4.19.3  IMF Automated Underreporter Program (Cont. 4)

4.19.3.14 
Changes to Other Taxes

4.19.3.14.1  (08-26-2016)
Self-Employment Tax

  1. The TP must pay SE tax, which is a combination of social security tax and Medicare tax for individuals who work for themselves. Self-employed individuals must pay SE tax on the entire amount of his/her net earnings from self-employment of $400 or more ($108.28 or more of church employee income).

  2. SE tax is computed on Schedule SE and entered on Form 1040, see table below for line numbers

    TY 2013 TY 2014 TY 2015
    line 56 line 57 line 57
  3. Schedule SE represents information for only one TP (a maximum of two, one for each spouse, may be attached to a return). Underreported self-employment income must be associated with the appropriate TP.

  4. Verify that the correct Income Identify Code is displayed for U/R income that is subject to SE tax.

    • "PB" - business self-employment income for the primary TP

    • "PF" - farm self-employment income for the primary TP

    • "SB" - business self-employment income for the secondary TP

    • "SF" - farm self-employment income for the secondary TP

    Note:

    Payee EIN IRs will not have an Income Identify code. An Income Identify code must be input in order for the system to assess the SE tax.

  5. SE tax must be computed/recomputed or evaluated (considered) when the following conditions apply:

    • There is U/R self-employment income

      Note:

      A fully U/R Interest and/or Dividend IR with a payee EIN is considered self-employment income.

    • There is reported self-employment income that is not included on Schedule SE, see Exhibit 4.19.3-22, Examples of Self Employment Income.

    • If self-employment income and/or SELF EMPLOYMENT TAX field on Income Comparison is asterisked

      Note:

      Unidentified income of $400 or more reported on line 21 is subject to SE tax. Send PARAGRAPH 39, see Exhibit 4.19.3-7, CP PARAGRAPHS.

      Note:

      If the amount reported on line 21 is identified as Gulf Oil Spill (GOS or GCCF) payments, DO NOT assess SE tax.

    • There is an increase to social security wages, Medicare wages, allocated tips, or tips from Form W-2

    • There is a change to Form 4137, line 10 (as filed or as adjusted during U/R processing)

    • There is a change to Form 8919, line 10 (as filed or adjusted during U/R processing).

    • There is a change to self-employment income using the Misc Adjust/Schedule C Expense window

  6. Be sure to follow Schedule SE line-by-line when computing or recomputing SE tax as certain limitations apply.

  7. When SE tax is computed or recomputed, input/verify the appropriate entries in the SE Tax window of the Case Analysis screen.

    Note:

    If the SE Tax window computes a $1 change, check the Form 1040, (see table below for line numbers) amount or the SE tax amount on the Tax Account screen (consider dollars and cents), then adjust the SE Tax window accordingly.

    TY 2013 TY 2014 TY 2015
    line 56 line 57 line 57
  8. The system computes the correct amount of SE tax for each TP.

  9. If there is U/R SE income or SE tax on the original return and the RETURN VALUE option is selected, the SE Tax window displays. The SE Tax window may also be selected from the menu.

    1. Incorrect entries in the SE Tax window cause unpostable conditions.

    2. The SE Tax window must be selected in the proper case analysis sequence as described in IRM 4.19.3.3.2 (3), Case Analysis Screen. If SE Tax window is selected out of order, a message displays describing the proper sequence.

    3. To allow the system to recompute the SE tax, the PRIMARY and/or SECONDARY SE TAX NOW field(s) must be blank.

    4. Negative amounts must be entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field(s) in the SE Tax window. This amount should include (but is not limited to) the totals from Schedule C, line 31 and Schedule F, line 34.

    5. Changes made to the PRIM/SEC SCH C EXPENSES in the MISC ADJUSTMENT/SCHEDULE C EXPENSE window displays on the SETAX window.

    6. Verify the TP has reported the correct amount of social security wages and tips and railroad retirement (Tier 1) compensation, on the Schedule SE, section B, Part 1, line 8a.

    7. Enter the verified line 8a amount plus U/R SS/RR wages in the PRIMARY/SECONDARY SS WAGES/TIPS/RR field.

    8. If Schedule SE is not present, enter the total REPORTED amount from self-employment income in the PRIM REPRTD SE INC NOT ON SE field and/or the SEC REPRTD SE INC NOT ON SE field. Do not enter negative amounts.

    Note:

    See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Self-Employment Tax, for information regarding optional method.

