE field in the SEP Adjustment window. The system computes the allowable deduction based on this entry.

  2. If the TP responded with information about an additional IRA deduction amount(s) that was not taken originally, use the IRA window to compute the allowable IRA deduction amount(s).

  3. When the IRA deduction is an issue, check for Form 8880, Credit for Qualified Retirement Savings Contributions, and adjust as appropriate.

  4. If the IRA deduction was disallowed in screening because of an indication the TP(s) had reached an age of 70 1/2, and it is now found that the TP(s) age is less than 70 1/2, enter the correct amounts in the PRIMARY and/or SECONDARY COMPENSATION fields as applicable on the IRA window. The system computes the correct deduction.

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ an employer's pension plan (even though the "pension plan" box is checked on the Form W-2), UNLESS

    • the attached Form W-2 shows the TP contributed to a pension plan (i.e., Box 1 Wages are less than SSWAG by the Box 12 amount and code D, E or F is present) OR

    • the WAGES IR shows the TP contributed to a pension plan (i.e., WAGES are less than SSWAG and the WAGES IR contains literal "DC" ).

  6. Section 457 plans (Code G) and 501(c)(18) plans (Code H) are not considered pension plans for determining allowable IRA contributions. See IRM 4.19.3.8.6.1 (4) g Exception, IRA Deduction - Analysis, for further information.

  7. Members of Reserve Components of the Armed Services are not active participants unless they serve on active duty over 90 days. Refer to Notice 87-16, 1987-1 C. B. 446.

  8. If accepting the TP explanation for IRA deduction, check the Retirement Saving Credit window to ensure entries are correct per the TP response.

  9. Accept the TP's response when documentation provided supports the contribution was intended for the AUR tax year in question and was made on or before April 15th of the subsequent year.

  10. The TP's response indicates the contribution was based on a rollover. Do not accept the TP explanation and advise the TP that rollover(s) cannot be used as a deduction and refer to Pub 590, Individual Retirement Arrangements (IRAs), for additional information.

  11. Taxpayers who contribute to a Roth IRA may recharacterize those contributions to a traditional IRA before the due date of the tax return. Those contributions are treated as having been made to the second IRA. If the TP indicates overclaimed IRA deduction was due to Roth IRA contributions that were recharacterized:

    1. Create a CONTR IR for the amount of the recharacterized contribution (whether or not there is a matching Form 5498 RCONT).

    2. Verify the appropriate entries in the IRA window.

4.19.3.8.7  (09-01-2003)
Student Loan Interest Deduction (SLID) - General

  1. Student Loan Interest Deduction (SLID) is reported to the IRS on Form 1098-E, Student Loan Interest Statement.

  2. SLID is identified on the Case Analysis screen by the literal "1098E" in the DOC TYPE field and "SLID" in the INCOME TYPE field.

4.19.3.8.7.1  (08-26-2016)
SLID - Analysis

  1. The amount of SLID the TP may claim cannot exceed $2,500, and begins to decrease (phase-out) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Exception:

    SLID cannot be claimed for Married filing separately (FS 3 or FS 6) or if the TP can be claimed as a dependent on someone else's tax return.

    Filing status TY 2013 TY 2014 TY 2015
    1, 4 or 5 $60,000 - $75,000 $65,000 - $80,000 $65,000 - $80,000
    2 $125,000 - $155,000 $125,000 - $155,000 $130,000 - $160,000
    3 or 6 TP cannot claim a SLID deduction TP cannot claim a SLID deduction TP cannot claim a SLID deduction

    Reminder:

    Always disallow claimed SLID amounts for filing status 3 or 6. If necessary, create an IR for zero (0).

  2. SLID amounts reported on the return are substantiated when 1098E IRs (or similar payer statement attached to the return) amounts are equal to or exceed the deduction claimed. Payers are not required to file Form 1098-E for amounts less than ≡ ≡ ≡ . SLID amounts of ≡ ≡ or more must be substantiated with either a:

    • 1098E IR with a SLID amount, or

    • Similar payer statement attached to the return

  3. Use the following chart to determine O/D SLID amounts:

    If the total of all 1098E IR(s) (or attached payer statements are): AND Then
    Equal to or greater than the amount of SLID claimed on the tax return.   ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Note:

    Be alert to changes made during or after original processing when entering/verifying information in this window.

    Less than the amount of SLID claimed on the tax return. The SLID claimed on the tax return is less than $600 Allow the deduction. Mark the IR(s) with "R" , "N" , or "D" . Do not create an IR.

    Exception:

    If, due to additional U/R income, the proposed new MAGI is equal to or greater than the upper limit amounts listed in (1) above, disallow the deduction. If no SLID IRs are present, create an IR for zero (0), mark the SLID IR with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction.

    Less than the amount of SLID claimed on the tax return The SLID claimed on the tax return is $600 or more. ALWAYS mark the SLID IR(s) with status code "U" and use the AUR system to compute the allowable SLID based on the appropriate entries in the Adjusted Gross Income (AGI) window and the Student Loan Interest Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures, Student Loan Interest Deduction. If no SLID IRs are present, create a SLID IR for zero (0).

    Exception:

    If the O/D SLID amount is less than ≡ ≡ ≡ AND the new proposed MAGI (including other U/R income) is less than the upper limit amounts listed in (1) above, do not pursue the issue.

    Note:

    If SLID, Tuition and Fees and/or DPAD are issues on the same case, see IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence.

4.19.3.8.7.2  (11-09-2004)
SLID Miscellaneous

  1. A SLID AUR issue exists when the TP claims a larger SLID amount than is substantiated. Send PARAGRAPH 22, see IRM 4.19.3-7, CP PARAGRAPHS.

  2. A CP 2000 is issued for the discrepant SLID only if the TP claims a larger deduction than he/she is entitled to take. Do not allow any additional deduction if SLID was not fully claimed.

  3. PARAGRAPH 23 automatically generates when an increase to the MAGI causes a decrease in the allowable SLID amount and/or when SLID is disallowed because the TP is filing status 3 or 6, or can be claimed as a dependent on someone else's return. See IRM 4.19.3-7, CP PARAGRAPHS.

  4. If SLID is O/D, enter the return amount in the RETURN field on the Summary screen.

4.19.3.8.7.3  (09-30-2014)
SLID - Responses

  1. The TP explanation is acceptable when he/she provides Form 1098-E or similar payer statement, for the amount claimed on the return.

  2. If Form 1098-E, or similar payer statement, is for somebody other than the primary or secondary TP, accept the explanation when TP states the student was enrolled at least half-time in a degree program and all of the following apply:

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

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

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

4.19.3.8.8  (08-26-2016)
Tuition and Fees Deduction (TUTFE)

  1. Taxpayers who paid tuition and fees expenses to an accredited educational institution (college, university or vocational school) for an eligible student may be eligible to deduct up to $4,000.

  2. Tuition and Fees Deduction is reported on Form 1098-T, Tuition Statement.

  3. Tuition and Fees is identified on the Case Analysis screen by the literal "1098T" in the DOC TYPE field and "TUTFE" in the INCOME TYPE field.

  4. The Tuition and Fees Deduction is claimed on:

    1. Form 1040, line 34 or

    2. Form 1040A, line 19.

  5. Taxpayers can claim Tuition and Fees deduction if they meet the following conditions:

    1. They paid qualified tuition and fees for themselves, their spouses or dependents.

    2. Their filing status is any status except Married Filing Separately (FS 3 or 6).

    3. They cannot be claimed as a dependent on someone else's tax return.

    4. They are not claiming Education Credits for the same student. See (15) below.

  6. The amount of Tuition an Fees the TP may claim begins to decrease (phase-out) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    Filing status TY 2013 TY 2014 TY 2015
    1, 4, or 5 $65,000 - $80,000 $65,000 - $80,000 $65,000 - $80,000
    2 $130,000 - $160,000 $130,000 - $160,000 $130,000 - $160,000
    3 or 6 TP cannot claim a Tuition and Fees deduction TP cannot claim a Tuition and Fees deduction TP cannot claim a Tuition and Fees deduction
  7. If, due to U/R income, the TP's MAGI now exceeds the amounts listed in (6) above, use the TUITION AND FEES DEDUCTION window to adjust/disallow the amount of Tuition and Fees deduction claimed. Send PARAGRAPH 110. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. The instructions in (9) - (14) below apply only if there are other issues being pursued. DO NOT issue a notice solely for unsubstantiated Tuition and Fees deduction unless the case is in Category 68 or 69.

  9. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and there is no 1098T IR present, take the following action:

    1. Create an IR for zero (0).

    2. Enter status code "U" , the AGI window displays.

    3. Input/Verify the entries in the AGI window.

    4. <F12>, the Tuition and Fees Deduction window displays.

    5. Input/Verify the entries in the Tuition and Fees Deduction window.

    6. <F12>.

    7. PARAGRAPH 112 automatically generates when tuition and fees deduction is not substantiated, see Exhibit 4.19.3-7, CP PARAGRAPHS.

  10. If the Tuition and Fees amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code "U" , the AGI window displays.

    2. Input/Verify the entries in the AGI window.

    3. <F12>, the Tuition and Fees Deduction window displays.

    4. Input/Verify the entries in the Tuition and Fees Deduction window using the 1098T amount in the TUITION AND FEES DEDUCTION field.

    5. <F12>.

    6. Send PARAGRAPH 112, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

  11. If the Tuition and Fees claimed on the Form 8917 is for a dependent, determine if the child has been claimed for Child Tax Credit, Child Care Credit, EIC and/or Additional Child Tax Credit. If the child has NOT been claimed for one of these credits, see (12) - (14) below for additional instructions. If child has been claimed for any of these credits, take the following actions:

    Note:

    If the dependent is claimed for EIC purposes, look at the child's year of birth to determine if the child is eligible (old enough to be attending a post secondary education institute) before disallowing the deduction.

    1. Create an IR for zero (0).

    2. Enter status code "U" , the AGI window displays.

    3. Input/verify the entries in the AGI window.

    4. <F12>, the Tuition and Fees Deduction window displays.

    5. Input/verify the entries in the Tuition and Fees Deduction window.

    6. <F12>.

    7. Send a Special Paragraph using the following verbiage as an example: "The Tuition and Fees deduction can only be claimed for qualified education expenses paid to a post-secondary educational institution. Based on the information provided on your return we have disallowed the Tuition and Fees deduction claimed for your dependent."