  10. Do not include in the PRIMARY/SECONDARY SS WAGES/TIPS/RR field any U/R SS/RR, allocated tips, any changes to Form 8919 or U/R tips on Form 4137, or SE income identified as being subject to FICA tax, the system adds these amounts automatically.

    Note:

    If the original SE tax from Schedule SE, Section A, line 5 or Section B, Part 1, line 12 is over $.50, round to the nearest dollar when entering the amount in the SE Tax window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Self-Employment Tax.

  11. The REASONABLE CAUSE field(s) only display when the Accuracy Penalty Due to Negligence applies.

  12. SE tax is not assessed for the following conditions.

    1. The payer name indicates that the PTK-1 income is from a limited partnership (e.g., Smith and Jones, LTD, LLC, LLP, LC, or LP).

      Exception:

      G-PAY income elements on a fully U/R PTK-1 from a limited partnership are subject to SE tax.

    2. Partially reported PTK-1 IR(s) that the TP did not treat as self-employment income.

    3. The payer name indicates that the TP works for his/her spouse, or is under age 18 and works for his/her parents.

    4. The TP writes "Exempt-Form 4361" or "Exempt -Form 4029" on Form 1040, (see table below for line numbers), or there is some indication that he/she is exempt from SE tax.

      TY 2013 TY 2014 TY 2015
      line 56 line 57 line 57

      Caution:

      If the TP claims Exempt Form 4361 or Form 4029 on an ELF return, the applicable indicator is checked on the TRDB screen.

      Note:

      Long Schedule SE, Section B, contains a box for TPs to check if they filed Form 4361, but they also had $400 or more of OTHER earnings subject to SE tax. If the box is checked, determine if SE tax should be computed.

    5. The TP writes "Exempt-Notary" on Form 1040,

      TY 2013 TY 2014 TY 2015
      line 56 line 57 line 57

      Caution:

      Only the income attributable to Notary Public is exempt from SE tax.

    6. The TP is a Statutory employee (Box 13 on Form W-2 is checked or IR indicates SEI).

    7. The TP is a motor vehicle sales person and is paid OTINC by an auto manufacturer.

    8. The TP is a member of a federally recognized tribe and received income from tribal per capita distributions or from Indian gaming proceeds. See IRM 4.19.3.7.6.1 (13), Nonemployee Compensation(NEC) - Analysis.

    9. The TP is a newspaper carrier or magazine seller under the age of 18.

    10. Scholarship/stipend or fellowship income.

    11. Non-compete income.

    12. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    To suppress the SE tax computation, the Income Identify Code for the U/R income should be blank. See Exhibit 4.19.3-9, Income Identify Codes.

  13. When Schedule C or Schedule C-EZ expenses are disallowed for a Non-Statutory Employee, do not adjust any SE tax claimed. To suppress a change to SE tax:

    1. Manually access the SE Tax window.

    2. Enter the SE tax per return in the PRIMARY and/or SECONDARY SE TAX NOW field(s).

  14. The TP no longer qualifies for the optional method if the TP originally computed SE tax using the farm or non-farm optional method, but because of AUR processing, now has:

    Tax Year New gross farm income greater than And new net farm profits equal to or greater than
    2013 $6,960 $5,024
    2014 $7,200 $5,198
    2015 $7,320 $5,284


    OR new net non-farm profits equal to or greater than the amounts listed in the table below or 72.189 percent of his/her farm income

    TY 2013 TY 2014 TY 2015
    $5,024 $5,198 $5,284
  15. Send applicable IR elements when the SE tax is adjusted.

  16. PARAGRAPH 17 automatically generates when SE tax is adjusted because of U/R self-employment income and/or reported income on which the TP should have paid SE tax but did not. See IRM 4.19.3-7, CP PARAGRAPHS.

  17. PARAGRAPH 18 automatically generates when SE tax is adjusted because there is an increase to social security wages or tips from Form W-2. See IRM 4.19.3-7, CP PARAGRAPHS.

  18. PARAGRAPH 29 automatically generates when SE tax is adjusted because the TP no longer qualifies for the optional method. See IRM 4.19.3-7, CP PARAGRAPHS.

  19. Taxpayers can claim the deductible part of SE tax on Form 1040, line 27. Whenever there is a change to SE tax, the system automatically recomputes the SE tax deduction. This deduction must be figured separately when a joint return is filed.

  20. When there is a change to SE tax, the TOTAL AGI CHANGE field on the Case Analysis screen will include the adjustment to the SE tax deduction.