  12. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ adjust only if there is a change to AGI that would cause the credit to be phased out or eliminated. Create an IR for the amount of the Tuition and Fees claimed and work through the applicable windows.

  13. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and NO 1098T is present take the following actions:

    Note:

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

    1. Create an IR for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. Enter status code "U" , the AGI window displays.

    3. Input/Verify the entries in the AGI window.

    4. <F12>, the Tuition and Fees Deduction window displays.

    5. Input/Verify the entries in the Tuition and Fees Deduction window.

    6. <F12>.

  14. If the Tuition and Fees claimed on the Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the 1098T IR is less than the amount claimed on Form 8917 take the following actions:

    1. Enter status code "U" , the AGI window displays.

    2. Input/Verify the entries in the AGI window.

    3. <F12>, the Tuition and Fees Deduction window displays.

    4. Input/Verify the entries in the Tuition and Fees Deduction window.

    5. <F12>.

    6. PARAGRAPH 112 automatically generates, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    Caution:

    The amount of Tuition and Fees claimed cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

  15. If the TP erroneously claims both the Education Credit and the Tuition and Fees deduction AND the Form 8917, Tuition and Fees Deduction, indicates that the credits were for the same student, disallow Tuition and Fees. Send PARAGRAPH 111, see IRM 4.19.3-7, CP PARAGRAPHS.

  16. If Form 8917 is not attached to the return, disallow the Tuition and Fees deduction and send PARAGRAPH 111. See IRM 4.19.3-7, CP PARAGRAPHS.

  17. If Tuition and Fees and/or DPAD are issues on the same case, compute Tuition and Fees BEFORE DPAD. See IRM 4.19.3.3.2 (3), Case Analysis Screen, for the proper window sequence.

4.19.3.8.8.1  (09-30-2014)
TUTFE - Responses

  1. If the TP responds with a completed Form 8917 claiming Tuition and Fees deduction for the first time, take the following action:

    IF THEN
    1098T IR is present Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the 1098T IR amount, unless the TP has attached an explanation of the additional expenses.

    The TP provides a copy of Form 1098-T or similar documentation Allow the deduction.

    Caution:

    The amount of qualified expenses cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

    1098T IR is NOT present or the TP does not provide a copy of Form 1098-T or similar documentation Do not allow the deduction. Correspond with the TP for a copy of the Form 1098-T.
    1. Attempt to call the TP for the requested documentation. See IRM 4.19.3.20.2.4.1, Out Calls - Calling the Taxpayer, for additional information on Out Calls.

    2. Request verification for the amount claimed on Form 8917≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

4.19.3.8.9  (09-30-2014)
Domestic Production Activity Deduction (DPAD)

  1. Taxpayers use Form 8903 to figure their domestic production activities deduction (DPAD). The deduction is claimed on Form 1040, line 35. Adjustments to the deduction are made based on changes to AGI.

    Note:

    If the TP has claimed a deduction for DPAD and there are no IRs containing the DPAD element, create a 99PAT IR with a DPAD element for zero (0) to access the DPAD window.

  2. The deduction is limited to 9 percent of the lesser of the TP’s:

    Exception:

    If the DPAD is oil related, the deduction is reduced by 3 percent.

    1. Qualified Production Activities.

    2. AGI figured without the DPAD.

    Note:

    The deduction is further limited to 50 percent of the Form W-2 wages the TP pays to their employees.

  3. The Domestic Production Activity Deduction window must be selected in the proper cases analysis sequence as described in IRM 4.19.3.3.2 (3), Case Analysis Screen.

  4. If Form 8903 is not present, group DPAD elements from all available 99PAT IR’s and:

    1. Update the group with status code "R" .

    2. Mark each DPAD element with Send Indicator "S" .

    3. Include a Special Paragraph using the following verbiage as an example: "Our records indicate that you have a domestic production activities deduction from cooperatives as shown on Form 1099-PATR, box 6. If you are eligible to claim this deduction, please provide us with a completed Form 8903, Domestic Production Activities Deduction" .

  5. Input/verify the appropriate amounts in the Domestic Production Activity Deduction window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Domestic Production Activity Deduction window.

  6. If the DPAD element is discrepant, enter the return amount in the RETURN field on the Summary screen. Include a Special Paragraph using the following verbiage as an example: "Our records indicate that you have a domestic production activities deduction from cooperatives as shown on Form 1099-PATR, box 6. We used this information to revise your Form 8903, Domestic Production Activities Deduction."

  7. PARAGRAPH 133 automatically generates when an adjustment is made to the DPAD. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.9  (08-26-2016)
Return Value Screen

  1. The Return Value screen is used to verify and input the amounts from the tax return. It also performs calculations necessary to determine the correct tax increase or decrease. The AUR system is updated with the amounts from the originally processed tax return. Any subsequent adjustments to the TP's return must be considered when verifying and entering amounts on the Return Value screen and windows.

    Note:

    An AGI and/or TXI mismatch could be due to a TP and/or processing error. AUR is responsible for issuing a notice (CP 2000) to correct these types of errors.

  2. Using the information from the original return, and amounts computed in Case Analysis, the system displays the appropriate windows and also performs the necessary calculations. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Return Value Screen.

    Note:

    Each window in Case Analysis MUST be accessed in the appropriate sequence before the Return Value screen is selected and calculations are completed.

  3. Input/verify the filing status per return. Be sure to take into account any changes to filing status. If the filing status (FS) displayed does not match the FS shown on the return or the information provided by the TP, input the correct FS prior to performing calculations.

    Note:

    It may be necessary to update the filing status prior to performing Case Analysis functions such as: CREATE IR and MODIFY IR.

  4. Input/verify the EXEMPTIONS PER RETURN and EXEMPTIONS NOW fields. Be sure to take into account any changes to exemptions. Correct entries in these fields will allow the CP 2000 to reflect any disallowed dependent issues from original processing, as well as changes to exemptions based on TP responses.

    Note:

    When the EXEMPTIONS NOW field reflects a change from the EXEMPTIONS PER RETURN field in the Return Value screen, the system automatically enters the TC 887 change in the Assessment window.

    Caution:

    Whenever Return Value is accessed after corrections have been made to exemptions, it will be necessary to re-enter the corrections.

  5. Exemption deduction begins to phaseout when the AGI reaches the following amounts:

    Filing status TY 2013 TY 2014 TY 2015
    1 $250,000 $254,200 $258,250
    2 or 6 $300,000 $305,050 $309,900
    3 $150,000 $152,525 $154,950
    4 $275,000 $279,650 $284,050
  6. Input/verify the AGI PER RET field. This must be the amount reported on the original return, as adjusted by Error Resolution function, or a subsequent adjustment.

    Note:

    The Misc Adjust/Sch C Exp window may be used to adjust the AGI when the TP adjusts his/her Schedule C, D, E, F and/or any other allowable schedule or form during the response phase.

  7. If the TP writes "CCF" (Capital Construction Fund) on the dotted portion of Form 1040, line 43, and deducts an amount from the taxable income, include the amount in both the MISC TXI ADJ PER RETURN and the MISC TXI ADJ NOW fields.

    Note:

    If the TP responds to the CP 2000/CP 2501 with either a new CCF amount or a change to the previously claimed CCF amount, enter the revised CCF amount in the MISC TXI ADJ NOW field. Include a Special Paragraph explaining that the revised CCF amount is accounted for in the taxable income shown on the notice.

  8. If the AGI per return and AGI on Return Value match, but the TXI per return does not match the TXI PER RET field, the TP/processing error may involve the Standard Deduction, Schedule A, and/or exemptions. Verify the Filing Status, Number of Exemptions, and Schedule A window fields. Be sure these fields account for any initial processing error or adjustments due to a subsequent filing of a Form 1040X by the TP.

  9. When the TXI per return does not match the TXI COMPUTED PER RET field, the message "TXI differs from original return. Send appropriate paragraph." displays. This situation can be caused by:

    1. The standard deduction for TPs that can be claimed as a dependent on someone else's return changes the TXI per return due to U/R earned income. See IRM 4.19.3.11 (4), Standard Deduction, for further instructions.

    2. The TXI PER RETURN shows zero (0) and the TXI RECOMPUTED PER RETURN is negative. PARAGRAPH 94 automatically generates when the new or original TXI is negative. See IRM 4.19.3-7, CP PARAGRAPHS.

      Note:

      If these conditions do not apply, verify that the Schedule A window entries are accurate.

  10. Input/verify the BASE TAX PER RET field. The base tax is the amount of tax assessed prior to credits and other taxes. This amount may need to reflect any changes, math errors, subsequent adjustments (e.g., TC 290, 291, 300, 301). The base tax per return plus or minus the credits and other taxes per return MUST equal the tax assessed ≡ ≡ ≡ ≡ ≡ .

    Caution:

    Ensure that the entry in the BASE TAX PER RETURN field does not include Form 4972 tax, nor any O/C W/H adjusted as a TC 290 RC 051.

  11. If the total TAX PER RET field on Return Value does not match the total tax on the return but there is both an AGI match and a TXI match (between the return and Return Value), the processing error may involve credits or other taxes. Access, verify, and correct window entries in Case Analysis and/or Return Value as appropriate. If necessary, perform IDRS research (i.e., CC RTVUE) to complete the Return Value screen.

  12. If a TP or initial processing error is identified that results in U/R income and/or prepayment credits being adjusted, and no corresponding IRs are present, send a Special Paragraph to explain the adjustment to the TP.

  13. When amounts per return on the CP 2000 are different from those shown on the original return because of a processing change (Math Error Code present), amended return, or other adjustment, and:

    1. The TP is aware of the adjustment, send PARAGRAPH 158. See IRM 4.19.3-7, CP PARAGRAPHS.

    2. The tax change was ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the TP was not notified, send PARAGRAPH 125. See IRM 4.19.3-7, CP PARAGRAPHS.

  14. By using the <F12> key, the windows display in a sequence determined by the system. If a necessary window does not display, it may be selected from the menu and information input in the appropriate fields. If a window is selected from the menu, it displays by using the <F12> key only AFTER Return Value is committed and exited.

    Example:

    If forms/schedules are not attached to the original return (they are filed with a Form 1040X) or are not transcribed, the applicable windows must be manually selected.

  15. The Return Value screen must be committed before a CP 2000/CP 2501 Notice is issued. It is necessary that each window is accessed in the appropriate sequence before all calculations are completed. When Return Value is committed, the system verifies that the base tax per return plus or minus the credits and other taxes per return equals the tax assessed. If there is a discrepancy ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , an error message displays. "TAX PER RETURN NOT EQUAL TO TAX ASSESSED. REWORK CASE." If this message appears, take the appropriate following action(s).

    1. If no changes were made to the original return, verify the amounts displayed in the PER RETURN fields of the Credits and Other Taxes windows.

    2. In the BASE TAX PER RETURN field input the amount from: Form 1040, line 44; Form 1040A, line 28, or Form 1040EZ, line 10.

    3. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

      Note:

      If Form 8919 is attached see IRM 4.19.3.7.6.1 (10), NEC - Analysis.

  16. If a subsequent adjustment has been made to the tax return, use the following manual calculation to determine the base tax per return:

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract other taxes per return and any subsequent adjustments. See (10) above.

    3. Add credits per return and any subsequent adjustments. See (10) above.

    4. Enter the result in the BASE TAX PER RETURN field.

    5. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  17. If changes were made due to a math error and an error correction notice was issued, determine the reason for the issuance of the notice. Also verify the amounts displayed in the PER RETURN fields of the Credits and Other Taxes windows. Include any applicable changes made by Error Resolution function. Use the following manual calculation to determine the base tax per return:

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract the other taxes per return or as corrected.

    3. Add the credits per return or as corrected.

    4. Enter the result in the BASE TAX PER RTN field.

    5. If SE TAX, TIP TAX, or Lump Sum is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  18. If changes have been made due to a math error and an error correction notice was NOT issued use the following manual calculation to determine the base tax per return. Also verify the per return amounts in the credits and other taxes window.

    1. Use the amount from the TOTAL TAX PER RETURN field of the Return Value screen.

    2. Subtract the other taxes per return using the TP's figures.

    3. Add the credits per return using the TP's figures.

    4. Enter the result in the BASE TAX PER RETURN field.

    5. If SE TAX, TIP TAX, or Lump Sum, is applicable, it may be necessary to return to Case Analysis to verify these per return amounts.

  19. Determine the correct tax based on the TP's filing status and taxable income per return. The taxable income per return must include changes made by error resolution and any subsequent adjustments.

  20. Input the correct net operating loss (NOL). See IRM 4.19.3.4.9 (3), Miscellaneous.

  21. A Parameter Value window displays when certain calculation window(s) are selected that should not be used with the tax form that was originally filed.

    Example:

    If the Schedule A, EIC, Alternative Minimum Tax, Credit for the Elderly or Disabled, and/or Child Care Credit window(s) are selected and the TP originally filed a Form 1040EZ, a Parameter Value window displays; enter "Y" to continue or select CANCEL if the calculation window is not being used. If the Schedule A is selected and the TP originally filed a Form 1040A, a Parameter Value window displays; enter "Y" to continue or select CANCEL if the calculation window is not being used.

  22. Certain conditions require a Manual Interest computation. See IRM 4.19.3.3.3.2 (6), Freeze Codes, IRM 4.19.3.16.10, Manually Computed Interest for the CP 2000, and IRM 20.2.5.6.2, Reasons to Manually Compute Interest, for additional information. The system alerts the tax examiner with a message when the conditions are present. When issuing a CP 2000 and the system displays the message that manual interest conditions exist, ensure that the case is worked to completion, prior to entering IPC "MI"

    Reminder:

    During screening, cases that require manual interest are closed with PC 27.

    .

    1. Return Value must be completed and committed.

      Note:

      If the Return Value screen reflects a refund, and there is no "I-" freeze code present input zero (0) in the MANUAL INTEREST field and continue processing. Do not input IPC "MI" . If there is a "-I" or "I-" freeze on the account see IRM 4.19.3.3.3.2, Freeze Codes, for additional information.

    2. On the Notice Summary screen, all RETURN fields must be updated and all non-automatic paragraphs must be accounted for. The Notice Summary screen must be committed.

    3. Input IPC "MI" .

      Reminder:

      Input PC 30 if a CP 2501 is to be issued. Do not input IPC "MI" .

  23. Cases with IPC "MI" are batched in BT 61 (Manual Interest batch) for a Manual Interest computation. If the case is in BT 61 (Manual Interest batch) follow the instructions in IRM 4.19.3.16.10, Manually Computed Interest for the CP 2000, otherwise, leave the MANUAL INTEREST field blank.

4.19.3.10  (09-01-2003)
Changes to Itemized Deductions

  1. These instructions are for changes to Form 1040, Schedule A caused by AUR processing.

4.19.3.10.1  (08-26-2016)
Schedule A Window

  1. When there are changes to AGI, the system computes the change to Medical and Dental Expenses, Casualty and Theft Losses, and/or Miscellaneous Expenses as applicable. Input/verify the appropriate amounts in the Schedule A window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Schedule A Deductions. The following input fields require entering the amounts from:

    1. Schedule A, line 1, gross Medical and Dental Expenses.

    2. Form 4684, Casualties and Thefts, line 16, gross Casualty and Theft Loss.

    3. Schedule A, line 24, gross Job and Misc Expense.

  2. When TPs use dollars and cents on Schedule A, rounding errors can occur because the system records only dollar amounts. Ensure that any rounding errors are not added to the corrected TXI. Make the appropriate changes in the Schedule A window.

  3. If the TP's AGI per return is greater than the amounts listed below; add the amounts reported on Schedule A, lines 4, 9, 15, 19, 20, 27, and 28 and enter the sum in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

    Filing status TY 2013 TY 2014 TY 2015
    1 $250,000 $254,200 $258,250
    2 $300,000 $305,050 $309,900
    3 $150,000 $152,525 $154,950
    4 $275,000 $279,650 $284,050
  4. If the TP's AGI per return is equal to or less than the amounts listed in (3) above, enter the Schedule A, line 29 amount in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

  5. The Schedule A change displays on the Summary screen in the MEDICAL DEDUCTION, MORTGAGE INTEREST DEDUCTION, CASUALTY LOSS DEDUCTION, and MISCELLANEOUS DEDUCTION INCREASE or DECREASE field(s) as appropriate. The TOTAL INCREASE/DECREASE field includes only the actual change to the Schedule A.

  6. If the TP's Schedule A charitable contributions (line 19) were limited to 50 percent of the AGI, during original processing and the AGI is increased due to U/R processing, send PARAGRAPH148. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. See IRM 4.19.3.7.19.2, Gambling Losses, for information on Gambling Losses.

  8. PARAGRAPH 10 automatically generates when Medical and Dental Expenses are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. PARAGRAPH 21 automatically generates when Casualty and Theft Losses are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. PARAGRAPH 7 automatically generates when Miscellaneous Deductions are adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

  11. PARAGRAPH 9 automatically generates when the standard deduction exceeds the itemized deductions. The system also alerts the tax examiner with a message indicating the Schedule A changes have been limited to the standard deduction. See IRM 4.19.3-7, CP PARAGRAPHS.

  12. PARAGRAPH 54 automatically generates when itemized deductions are limited based on the TP's new AGI. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  13. PARAGRAPH 33 automatically generates if there is an indication that the TP claimed the General Sales Tax on Schedule A, line 5. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.10.1.1  (09-01-2013)
Schedule A - Responses

  1. If the TP's response indicates a NEW Schedule A (the TP used the Standard Deduction during original filing) or a revision to an existing Schedule A (e.g. a notice was issued for unreported gambling income and the TP responds with additional gambling losses on Schedule A, line 28), select the Schedule A window.

    1. For a NEW Schedule A, follow the system prompts and input all appropriate fields in the Schedule A window. Enter a zero (0) in the TOTAL DEDUCTION fields.

    2. For a revision to an existing Schedule A, input the updated amount(s) in the appropriate field(s) in the Schedule A window. DO NOT update the TOTAL DEDUCTION field.

    3. Compare the recomputed Total Itemized Deductions amount to the new or revised Schedule A, line 29. If these amounts differ, recheck entries in the window for accuracy. If the difference is due to a TP error in calculating the new Schedule A, inform him/her of the error with a Special Paragraph.

    4. The changes due to revising Schedule A reflect in the INCREASE/DECREASE field of the Summary screen. Since there is no field in the Summary screen that displays an "overall change to Schedule A" , send PARAGRAPH 114. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.10.2  (09-30-2014)
Mortgage Interest Deduction and Points Paid

  1. Screen Mortgage Interest (MORT) ONLY in Categories 01, 36, or 67. If MORT is asterisked in categories other than "01" , "36" , or "67" mark the IR(s) with status code "D" or "N" (unless they have been system deleted with status code "X" ). If appropriate, close the case with PC 2X. If the case is open for any other category, do not screen MORT.

  2. Deductible MORT and/or points paid (PTSPD), for purposes of the AUR Program, is interest paid to a lender for a loan obligation secured by a qualified residence. This includes up to two personal residences, which could include a house, condominium, motor/mobile home, house boat, or house trailer that contains a sleeping space, toilet and cooking facilities. Deductible MORT may be paid on an acquisition or home equity loan.

  3. Mortgage interest payments are reported on Form 1098, Mortgage Interest Statement.

  4. Mortgage interest and/or Points Paid are identified on the Case Analysis screen by the literal "1098" in the DOC TYPE field and the literal "MORT" and "PTSPD" in the INCOME TYPE field. Income Identity Code "MA" displays.

4.19.3.10.2.1  (08-26-2016)
MORT - Analysis

  1. Mortgage Interest is a deduction used to reduce AGI and/or TXI and becomes an AUR issue when the TP deducts more mortgage interest than is shown on the MORT IR(s).