4.19.3.14.2  (08-26-2016)
Social Security Tax on Tip Income Unreported to the Employer

  1. If the TP received tips of $20 or more in any month (working for one employer) but did not report all of them to his/her employer, social security tax must be figured on the tips not reported regardless of the category or the amount. This tax is computed on Form 4137, Social Security and Medicare Tax on Unreported Tip Income, and carried forward to Form 1040 (see table below for line numbers). The income may or may not be reported on the return.

    TY 2013 TY 2014 TY 2015
    line 57 line 58 line 58
  2. The SST on TIPS window displays upon selection of Return Value when Social Security tax on U/R income is present on the return.

  3. When the TP completes Form 4137, paying the TIP TAX, but does not report the Allocated Tips (ATIPS) on Form 1040, line 7, take the following action:

    1. Input a zero (0) in the PRIM/SEC A-TIP field(s).

    2. Input a zero (0) in the PRIM/SEC UNREPORTED SSTIPS field(s).

    3. See IRM 4.19.3.7.1.5 (5), Wages Miscellaneous, for further instructions.

  4. The system automatically computes the correct social security tax on unreported tip income based on the entries in the SST on TIPS window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Social Security Tax on Tips.

  5. The SST on TIPS 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 SST on TIPS window is selected out of order, a message displays describing the proper sequence.

  6. The REASONABLE CAUSE field(s) only displays when the Accuracy Related Penalty Due to Negligence applies.

  7. Send PARAGRAPH 68 when an increase in social security wages causes a change to Form 4137. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Close with PC 28.

4.19.3.14.3  (08-26-2016)
10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs

  1. The taxable portion of early distributions from qualified retirement plans may be subject to an additional tax equal to 10 percent.

    1. SIMPLE IRA - for early distributions from a SIMPLE IRA within the first two years, the additional tax is increased to 25 percent, (but is reduced to 10 percent for years thereafter).

    2. Roth distributions that are a return of conversion contributions or rollover contributions from a qualified retirement plan may be subject to the additional 10 percent tax on early distributions from qualified retirement plans if taken within the 5-year period (early distribution) and an exception does not apply. This is true even if the distribution is not considered taxable income.

  2. If an early withdrawal from a deferred annuity is otherwise subject to the 10 percent additional tax, a 5 percent rate may apply instead. A 5 percent premature distribution tax could apply to distributions under a written election providing a specific schedule for the distribution of the TP's interest in the contract if, as of March 1, 1986, the TP began receiving payments under the election. The TP will multiply the taxable portion of the eligible distribution by 5 percent (instead of 10 percent). The TP must attach an explanation to the tax return. If the distribution is identified as being only subject to a 5 percent additional tax, see (12) d) below for further instructions.

  3. Distributions issued before the TP reaches age 59 1/2 are subject to the additional 10 percent tax or additional 25 percent tax for SIMPLE IRAs unless the distribution is subject to certain exceptions to the additional tax.

  4. Qualified retirement plans include:

    • Section 401(k) plan

    • Section 403(a) annuity

    • Section 403(b) plan

    • Qualified employee retirement plans

    • Qualified annuity plans

    • Tax-sheltered annuity plans for employees of public schools or tax-exempt organizations

    • IRAs (traditional, Roth, or SIMPLE)

  5. The system computes the 10 percent tax on early distributions from qualified retirement plans (including IRAs) or the 25 percent tax on early distributions from SIMPLE IRA Plans when the TP's age is less than 59 and:

    • For the 10 percent tax on early distributions, the IND field on the Case Analysis screen has a Distribution Code of "J" , "L" , "1" , "5" or "7" (COD 7 must have PGR of "1" )

    • For the 25 percent tax on early distributions from SIMPLE IRA Plans, the IND field on the Case Analysis screen has a Distribution Code of "S"

      Note:

      When an IR contains both GR/A and TX/A amounts, the IR Code of the GR/A amount must be "X" (system assigned), "D" or "N" to ensure that the 10 percent or 25 percent tax is not assessed on the Gross Distribution amount.