  2. Mortgage interest of $600 or more must be substantiated with either:

    • Form 1098 with a MORT and/or PTSPD amount, or

    • A similar payer statement attached to the return

  3. Lenders/Payers are not required to file a Form 1098 for amounts less than $600. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Example:

    The MORT IR is for $7,000 and the TP reports $8,000 mortgage interest on Schedule A, line 10 and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Taxpayers who own shares in a cooperative (co-op) may not receive individual Form 1098 statements. The Form 1098 is issued to the cooperative and then each TP is allocated mortgage interest based on the number of shares owned. Whenever there is an indication that the mortgage interest claimed is derived from a co-op (e.g., attachments list the name of the property and include such terms as "shares" or "SHS" , etc. or may indicate a percentage of total shares),

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

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

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

  5. Compare MORT and/or PTSPD amounts with mortgage interest amount(s) claimed by the TP on the following schedules or forms. If mortgage interest is claimed on schedules/forms other than Schedule A, modify the IR(s) in question to show the applicable Income Identity Code.

    1. Schedule A, line 10 (Income Identify Code "MA" ). Do not use Schedule A, line 12 when determining O/D MORT.

    2. Schedule C, line 16a (Income Identify Code "PB" or "SB" ).

    3. Schedule E, line 12 (Income Identify Code "ME" ).

      Note:

      TPs with more than three rental properties file as many Schedules E as are needed to report all rental income, but are instructed to complete lines 23a - 26 on only one Schedule E. If multiple Schedules E were filed it may be necessary to compare MORT and/or PTSPD amounts to the total on Schedule E, line 23c.

    4. Schedule F, line 21a (Income Identify Code "PF" or "SF" ).

    5. Form 4835, line 19a (Income Identify Code "ME" ).

    6. Form 8829, line 10 (Income Identify Code "PB" or "SB" ).

  6. If mortgage interest is claimed on the return and there are no MORT IRs present, create an IR for zero (0) and pursue the reported amount.

  7. If MORT is marked with a status code "U" , the Income Identify Code is MA, and the system determines a Schedule A was not filed, a warning message displays, "Verify Schedule A was used" . Determine if a Schedule A was filed.

    1. If a Schedule A is attached and the line 29 amount is greater than the standard deduction, verify the fields in the Schedule A window.

    2. If Schedule A is attached and was not used (line 29 amount is less than the standard deduction), either mark the MORT IR(s) as reported or change the Income Identify Code as applicable.

    3. If Schedule A was not filed or the line 29 amount is less than the standard deduction and the Income Identify Code remains MA you must access the Schedule A window in Return Value. IF THE SCHEDULE A WINDOW IS NOT ACCESSED AN INCORRECT NOTICE MAY BE SENT TO THE TP.

  8. MORT and/or PTSPD is O/D when the sum of mortgage interest and points paid (Form 1098, boxes 1 and 2) is less than the sum of mortgage interest and/or points paid on the return.

    1. If the TP attaches a breakdown of Schedule A, line 10, and includes closing and/or settlement statement (e.g., "Discount Points" , "Loan Discount" , "Points" , etc.), allow the deduction. Do not allow the TP to deduct fees paid for appraisal, inspection, title or attorneys.

    2. Consider MORT O/D when the TP has claimed the full MORT IR(s) on Form 1040, Schedule A and has also claimed a credit identified as Form 8396, Mortgage Interest Credit, on Form 1040, see table below for line number. The O/D amount from Form 1040, Schedule A is the credit shown on Form 1040, see table below for line number.

      TY 2013 TY 2014 TY 2015
      line 53 line 54 line 54
  9. When TPs rent a portion of their own residence, they may deduct only a portion of the expenses on Schedule E. They may indicate a percentage of personal use. Taxpayers generally report the entire mortgage interest amount on Schedule E, line 12, then reduce the overall expenses by the percentage of personal use. The balance of the mortgage interest is then claimed on Schedule A, line 10.

    1. Math verify the rental income on Schedule E, minus all the expenses and depreciation to determine whether the overall income/loss claimed is reduced. If the overall expenses were reduced and the balance of the mortgage interest is claimed on Schedule A, consider the MORT discrepancy resolved.

      Example:

      The MORT IR is for $10,000. The TP claims $10,000 on Schedule E, line 12 and $5,000 on Schedule A, line 10. Verifying the Schedule E expenses shows that the overall expenses (including mortgage interest) claimed were reduced by 50 percent. The TP allocated the entire $10,000 mortgage interest between Schedule E and Schedule A ($5,000 on each schedule). The system identified MORT discrepancy is resolved.

    2. The TP may not indicate a percentage of personal use but may still reduce the net profit/loss. Always math verify the rental income less all the expenses and depreciation to determine whether the TP is claiming the full MORT amount before determining the U/R amount.

    Note:

    The TP's rental losses may be limited. When the overall loss is other than the math verified amount, determine if the TP filed Form 8582, Passive Activity Loss Limitations. If the loss was limited, the mortgage interest claimed on Schedule E, line 12 for that property is the amount that is applied against the MORT IR.

  10. When the mortgage account is jointly owned, the lender issues a single Form 1098 to the primary holder of the loan. Since any mortgage interest claimed by the secondary holder of the loan is not substantiated by a MORT IR, the system considers the MORT claimed potentially O/D. If the TP reports mortgage interest for which there is no corresponding MORT IR and indicates joint ownership, consider the MORT discrepancy resolved when:

    1. Form 1098 or other payer statement is attached, showing the mortgage interest claimed is from a jointly held account, or

    2. The TP provides the name and SSN or the name and address of the co-owner of the loan.

    Note:

    If the TP is the primary and deducts a portion of the MORT IR, do not apply the balance of the MORT against mortgage interest claimed on any other schedule/form.

    Caution:

    If there is an indication of a percentage of ownership, determine the correct amount of mortgage interest deducted.

  11. When comparing MORT IR(s) to amounts claimed on the return, always try to associate specific MORT IR amounts to specific Schedules/Forms (in the case of Schedule E, to specific properties). If unable to determine the specific schedule on which the mortgage interest was O/D (e.g., the O/D amount does not match any schedule/forms mortgage interest, or the name or address on the IR does not offer an indication as to which schedule/form), group all MORT IRs and compare the total and offset it against the mortgage interest amount reported on the following schedules in the order shown.

    1. Schedule C.

    2. Schedule E.

    3. Schedule F.

    4. Form 4835.

    5. Form 8829. If the TP files Schedule C and is deducting expenses for business use of a home, all deductible mortgage interest should be reported on Form 8829, Expenses for Business Use of Your Home, line 10. The TP should show, on line 7 of Form 8829, the percentage of his/her home used for business. To determine the allowable business part of the mortgage interest (and how mortgage interest should be allocated between Schedule A and Schedule C), multiply the percentage used for business by the amount on line 10 of Form 8829. The remainder is deductible on Schedule A, lines 10 and 11. No portion of the business part is an allowable deduction on Schedule A. If the amount of interest deducted on Schedule A is limited, any excess should be entered on Form 8829, line 16.

      Note:

      Mortgage interest on Schedule A and Form 8829 should equal Form 1098. However, TPs often take the allowable percentage deduction on Form 8829 and the full deduction on Schedule A. Follow the allocation procedures above to determine the O/D MORT and send PARAGRAPH169. See IRM 4.19.3-7, CP PARAGRAPHS.

    6. Schedule A (limit the O/D amount to the line 10 amount).

      Example:

      IR total is $25,000. The TP claims mortgage interest on Schedule C of $10,000, Schedule E of $10,000, and Schedule A of $9,000. The O/D MORT is $4,000, with Income Identity Code of "MA" . Changes to these schedules/forms may also result in changes to other forms (e.g., Form 2441), schedules, and computations (e.g., SE tax). See the appropriate sections of the IRM.

    7. When allocating MORT, send PARAGRAPH 121. See IRM 4.19.3-7, CP PARAGRAPHS.

  12. DO NOT pursue MORT IR(s) that are not fully claimed.

  13. Do not pursue MORT/PTSPD when the system assigns a status code "X" .

  14. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Points Paid deductions claimed on Schedule A, line 12.

  15. Issue a notice if the total MORT ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  16. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡

4.19.3.10.2.2  (09-30-2014)
MORT - Miscellaneous

  1. If there is an O/D Schedule A mortgage interest, ALWAYS enter the mortgage interest amount from Schedule A, line 10 in the MORTGAGE INTEREST PER RETURN field in the Schedule A window on the Return Value screen.

  2. When pursuing O/D mortgage interest from Schedule(s) C, E, F, and/or Form 4835, enter the total mortgage interest amount from these schedule(s) or form(s) in the REPORTED field on the Summary screen.

  3. If there are mortgage interest amounts for both TPs on a joint return and it is not possible to allocate the MORT IR(s) between schedules, refer to the lead.

  4. When a change to mortgage interest claimed on Schedule C and/or F results in a change to SE tax send PARAGRAPH 161. See IRM 4.19.3-7, CP PARAGRAPHS.

  5. See IRM 4.19.3.7.26, Refund of Overpaid Mortgage Interest Deduction (ROMID) - General, for instructions when there is ROMID on the IR.

  6. PARAGRAPH 40 automatically generates when MORT is O/D. Include all valid MORT IR elements (both reported and discrepant) on the notice. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.10.3  (12-21-2015)
Mortgage Insurance Premiums (MIP)

  1. Mortgage insurance premiums (MIP) are reported on Form 1098 and are identified on the Case Analysis screen by the literal "MIP" in the INCOME TYPE field.

  2. Eligible TPs deduct qualified mortgage insurance premiums on Schedule A, line 13. Since MIP can only be claimed on Schedule A, no Income Identify Code is required.

  3. MIP of $600 or more must be substantiated with either:

    • Form 1098 with a MIP amount, or

    • A similar lender/payer statement attached to the return.

  4. Lenders/Payers are not required to file a Form 1098 for amounts less than $600. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. The qualified mortgage insurance premiums begin to phase-out when the AGI is greater than $100,000 ($50,000 for FS3). Taxpayers cannot claim a mortgage insurance premium deduction when their AGI is greater than $109,000 ($54,500 for FS3). When the TP has limited the qualified MIP deduction on line 13 based on the phase-out, follow the instructions in (7) or (8) below.

  6. If the TP claimed a MIP deduction on Schedule A, line 13 in categories other than 01, 36, or 67:

    If AND Then
    No MIP IR is present The TP is NOT subject to the phase-out per the amounts in (5) above
    1. Create an IR for the amount claimed.

    2. Mark the IR with a status code "R" .

    The amount reported is equal to the MIP IR The TP is NOT subject to the phase-out per the amounts in (5) above Mark the IR with a status code "R" .
    The amount reported does not match the MIP IR - including discrepancy due to the $1 rounding The TP is NOT subject to the phase-out per the amounts in (5) above
    1. Create an IR for the amount claimed.

    2. Mark the IR with a status code "R" .

    3. Delete the original MIP IR.

    The amount reported is equal to or less than the MIP IR. The TP is subject to a phase-out per the amounts in (5) above.
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    The amount reported is more than the MIP IR, including discrepancy due to $1 rounding. The TP is subject to a phase-out per the amounts in (5) above.
    1. Create an IR for the amount claimed.

    2. Mark the IR with status code "R" .

    3. Delete the original MIP IR.

    4. Allow the system to refigure the MIP deduction.

    5. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    1. DO NOT ALLOW ADDITIONAL MIP DURING SCREENING.

    2. If pursuing MIP, mark original MIP IR with a Send indicator "S" .

  7. If the TP claimed a MIP deduction on Schedule A, line 13 in categories 01, 36, or 67:

    If And Then
    No MIP IR is present   Allow the system to refigure the MIP deduction. When pursuing MIP because there is no MIP IR, Paragraph 73 automatically generates.

    Exception:

    If the TP claims less than $600, create an IR for the amount claimed and mark with a status code "R" .

    The amount reported is more than the MIP IR due to $1 rounding.  
    1. Create an IR for the amount claimed.

    2. Mark the created IR with status code "R" .

    3. Delete the original MIP IR.

    The amount reported is equal to or more than the MIP IR.  
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    The amount reported is less than the MIP IR. The TP is not subject to a phase-out per the amounts in (5) above.
    1. Create an IR for the amount claimed.

    2. Mark the created IR with status code "R" .

    3. Delete the original MIP IR.

    The amount reported is less than the MIP IR. The TP is subject to a phase-out per the amounts in (5) above.
    1. Mark the IR with status code "R" .

    2. Allow the system to refigure the MIP deduction.

    3. Send a Special Paragraph using the following verbiage as an example: "We refigured your Mortgage Insurance Premium (MIP) deduction. If your calculations differ, please provide copies of the documents used to support the amount claimed on Schedule A line 13."

    1. DO NOT ALLOW ADDITIONAL MIP DURING SCREENING.

    2. If pursuing MIP, mark original MIP IR with a Send indicator "S" .

  8. PARAGRAPH 78 automatically generates when the Mortgage Insurance Premium deductions are adjusted due to AGI. See IRM 4.19.3-7, CP PARAGRAPHS. If pursuing MIP due to lack of substantiation, toggle off PARAGRAPH 78 in the Summary screen.

4.19.3.10.3.1  (12-15-2015)
MIP - Responses

  1. Home owners insurance premiums and hazard insurance premiums are not deductible as MIP. If the TP claimed these amounts as MIP, disallow the deduction and send the TP a Special Paragraph using the following verbiage as an example: "Mortgage Insurance Premiums must be connected to your home acquisition debt and the insurance contract must have been issued after 2006. Form 1098, Mortgage Interest Statement, should reflect the interest and Mortgage Insurance Premiums paid during the year. Mortgage Insurance Premiums may qualify as deductible interest paid. Refer to Pub 936, Home Mortgage Interest Deduction."

  2. Use the table below to evaluate the TP's response.

    If And Then
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  3. Accept the TP's explanation when:

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

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

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

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

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.11  (08-26-2016)
Standard Deduction

  1. The standard deduction is for TPs who do not itemize deductions on Form 1040, Schedule A. The amount of the standard deduction depends on filing status and whether the TP is 65 years old or older or blind. The following are the basic standard deduction amounts:

    Filing Status TY 2013 TY 2014 TY 2015
    1, 3, or 6 $6,100 $6,200 $6,300
    2 or 5 $12,200 $12,400 $12,600
    4 $8,950 $9,100 $9,250
  2. If Form 1040, Box 39a on page 2; or Form 1040A, Box 23a is checked, input/verify the appropriate entries in the AGE/BLIND COUNT field of the Return Value screen.

  3. Enter a "Y" in the FS3 ITEMIZED/DUAL STATUS ALIEN/IE field when:

    1. The filing status is 3 and the TP has itemized deductions, or

    2. The box on Schedule A, line 30, is checked or

      Note:

      Manually access the Schedule A window, input/verify the entries.

    3. Form 1040, Box 39b (or Form 1040A, Box 23b) is checked.

    Note:

    If Form 1040, Box 39b or Form 1040A, Box 23b is checked, the TP's standard deduction is zero. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Standard Deduction.

  4. If the TP is claimed as a dependent on another person's tax return, the standard deduction is limited to the greater of

    TY 2013 TY 2014 TY 2015
    $1,000 $1,000 $1,050


    or the individual's earned income for the year plus

    TY 2013 TY 2014 TY 2015
    $350 $350 $350


    The standard deduction and TXI per return for this type of individual may change due to U/R issues. The system computes the changed TXI per return, if applicable.

    1. Input/verify "Y" in the TP CLAIMED ON ANOTHER'S RETURN? field of the Return Value screen.

    2. Enter the earned income in the PRIMARY and/or SECONDARY EARNED INCOME field(s) as applicable.

      Note:

      Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services performed. It also includes any amount received as a scholarship that must be included in income. Generally earned income is the total of wages, Schedule C gain/loss, and Schedule F gain/loss.

    3. The system automatically subtracts Form 1040, line 27 from the amount in b above and adds any U/R earned income to compute the correct standard deduction.

      Note:

      Be sure that all nontaxable earned income is included in the calculations as is appropriate.

    4. If the TP's itemized deductions or earned income is larger than the appropriate standard deduction amount for his/her filing status, the TXI per return does not change.

    5. If the TP's itemized deductions or earned income (plus the amount listed in the 1st table below) is less than the amount listed in the 2nd table in f below and remains less than the amount listed in the 2nd table in f below, the TXI per return does not change.

    6. If the TP's itemized deductions or recomputed earned income (plus the amount listed in the 1st table below) is equal to or greater than the amount listed in the 2nd table below, but less than the standard deduction amount for his/her filing status, and there is no U/R unearned income, the system alerts you that the case is below tolerance. Close the case using PC 22.

      TY 2013 TY 2014 TY 2015
      $350 $350 $350
      TY 2013 TY 2014 TY 2015
      $1,000 $1,000 $1,050
  5. PARAGRAPH 149 automatically generates when the recomputed TXI is different from the TXI on the Tax Account screen. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.12  (08-26-2016)
Recomputation of Tax

  1. There are several tax rates for ordinary income as shown on the table below. Capital gains may be taxed at different rates, but no higher than 28 percent, even though the TP may have other income taxed at the higher rates. See IRM 4.19.3.7.4.5 (7), Capital Gain Distributions - Analysis.

    Tax Year Tax Rate Percentages
    2013 10, 15, 25, 28, 33, and 35, and 39.6
    2014 10, 15, 25, 28, 33, 35, and 39.6
    2015 10, 15, 25, 28, 33, 35, and 39.6
  2. The system automatically computes the tax if the TP uses the tax tables and/or, the tax rate schedules. If the TP uses the Schedule D computation, Schedule J computation, Form 8615, or Form 8814, Parents' Election To Report Child's Interest and Dividends, the system computes the tax after the necessary information is entered in the applicable windows. See IRM 4.19.3.12.1, 8615 Window, IRM 4.19.3.12.2, Sch D/8814/ECR Tax Window, and/or IRM 4.19.3.12.3, Schedule J (Farm Income Averaging), for further information.

  3. If there is no Schedule D and capital gains are listed on the Form 1040, line 13 (or Form 1040A, line 10), see IRM 4.19.3.12.2 (1), Sch D/8814/ECR Tax Window, for further instruction.

4.19.3.12.1  (08-26-2016)
8615 Window

  1. A part of some children's investment income may be subject to tax at their parent's rate. This tax is computed on Form 8615, Tax for Certain Children Who Have Unearned Income. If data is present in the 8615 Tax window, it displays in Return Value. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Form 8615 Tax.

  2. A child with investment income over the amounts listed in the table below may use the Form 8615 to compute his/her tax. Investment income includes any income other than earned income.

    TY 2013 TY 2014 TY 2015
    $2,000 $2,000 $2,100
  3. The system uses the U/R income which does not have an Income Identify Code of "PE" , "SE" , "PF" , "SF" , "PB" , "SB" , or "MA" , to compute the investment income. (Be sure to enter ONLY the investment income reported on the return in the CHILD'S INVESTMENT INCOME field on the Form 8615 Tax window.)

  4. When the tax tables or tax rate schedules were used to figure both the child’s and the parent’s tax, input/verify the appropriate entries in the 8615 TAX window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Form 8615 Tax.

  5. If there is an indication that the child or the parents used the Qualified Dividend and Capital Gain worksheet, Schedule D or Schedule J (Farm Income Averaging) tax method to figure their tax, input/verify the appropriate entries in the 8615 Tax window. Issue a CP 2501 Notice and send PARAGRAPH 59. See IRM 4.19.3-7, CP PARAGRAPHS.

    1. When the recomputed Form 8615 is received, update the 8615 Tax window as appropriate.

    2. If necessary, enter the amount from the recomputed Form 8615, line 18 in the MANUAL CHILD'S INVESTMENT TAX field.

  6. The computed 8615 tax displays in the CORRECTED TAX field of the Return Value screen.

4.19.3.12.2  (12-12-2014)
Sch D/8814/ECR Tax Window

  1. If there is no Schedule D and qualifying dividends are listed on Form 1040 or Form 1040A, line 9b and/or capital gains are listed on the Form 1040, line 13 (or Form 1040A, line 10):

    1. Access the Sch D/8814/ECR Tax window.

    2. Enter/verify the qualifying dividends from Form 1040 or Form 1040A, line 9b in the QUALIFIED DIVIDENDS field, even if there is no corresponding IR(s) showing the amount of QDIV.

    3. Enter the capital gain amount from Form 1040, line 13 (or Form 1040A, line 10) in the LONG TERM GAIN(LOSS) field.

  2. If Schedule D or Form 8814 is attached and/or the TP indicates "ECR" on the dotted portion of Form 1040, line 44 or Form 1040A, line 28, input/verify the amounts in the Sch D/8814/ECR Tax window.