  6. Suppress the system computed 10 percent tax on early distributions from qualified retirement plans (including IRAs), or 25 percent tax on early distributions from a SIMPLE IRA by:

    1. Selecting MODIFY IR from the menu, and

    2. Deleting the Distribution Code of "J" , "L" , "1" , "5" , "7" (COD 7 must have PGR 1) or "S" from the IND field and leaving it blank, or

    3. Input of Income Identify Code "RO" .

  7. DO NOT assert the 10 percent tax on an early distribution from qualified retirement plans (including IRAs), or the 25 percent tax on an early distribution from SIMPLE IRA Plans when there is an indication:

    Exception:

    If it can be clearly determined that the Form 5329 exception code or explanation is not consistent with the distribution type (example: There is a clear indication that the Form 1099-R distribution is an IRA distribution and the TP uses Form 5329 exception code 01 which is not applicable to an IRA.), pursue the premature distribution tax issue. Include a Special Paragraph explaining the reason for the disallowance.

    Note:

    For exceptions to the 10 percent additional tax on Qualified Education Program distributions (QTP, EARN, and CESA), see IRM 4.19.3.14.5, 10 Percent Tax on Qualified Education Program Payments.

    1. The TP is age 59 1/2 or older.

    2. The distribution was from a qualified retirement plan other than an IRA (e.g., ESOP, TRASOP, PAYSOP, Thrift Plan, Savings Plan, Incentive Plan) and was made to an employee who separated from service with his/her employer in or after the year in which he/she reached age 55 (age 50 for qualified Public Safety Officers) - Form 5329 Exception Code 01.

    3. The distribution is part of a series of substantially equal periodic payments over the owner's/TP's life (an annuity) - Form 5329 Exception Code 02.

    4. The distribution was due to total and permanent disability. The TP may indicate this by attaching a Schedule R to his/her return containing a Statement of Permanent and Total Disability, or there is an indication that a statement was filed previously - Form 5329 Exception Code 03.

    5. The distribution is a death benefit - Form 5329 Exception Code 04.

    6. The distribution was used to pay medical expenses in excess of the percentages shown in the table below of the AGI - Form 5329 Exception Code 05.

      TP or spouse age is TY 2013 TY 2014 TY 2015
      under 65 10 percent 10 percent 10 percent
      65 or older 7.5 percent 7.5 percent 7.5 percent
    7. The distribution was from a qualified retirement plan other than an IRA and was paid to an alternate person under a qualified domestic relations order (divorce decree) - Form 5329 Exception Code 06.

    8. The distribution from an IRA was used by certain unemployed TPs to pay health insurance premiums - Form 5329 Exception Code 07.

    9. The distribution from an IRA was used to pay for qualified higher education expenses - Form 5329 Exception Code 08.

    10. The distribution (up to $10,000 from each spouse's account) from a traditional, SIMPLE (must be held for more than two years) or Roth IRA was used to buy, build or rebuild a first home. - Form 5329 Exception Code 09.

    11. The distribution is due to an IRS levy of a qualified plan - Form 5329 Exception Code 10.

    12. The TP indicates that they are an active duty reservist. The Pension Protection Act of 2006 exempts active duty reservists from the premature distribution tax that normally applies to retirement distributions received before age 59 1/2 - Form 5329 Exception Code 11.

    13. There are several situations that can be listed as Form 5329 Exception Code 12, Other.

      Example:

      The TP separated from service as of March 1, 1986, and began receiving benefits from the qualified plan under a written election designing a specific schedule of benefits.

    14. The TP held the SIMPLE IRA for 2 years or more before taking the distribution. This applies only to the 25 percent tax.

  8. If Form 5329 is attached with Part I completed, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of the distribution(s) subject to the 10 percent or 25 percent tax on early distributions from IRAs, qualified retirement plans (including IRAs).

  9. Verify the amounts in the PREMATURE DISTRIBUTION TAX fields in the Total Other Tax window of the Return Value screen. If the amounts are incorrect, mark or modify the IR(s) on the Case Analysis screen, as needed, to allow the system to compute the correct additional tax. Due to TP rounding, the amount of premature distribution tax reported on the tax return may be $1 more than the AUR system calculation. To account for the $1 difference, create a 1099R IR for $10 TX/A with IND "1" and mark the IR with status code "R" . See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Creating Information Returns and Other Taxes for additional information.

    Caution:

    DO NOT change the amounts in the PREMATURE DISTRIBUTION TAX fields in the Total Other Tax window.

  10. Because the system only computes the 10 percent or 25 percent tax when ALL the conditions in (4) above apply, an IR may need to be created or modified.

  11. Create an IR if:

    1. The TP paid the 5 percent, 10 percent or 25 percent tax on a distribution for which there is no IR present on the Case Analysis screen.

    2. The Form 5329 or Form 1099-R are attached, use to determine the amount for the created IR.

    3. The TP has a Form 1099-R attached which is subject to the 5 percent, 10 percent or 25 percent tax, the TP did not pay the 5 percent, 10 percent or 25 percent tax on it, and there is no IR present on the Case Analysis screen.

  12. Modify an IR if:

    1. The conditions in (5) above apply but the IR is not subject to the 10 percent or 25 percent tax. See (7) above to determine when the 10 percent or 25 percent tax does not apply. Delete the Distribution Code in the IND field and leave it blank.

    2. The IR is subject to the 10 percent or 25 percent tax but the Distribution Code is not "J" , "L" , "1" , "5" , "7" (with PGR of 1) or "S" . Input the appropriate Distribution Code in the IND field.

    3. The IR was partially rolled over and only the taxable portion is subject to the 10 percent or 25 percent tax. Distribution Code "J" , "L" , "1" , "5" , "7" (with PGR of 1 for Distribution Code "7" ) or "S" should be used only for the portion which was not rolled over.

    4. A Form 1099-R distribution is identified as being only subject to a 5 percent premature distribution tax (as identified by the TP's explanation), change the Income Identify Code to "5P" . See (2) above for further information.

  13. To avoid the additional 25 percent tax on an early distribution from a SIMPLE IRA Plan, the distribution must be rolled over/transferred into another SIMPLE IRA Plan.

  14. PARAGRAPH 11 automatically generates when the additional 10 percent tax is assessed. See IRM 4.19.3-7, CP PARAGRAPHS.

  15. PARAGRAPH 194 automatically generates when the additional 25 percent tax is assessed. See IRM 4.19.3-7, CP PARAGRAPHS.

  16. Send reported 1099R IR elements when the additional 10 percent or 25 percent tax is adjusted.

4.19.3.14.4  (09-30-2014)
20 Percent Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions

  1. Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) distributions may be subject to an additional tax equal to 20 percent of the taxable portion of the distribution.

  2. The system computes the 20 percent additional tax on the distribution when:

    • The TP's age is less than 65, and

    • The DIST CD field on the Case Analysis screen has a Distribution Code of 1 or 5

  3. DO NOT assert the 20 percent additional tax if there is an indication:

    • The TP is age 65 or older

    • The TP attaches a Schedule R to his/her return containing a Statement of Permanent and Total Disability, or there is an indication that a statement was filed previously

    • The distributions were used to pay qualified medical expenses

    • The TP rolled over the distributions

    • The distribution was received after the death of the owner/TP

  4. Input the Income Identify Code "RO" to suppress the system computed 20 percent additional tax on distributions.

  5. If Form 8853 is attached with Part II completed correctly, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of distribution(s) subject to the 20 percent additional tax on MSA distributions. Do not pursue the 20 percent additional tax if the box on Form 8853, Part II line 9a is checked.

  6. If Form 8889 is attached with Part II completed correctly, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of distribution(s) subject to the 20 percent additional tax on HSA distributions. Do not pursue the 20 percent additional tax if the box on Form 8889, Part II line 17a is checked.

  7. Input/verify the amount in the ARCHER MSA/HSA field in the Other Taxes window of the Return Value screen.

  8. Because the system only computes the 20 percent additional tax when all the conditions in (2) above apply, an IR may need to be created or modified. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Modifying Information Returns, for additional information.

  9. If the conditions in (2) above apply but the IR is not subject to the 20 percent additional tax (see (3) above to determine when the 20 percent additional tax does not apply), input Income Identify Code "RO" to suppress the 20 percent additional tax.

  10. Create an IR if:

    1. The TP paid the 20 percent additional tax on a distribution for which there is no IR present on the Case Analysis screen. Use the Form 8853, Form 8889 or Form 1099-SA if attached, to determine the amount for the created IR.

    2. The TP has a Form 1099-SA attached which is subject to the 20 percent additional tax, the TP did not pay the 20 percent additional tax on it, and there is no IR present on the Case Analysis screen.

    3. The IR is subject to the 20 percent additional tax but the Distribution Code is not "1" or "5" . Input Distribution Code "1" in the DIST CD field.

    4. The IR was partially rolled over and only the taxable portion is subject to the 20 percent additional tax. Distribution Code 1 or 5 should be used only for the portion which is not rolled over.

    Reminder:

    Mark the 99-SA IR element(s) with Send Indicator "S" when adjusting the 20 percent additional tax.