  3. When the TP owes tax from recapture of an education credit, the tax owed is included with the base tax and the TP indicates "ECR" and the amount on the dotted portion of Form 1040, line 44 or Form 1040A, line 28.

  4. If Form 4952, Investment Interest Expense Deduction, is attached, an adjustment to the Schedule D, long term gain amount may be necessary. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Schedule D Loss/Form 8814 Tax.

  5. The system computes the tax using the Schedule D computation only if applicable.

  6. PARAGRAPH 150 automatically generates when the recomputed tax is based on the Schedule D tax computation. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.12.3  (09-01-2004)
Schedule J (Farm Income Averaging)

  1. Taxpayers who receive income from farming may choose to figure their base tax using Schedule J, Farm Income Averaging. These cases require special handling, refer to the lead.

4.19.3.12.4  (09-04-2015)
Net Tax Increase/No Net Tax Increase/Tax Decrease Notices

  1. The Technical and Miscellaneous Revenue Act of 1988 (TAMRA) changed the definition of net tax deficiency to include a decrease to EIC. A notice must be issued if there is a proposed EIC decrease and the case meets balance due tolerance.

  2. The Community Renewal Tax Relief Act of 2000 (CRTRA) changed the definition of net tax deficiency to include a decrease to Additional Child Tax Credit (ACTC). A notice must be issued if there is a proposed decrease to ACTC and the case meets balance due tolerance.

  3. AUR defines the net tax change as basic income tax change, minus change to non-refundable credits, plus change to other taxes, plus or minus changes to EIC, Additional Child Tax Credit (ACTC), American Opportunity Credit (AOC), and/or Premium Tax Credit (PTC).

    1. Net tax increase is defined as a net tax change greater than zero (0). A majority of AUR cases have a net tax increase.

    2. No tax increase is defined as a net tax change of zero (0).

      Note:

      The TP's TXI remains negative even after the addition of U/R income.

    3. Net tax decrease is defined as a net tax change less than zero (0).

4.19.3.13  (09-01-2004)
Non-Refundable Credits

  1. The AUR program will not verify the eligibility/qualification issues relating to Non-refundable Credits claimed on the tax return. As a general rule, Non-refundable Credits allowed during original processing and/or after review by another program (i.e., Exam, CI, etc.) are considered valid.

  2. When the TP does not claim a Non-refundable Credit, AUR will:

    1. INCLUDE the credit(s) as part of the processing of the case when eligibility/qualification issues are already included on the tax return AND U/R income now entitles the TP to the credit(s).

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

  3. AUR is responsible for adjusting the Non-refundable Credits that are AGI dependent based on U/R income.

4.19.3.13.1  (08-26-2016)
Changes to Credits

  1. When a CP 2000 is issued and there are credits (see table below for Form and line numbers) input/verify the amount(s) in the Non-refundable Credit window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Non-refundable Credits.

    Form TY 2013 TY 2014 TY 2015
    1040 lines 47 through 53 lines 48 through 54 lines 48 through 54
    1040A lines 29 through 33 lines 31 through 35 lines 31 through 35
  2. ALWAYS check the tax return for the presence of non-refundable credits when verifying entries on the Non-refundable Credit window, WHETHER OR NOT THEY ARE BEING ADJUSTED DUE TO U/R PROCESSING.

  3. If the non-refundable credits are not entered, the TP will receive an incorrect CP 2000.

4.19.3.13.2  (08-26-2016)
Credit for Child and Dependent Care Expenses

  1. Form 2441, Credit for Child and Dependent Care Expenses, may be recomputed when:

    • The original AGI is less than $43,000, or

    • The earned income changes, or

      Note:

      Earned income is defined as wages, salaries, tips, other employee compensation and net earnings from self-employment. Earned income also includes the amount on Schedule SE, line 3 minus any deduction on Form 1040, line 27. A net self-employment loss reduces earned income. Statutory employee earned income (may be indicated by Form W-2, Box 13 being checked) is the amount shown on Schedule C, line 31. The spouse is also considered to have earned income, if the spouse is a full time student or is disabled. His/her earned income for each month or part of a month is considered to be at least $250 ($500 if more than one qualifying person is cared for).

    • The AGI changes, and/or

    • The Dependent Care Benefits (DCB) change. See IRM 4.19.3.7.2.1, Dependent Care Benefits (DCB), for further instructions on DCB.

  2. The person who qualifies the TP for the credit for child and dependent care expenses is any of the following:

    • A qualifying child under the age of 13 whom the TP can claim as a dependent.

    • A disabled person physically or mentally incapable of caring for himself/herself regardless of age, whom the TP can claim as a dependent (or could claim as dependent except that the person had gross income of the amount listed in the table below or more or filed a joint return) provided that the person lived with the TP for more than one-half of the tax year.

      TY 2013 TY 2014 TY 2015
      $3,900 $3,950 $4,000
    • A disabled person physically or mentally incapable of caring for himself/herself, whom the TP could claim as a dependent had it not been that another TP can claim the TP (or the spouse if the TP files a joint return) as a dependent on his or her return and lived with the TP for more than one-half of the tax year.

    • The TP’s spouse physically or mentally incapable of caring for himself/herself, and lived with the TP for more than one-half of the tax year.

  3. If the original AGI is less than $43,000, the credit may decrease if the AGI percentage changes. The credit remains the same as filed or previously adjusted if the original AGI is $43,000 or more, or if addition of the U/R amount does not cause the AGI percentage to change.

  4. The system computes the correct amount of credit for child and dependent care expenses. Input/verify the appropriate amounts in the Child Care Credit window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child Care Credit.

    Caution:

    When Math Error Codes are present that indicate the number of exemptions was changed additional research may be necessary to verify the number of qualifying children.

  5. Taxpayers sometimes enter an incorrect amount on Form 2441, line 3. This most frequently occurs when DCB is an issue and Part III of the Child Care Credit was incorrectly calculated or was incomplete. When entering QUALIFYING EXPENSES on the Child Care Credit window, use the following procedures to determine the correct entry:

    1. Review the TP's entries in Part III, lines 12 through 31 of Form 2441. Prepare a mock Form 2441 to correct any errors and/or complete any omitted entries.

    2. Carry the line 31 amount to line 3, Part II of Form 2441. This amount is also entered in the QUALIFYING EXPENSES field on the Child Care Credit window.

      Note:

      See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child care Credit, to determine the correct entry on Form 2441, line 3.

    3. Send PARAGRAPH 66 when Child Care Credit is adjusted due to DCB impact on the Qualifying Expenses. See IRM 4.19.3-7, CP PARAGRAPHS.

  6. PARAGRAPH 48 automatically generates when an adjustment is made that impacts Child Care Credit. If the change to Child Care Credit is due to DCB, "toggle off" Paragraph 48 in the Summary screen. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.13.3  (09-01-2012)
Credit for the Elderly or Disabled

  1. Manually access the Credit for the Elderly or the Disabled window and recompute Schedule R, Credit for the Elderly or the Disabled when:

    1. The AGI increases, and/or

    2. The nontaxable portion of SS/RR benefits or pension/annuity/disability benefits either changes or was not originally reported on Schedule R, line 13a and/or 13b.

      Note:

      Do not adjust the nontaxable pension amount on Schedule R, line 13b unless that TP provides a new line 13b.

  2. The system computes the correct amount of credit for the elderly.

  3. Input the appropriate entries in the Credit for the Elderly or Disabled window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Credit for the Elderly.

  4. PARAGRAPH 13 automatically generates when an adjustment is made to the credit for the elderly. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.13.4  (08-26-2016)
Child Tax Credit

  1. The Child Tax Credit may be claimed by TPs who have a qualifying child. The credit may be as much as $1,000 for each qualifying child.

  2. Taxpayers who claim a qualifying child may be eligible to claim an Additional Child Tax Credit. See IRM 4.19.3.15.4, Additional Child Tax Credit (ACTC), for further information.

  3. To claim a Child Tax Credit, the TP must have a base tax larger than zero (0) and have a qualifying child. A qualifying child, for purposes of claiming the Child Tax Credit, is a child who:

    1. Is the TP’s son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example: grandchild, niece, or nephew) AND

    2. Is under age 17 at the end of the current AUR tax year; AND

    3. Did not provide over one-half of their own support for the current AUR tax year, AND

    4. Lived with the TP for more than half of the year AND

    5. Does not file a joint return for the year or files it only to claim a refund of W/H or estimated tax paid AND

    6. Is a United States citizen, U.S. national or resident alien.

      Note:

      For each qualifying child, the TP must place a "check mark" in the box on Form 1040 or Form 1040A, line 6c, column (4).

  4. The amount of allowable Child Tax Credit begins to decrease when the TP's modified AGI exceeds:

    • $75,000 for filing status - Single, Head of Household and Qualifying Widow(er)

    • $110,000 for filing status - Married Filing Jointly

    • $55,000 for filing status - Married Filing Separately

  5. The system computes the correct amount of Child Tax Credit. Input/verify the appropriate amounts in the CHILD TAX CREDIT window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Child Tax Credit.

    Note:

    The child tax credit may be limited because other credits have already reduced the TP's tax liability.

  6. Due to U/R income, TPs who were previously ineligible to claim Child Tax Credit, may now qualify for the credit.

  7. When the TP does not claim a Child Tax Credit, AUR will:

    1. INCLUDE the credit as part of the processing of the case when eligibility/qualification issues are already included on the tax return AND U/R income now entitles the TP to the credit.

      Example:

      A box on Form 1040 or Form 1040A, line 6c, column 4, was checked to indicate a dependent claimed is a qualifying child for Child Tax Credit. The base tax per return was zero and Child Tax Credit was not claimed. The issue of Child Tax Credit is addressed as part of the Case Analysis processing.

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

      Example:

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

  8. When the BASE TAX PER RETURN is zero (0) and the NUMBER OF EXEMPTIONS is more than 1 (for filing status 1, 3, 4 or 5) or more than 2 (for filing status 2), the system displays a message that the TP may qualify for Child Tax Credit.

  9. When the TP has previously claimed Child Tax Credit, the Child Tax Credit window automatically displays on the Return Value screen.

    Caution:

    If the TP did not claim the Child Tax Credit, it may be necessary to access the window when certain conditions exist, see (10) below.

  10. If the Child Tax Credit window does not automatically display, manually access the window when either of the following situations occur:

    1. The BASE TAX NOW on the Return Value screen is greater than zero (0) and the TP checks a box on Form 1040 or Form 1040A, line 6c, column 4 to indicate that a dependent claimed is a qualifying child for the Child Tax Credit OR

    2. The TP is claiming Additional Child Tax Credit.

      Note:

      The Child Tax Credit window must be accessed BEFORE the Additional Child Tax Credit window, since the system uses the number of qualifying children from the Child Tax Credit window to calculate changes to Additional Child Tax Credit.

  11. Input/verify the entries in the Child Tax Credit window:

    1. Total the number of dependents indicated as qualifying child(ren) and enter the amount in the QUALIFYING CHILD field. This is a required field.

    2. Input/verify all other entries in the CHILD TAX CREDIT window.

    Reminder:

    Enter the total credit amount from Forms 3880, 8801, 8396, 8859, 8936, 8834, 8910, 8911 and 8912 in the MISC CREDIT AMOUNT field. Failure to do so will result in an incorrect notice.

    Note:

    Access the Foreign Tax Credit, Child Care Credit, Credit for the Elderly, Education Credits, Retirement Savings Contribution Credit, and/or EIC windows BEFORE computing the Child Tax Credit window.

  12. PARAGRAPH 120 automatically generates when the Child Tax Credit is adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.13.5  (08-26-2016)
Education Credits

  1. Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), is recomputed when U/R income causes a change to the modified AGI.

  2. Taxpayers CANNOT claim Education Credits when:

    1. They are claimed as a dependent on someone else's tax return.

    2. The filing status is Married Filing Separately (FS 3 or FS 6).

    3. A deduction for Tuition and Fees is claimed on Form 1040, line 34 for the same student.

    4. They are a non-resident alien.

  3. Lifetime Learning Credits begins to decrease (phase out) when the modified AGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below.

    Filing Status TY 2013 TY 2014 TY 2015
    1, 4 or 5 $53,000 - $63,000 $54,000 -$64,000 $55,000 -$65,000
    2 $107,000 - $127,000 $108,000 - $128,000 $110,000 - $130,000

    Note:

    Add foreign earned income/housing to the AGI per return to determine MAGI.

  4. American Opportunity Education Credit begins to decrease (phaseout) when the modified AGI exceeds lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below.

    Filing Status TY 2013 TY 2014 TY 2015
    1, 4 or 5 $80,000 - $90,000 $80,000 - $90,000 $80,000 - $90,000
    2 $160,000 - $180,000 $160,000 - $180,000 $160,000 - $180,000

    Note:

    Add foreign earned income/housing to the AGI per return to determine MAGI.

  5. Form 8863 is used to determine education credits:

    1. Form 8863, Part I is used to determine refundable portion of the American Opportunity Credit.

    2. Form 8863, Part II is used to determine the nonrefundable Education Credits.

    3. Form 8863, Part III is Student and Educational Institution Information. A separate Part III must be completed for each student. To access the student information click in the "Student Count" box and use the arrow up/down keys to view each student’s information.

      Note:

      The student may qualify for the following higher education tax benefits: American Opportunity Credit, Lifetime Learning Credit, deduction for Tuition and Fees or tax-free withdrawal from a Coverdell ESA. For each student, the TP can elect for any tax year only one of the credits or a deduction for Tuition and Fees. The TP can claim either the American Opportunity or Lifetime Learning Credit even if the student excluded a distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.

      Note:

      If the TP erroneously claims both the American Opportunity Credit and the Lifetime Learning Credit for the same student, allow the greater of the two qualifying expenses.

      If Then
      Form 8863, Part III, lines 23 - 26, indicate the student is not eligible
      1. Disallow their portion of the credit.

      2. Send PARAGRAPH 127, see Exhibit 4.19.3-7, CP Paragraphs.

      Based on the TP's entries, Form 8863, Part III, lines 23 - 26 are not completed appropriately
      1. Disallow their portion of the credit.

      2. Send PARAGRAPH 128, see Exhibit 4.19.3-7, CP Paragraphs.

  6. The following instructions apply only if there are other issues being pursued AND the criteria for issuing a notice is met. DO NOT issue a notice solely for Education Credits unless the case is in Category 68 or 69.

    1. If the dependent is claimed for EIC purposes, verify the child's year of birth to determine if the child is eligible (old enough to be attending a post secondary education institute) before disallowing the credit.

    2. If it can be determined that the dependent does NOT qualify for the Education Credits (i.e., has been claimed for Child Care Credit, Child Tax Credit, EIC and/or Additional Child Tax Credit) see (7) below.

    If the Education Credit Then
    Claimed on Form 8863, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and there is no 1098T IR present For each student listed on Form 8863 Part III:
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Enter a zero (0) in the MANUAL RFNDBLE EDU CREDIT field.

    3. Enter a zero (0) in the MANUAL EDUCATION CREDIT field.

    4. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on Form 8863≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , and the 1098T IR is less than the amount claimed on Form 8863, lines 27 or 31 For each student listed on Form 8863 Part III:
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Prepare a mock Form 8863using the 1098T IR amount on Form 8863, lines 27 or 31. Use the BASE TAX NOW plus revised ALT MIN TAX (if any) and revised Child Care Credit, Foreign Tax Credit and/or Credit for the Elderly to complete Form 8863, line 19. Use the AGI PER RET plus the TOTAL U/R AMT to complete the Form 8863, line 3 and 14.

    3. Enter new line 8 amount from the mock Form 8863 in the MANUAL RFNDBLE EDU CREDIT field.

    4. Enter new line 19 amount from the mock Form 8863 in the MANUAL EDUCATION CREDIT field.

    5. Send the 1098T IR.

    6. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on Form 8863, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and NO 1098T is present. For each student listed on Form 8863 Part III: ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Prepare a mock Form 8863≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on Form 8863, lines 27 or 31. Use the BASE TAX NOW plus revised ALT MIN TAX (if any) and revised Child Care Credit, Foreign Tax Credit and/or Credit for the Elderly to complete Form 8863, line 19. Use the AGI PER RET plus the TOTAL U/R AMT to complete the Form 8863, line 3 and 14.

    3. Enter new line 8 amount from the mock Form 8863 in the MANUAL RFNDBLE EDU CREDIT field.

    4. Enter new line 19 amount from the mock Form 8863 in the MANUAL EDUCATION CREDIT field.

    5. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on Form 8863 is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , and 1098T IR is present For each student listed on Form 8863 Part III: ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Prepare a mock Form 8863using the 1098T IR amount≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on Form 8863, lines 27 or 31. Use the BASE TAX NOW plus revised ALT MIN TAX (if any) and revised Child Care Credit, Foreign Tax Credit and/or Credit for the Elderly to complete Form 8863, line 19. Use the AGI PER RET plus the TOTAL U/R AMT to complete the Form 8863, line 3 and 14.

    3. Enter new line 8 amount from the mock Form 8863 in the MANUAL RFNDBLE EDU CREDIT field.

    4. Enter new line 19 amount from the mock Form 8863 in the MANUAL EDUCATION CREDIT field.

    5. Send the 1098T IR.

    6. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on the Form 8863≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  7. If it has been determined that the dependent DOES NOT qualify for education credits (i.e., claimed for EIC or ACTC purposes), disallow the dependent's education credit amount.

    If the Education Credit Then
    Claimed on Form 8863, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and NO 1098T is present.
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Enter a zero (0) in the MANUAL RFNDBLE EDU CREDIT field.

    3. Enter a zero (0) in the MANUAL EDUCATION CREDIT field.

    4. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    5. Send a Special Paragraph using the following verbiage as an example: "Education credits can only be claimed for qualified education expenses paid to a post secondary educational institution for eligible students. Based on the information provided on your return we have disallowed the education expenses and credit claimed for your dependent."

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on Form 8863 is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , and 1098T IR is present
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Prepare a mock Form 8863using the 1098T IR amount on Form 8863, lines 27 or 31. Use the BASE TAX NOW plus revised ALT MIN TAX (if any) and revised Child Care Credit, Foreign Tax Credit and/or Credit for the Elderly to complete Form 8863, line 19. Use the AGI PER RET plus the TOTAL U/R AMT to complete the Form 8863, line 3 and 14.

    3. Enter new line 8 amount from the mock Form 8863 in the MANUAL RFNDBLE EDU CREDIT field.

    4. Enter new line 19 amount from the mock Form 8863 in the MANUAL EDUCATION CREDIT field.

    5. Send the 1098T IR.

    6. Send PARAGRAPH 98, see Exhibit 4.19.3-7, CP PARAGRAPHS.

    7. Send a Special Paragraph using the following verbiage as an example: "Education credits can only be claimed for qualified education expenses paid to a post secondary educational institution. Based on the information provided on your return we have disallowed the education expenses and credit claimed for your dependent."

      Note:

      If decreasing education credit due to lack of substantiation, toggle off PARAGRAPH 58 and 38 in the Summary screen.

    Claimed on Form 8863, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    1. Enter/verify the return amount in both the RETURN AMT and RFNDBLE CREDIT RETURN AMT fields in the EDUCATION CREDIT window.

    2. Enter a zero (0) in the MANUAL RFNDBLE EDU CREDIT field.

    3. Enter a zero (0) in the MANUAL EDUCATION CREDIT field.

    4. Send a Special Paragraph using the following verbiage as an example: "Education credits can only be claimed for qualified education expenses paid to a post secondary educational institution for eligible students. Based on the information provided on your return we have disallowed the education expenses and credit claimed for your dependent."

      Note:

      If decreasing education credit because of qualification issues, toggle off PARAGRAPH 58 and 38 in the Summary screen.

  8. If the TP claimed a deduction for Tuition and Fees and the Education Credit, check Form 8917 to determine if the deduction and credit are for the same student. If the deduction and the credit ARE for the same student disallow the deduction for Tuition and Fees and send PARAGRAPH 111. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  9. Input/verify the appropriate entries in the Education Credits window.

  10. The amount of allowable Education Credits is determined after the Base Tax has been reduced by any Child Care Credit and/or Credit for the Elderly or Disabled claimed.

  11. The Education Credits window MUST be accessed after the Child Care Credit and/or the Credit for the Elderly or Disabled window(s). Selecting the windows out of sequence may result in calculating an incorrect change to the Education Credits.

  12. PARAGRAPH 58 automatically generates when Education Credits are adjusted. If decreasing education credit due to lack of substantiation and/or qualification issues, toggle off Paragraph 58 in the Summary screen. See Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.13.5.1  (08-26-2016)
Education Credits - Responses

  1. If ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ disallow the credit, even if the response includes Form 1098-T and/or a list of expenses, correspond with the TP. Send a Special Paragraph using the following verbiage as an example: "The information you provided indicates that you (or your dependent) are a graduate student. In order to claim the American Opportunity Credit you must not have completed the first four years of postsecondary education before the start of the tax year. Please refer to Publication 970, Tax Benefits for Education, to determine how you want to apply your education expenses."

    Example:

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

    Caution:

    The Form 1098-T is not accurate when determining if the student is at least half time or a graduate student.

  2. If the TP provides a copy of Form 1098-T with an amount in Box 1 or similar documentation, or a signed explanation of the amounts paid, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  3. If the TP responds with a Form 1098-T with an amount only in Box 2, advise the TP that the document cannot be accepted and to provide a signed explanation of the amounts paid to support the amounts claimed.

  4. If the TP responds with a completed Form 8863 claiming Education Credits (American Opportunity and Lifetime Learning Credits) for the first time (the credit was not claimed originally), take the following action:

    IF THEN
    Based on the TP's entries, Form 8863, Part III, lines 23 - 26 are not completed appropriately
    1. Disallow their portion of the credit.

    2. Send a Special Paragraph using the following verbiage as an example: "We are not able to allow the education credits claimed on your Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), because lines 23-26 are incomplete. If you are eligible to claim the credit, complete Form 8863, including lines 23 -26, and send it to us."

      Note:

      Attempt to call the TP for the requested documentation. See IRM 4.19.3.20.2.4.1, Out Calls - Calling the Taxpayer, for additional information on Out Calls.

    Form 8863, lines 23 - 26 indicate the student is not eligible
    1. Do not allow their portion of the credit.

    2. Send a Special Paragraph using the following verbiage as an example: "We are not able to allow the education credits claimed on your Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), because lines 23-26 indicate you do not qualify for the credit claimed. If you are eligible to claim an education credit, resubmit Form 8863, including lines 23 -26."

    1098T IR is present Allow the credit.

    Caution:

    The amount of qualified expenses cannot exceed the 1098T IR amount, unless the TP has attached an explanation of the additional expenses.

    The TP provides a copy of Form 1098-T or similar documentation

    Caution:

    The amount of qualified expenses cannot exceed the amount in Box 1 of Form 1098-T, unless the TP has attached an explanation of the additional expenses.

    Allow the credit.
    1098T IR is NOT present or the TP does not provide a copy of Form 1098-T, similar documentation, or a signed explanation of amounts paid. Do not allow the credit. Correspond with the TP for a copy of the Form 1098-T or a signed explanation of amounts paid. Send Paragraph 98 if issuing a CP 2000.
    1. Attempt to call the TP for the requested documentation. See IRM 4.19.3.20.2.4.1, Out Calls - Calling the Taxpayer, for additional information on Out Calls.

    2. Request verification for the amount claimed on Form 8863≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

4.19.3.13.6  (08-26-2016)
Qualified Retirement Savings Contributions Credit (QRSC)

  1. Form 8880, Credit for Qualified Retirement Savings Contributions (QRSC), is recomputed when:

    • U/R income causes a change to the AGI

    • Distributions are increased due to U/R

    • Contributions are disallowed

  2. Taxpayers CANNOT claim the QRSC credit when:

    1. They are younger than 18 years old.

    2. They are claimed as a dependent on someone’s tax return.

    3. They are a full-time student.

  3. The QRSC begins to phase-out when the TP’s AGI exceeds the lower limit and is eliminated (disallowed) when the AGI exceeds the upper limit in the table below:

    Filing Status TY 2013 TY 2014 TY 2015
    1, 3, 5 or 6 $17,750 - $29,500 $18,000 - $30,000 $18,250 - $30,500
    4 $26,625 - $44,250 $27,000 - $45,000 $27,375 - $45,750
    2 $35,500 - $59,000 $36,000 - $60,000 $36,500 - $61,000
  4. Input/verify the appropriate entries in the Retirement Savings Credit window if Form 8880 is attached to the return.

    1. TOTAL IRA CONTR/ELECTIVE DEFERRALS - Adjust ONLY when there is unsubstantiated traditional IRA contributions (no 5498 IR). Correct the amount claimed on Form 8880, line 1 and add to the TP entries from Form 8880, line 2. If not adjusting the contributions deduction, use the sum of the TP entries from Form 8880, lines 1 and 2.

      Note:

      Taxpayers are entitled to claim contributions to Roth IRAs on Form 8880, line 1.

    2. TOTAL DISTRIBUTIONS - Adjust ONLY when there are U/R retirement distributions. If the TP entry on Form 8880, line 4, equals the total retirement distribution amount, use the TPs entry in the window; if not, enter the sum of Form 8880, line 4, plus the U/R distribution amount in both the TP and SPOUSE fields for filing status 2; for all others enter only in the TP field. If not adjusting retirement distributions use the TP entries from Form 8880, line 4.

      Exception:

      Do not include distributions identified with COD "L" , "8" , "P" or military retirement distributions (DFAS) in the amount on line 4, Form 8880.

  5. The amount of allowable QRSC credits is determined after the Base Tax has been reduced by any: Foreign Tax Credit, Child Care Credit, Credit for the Elderly and/or Education Credits claimed.

    Caution:

    The Retirement Savings Credit window MUST be accessed after the Child Care Credit, Credit for the Elderly and/or Education Credit window(s). Selecting the windows out of sequence may result in calculating an incorrect change to the QRSC credit.

  6. PARAGRAPH 56 automatically generates when the QRSC credit is adjusted. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.13.7  (08-26-2016)
Qualified Adoption Expenses Credit

  1. Form 8839, Qualified Adoption Expenses is recomputed when the TP's modified AGI changes. A credit of up to the amounts listed in the table below may be claimed for qualifying expenses to adopt an eligible child.

    TY 2013 TY 2014 TY 2015
    $12,970 $13,190 $13,400
  2. The Credit for Qualified Adoption Expenses begins to phase-out when the TP’s MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI exceeds the upper limit in the table below:

    TY 2013 TY 2014 TY 2015
    $194,580 - $234,580 $197,880 - $237,878 $201,010 - $241,010
  3. If due to U/R income, the TP's MAGI is between the amounts listed in (2) above, PARAGRAPH 188 automatically generates when there is a change to the adoption credit.

  4. If due to U/R income, the TP's AGI exceeds the amounts in (2), PARAGRAPH 189 automatically generates when the adoption credit is disallowed. See IRM 4.19.3-7, CP PARAGRAPHS.

  5. The system computes the correct amount of credit for qualified adoption expenses.

  6. Input/verify the appropriate amounts in the ADOPTION CREDIT window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Adoption Credit window.

4.19.3.13.8  (08-26-2016)
Non-Refundable Carryback/Carryforward Credits

  1. If the remaining non-refundable credits are in excess of the tax liability, they may be carried forward or back to another year to offset tax.

  2. The Non Refundable Credits window is used to capture the following credits:

    1. Foreign Tax Credit.

    2. Residential Energy Credit.

    3. Form 8396 Credit.

    4. Form 8859 Credit.

    5. Miscellaneous Credits.

  3. Foreign Tax Credit - Input/verify the amount of Foreign Tax Credit reported on Form 1040, (or Form 1116) see table below for line number.

    Form TY 2013 TY 2014 TY 2015
    1040 line 47 line 48 line 48
    1116 line 30 line 30 line 30

    Note:

    Although the Non Refundable Credit window appears last in the sequence of credits windows, the AUR system applies the Foreign Tax credit first against the base tax.

  4. Residential Energy Credit (Form 5695) - Input/verify the amount of Residential Energy Credit included on Form 1040, from Form 5695, see table below for line numbers.

    Form TY 2013 TY 2014 TY 2015
    1040 line 52 line 53 line 53
    5695 lines 15 and 30 lines 15 and 30 lines 15 and 30
  5. Mortgage Interest Credit (Form 8396) - Input/verify the amount of Mortgage Interest Credit included on Form 1040, from Form 8396, see table below for line numbers.

    Form TY 2013 TY 2014 TY 2015
    1040 line 53 line 54 line 54
    8396 line 9 line 9 line 9
  6. DC First Time Home Buyers Credit (Form 8859) - Input/verify the amount of DC First Time Home Buyers Credit (Form 8859) included on Form 1040, see table below for line numbers.

    Form TY 2013 TY 2014 TY 2015
    8859 line 3 line 3 line 3
    1040 line 53 line 54 line 54
  7. Miscellaneous Credits input/verify the amount of miscellaneous credit(s) included on Form 1040, see table below for line number

    TY 2013 TY 2014 TY 2015
    line 53 line 54 line 54
  8. If it is determined there may be unused non-refundable credits (even if the unused credits would offset the additional tax), issue a notice as appropriate.

  9. PARAGRAPH 20 automatically generates when any entries (other than zero or the Foreign Tax Credit) are in the NONREFUNDABLE CREDITS window. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. Ensure that the carryback/carryforward guidelines are followed if the TP responds requesting change(s) to the amount of previously reported credits(s).

4.19.3.14  (09-30-2014)
Changes to Other Taxes

  1. The following instructions pertain to changes to certain other taxes claimed by TPs.

  2. These other taxes may include:

    • SE tax

    • Social Security tax on tip income unreported to the employer

    • 10 percent tax on early distributions from qualified retirement plans

    • 10 percent additional tax on Qualified Education Program Payments (QTPs and CESAs)

    • 25 percent tax on early distributions from SIMPLE IRAs

    • 20 percent tax on medical savings account distributions

    • 20 percent Additional Tax for Health Saving Accounts

    • 50 percent Additional Tax for Medicare Advantage MSA distributions

    • Additional taxes on income received due to participation in a nonqualified deferred compensation plan that does not meet the requirements under IRC 409A

    • Alternative minimum tax

    • Net Investment Income Tax (TY 2013 and subsequent)

    • Additional Medicare Tax (TY 2013 and subsequent) and

    • Miscellaneous other taxes


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