  11. PARAGRAPH 196 automatically generates when the 20 percent additional tax on AMSA applies. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  12. PARAGRAPH 140 automatically generates when the 20 percent additional tax on HSA applies. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.14.5  (09-30-2014)
10 Percent Tax on Qualified Education Program Payments

  1. Taxable EARN is subject to a 10 percent additional tax on the amount included as income. Taxpayers report the distribution subject to the 10 percent tax on Form 5329, Part II, line 7.

  2. The system will compute the 10 percent additional tax and enter the amount in the RECOMPUTED PREMATURE DIST TAX (EDU) field in the Total Other Taxes window. Include any reported 10 percent additional tax from Form 5329, Part II, line 8, in the PER RETURN PREMATURE DIST TAX (EDU) field.

    1. It may be necessary to create or modify an IR to allow the system to compute the correct amount of additional tax.

    2. Mark the 1099Q IR element(s) with Send Indicator "S" when adjusting the 10 percent additional tax.

  3. If the EARN is reported and the TP should have paid the 10 percent additional tax but did not, include a Special Paragraph using the following verbiage as an example: "Most taxable earnings from qualified education programs are subject to an additional 10 percent tax. Please see Publication 970, Tax Benefits for Education, for more information."

  4. Do not charge the 10 percent additional tax if there is an indication that the QTP/CESA distribution was paid to a beneficiary (or the estate of the designated beneficiary) on or after the death of the designated beneficiary. Do not charge the 10 percent additional tax if there is an indication that the QTP/CESA distribution was made because the designated beneficiary:

    Note:

    When applicable, Income Identify Code "RO" must be entered to suppress the 10 percent additional tax.

    1. Is disabled.

    2. Received a qualified scholarship, Veterans educational assistance, Employer-provided educational assistance or any other nontaxable payments received for educational expenses.

    3. Included in income because of attendance at a U.S. military academy (such as West Point).

    4. Included in income only because the qualified education expenses were taken into account in determining the Lifetime Learning Credit.

    5. The CESA distribution was a return of excess contributions.

4.19.3.14.6  (09-04-2015)
Alternative Minimum Tax (AMT)

  1. Input/verify the entries in the Alt Min Tax (Form 6251) window. Taxpayers filing Form 1040A may pay Alternative Minimum Tax. If the TP paid AMT on Form 1040A, enter the amount from the return in the OTHER MISC TAX field in the Total Other Tax window. If the Alt Min window does not automatically display, manually access the window.

  2. Alternative Minimum Tax may also apply due to U/R income and displays the following message: "Alt Min Tax is included in the Total Tax for this case" . See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Alternative Minimum Tax (Form 6251).

  3. If the TP is under age 24, manually compute the Form 6251 and enter the result in the MANUAL ALT MIN TAX field. If the Manual Accuracy Penalty applies, see IRM 4.19.3.16.5, Accuracy-Related Penalty Due to Substantial Understatement of Tax, and IRM 4.19.3.16.6, Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Disregard Penalty).

    Note:

    It may be necessary to manually recompute related tax forms/schedules (e.g., Form 8615, Schedule D, etc.).

  4. Manually compute the Alternative Minimum Tax Reasonable Cause amount and enter the result in the MANUAL ALT MIN TAX: RSNBL CAUSE field. Enter the new line 33 amount in the GROSS TENTATIVE TAX: RSNBL CAUSE field.

  5. PARAGRAPH 76 automatically generates when there is a change to Form 6251. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.14.7  (09-04-2015)
Additional Taxes on Income from Nonqualified Deferred Compensation Plan (IRC Section 409A)

  1. Income received due to participation in a nonqualified deferred compensation plan that does not meet the requirements under IRC 409A is identified as "NQDC" in the INCOME TYPE field on Form W-2 and "409AI" in the Nonemployee Compensation field on Form 1099-MISC.

    Note:

    IRC 409A(a)(1)(B)(i) imposes additional taxes that consist of two parts: One part consists of 20 percent of the deferred compensation required to be included as income (the "NQDC" or "409AI" amount) and the other is an interest calculation based on when the underpayment would have occurred had the deferred compensation been includible in gross income for the tax year in which it was first deferred or, if later, is not subject to a substantial risk of forfeiture. The interest is an additional 1 percent above the current rate for that year. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ "≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. Enter status code "R" on the "NQDC" or "409AI" element(s).

  3. The system computes the additional tax based on the "NQDC" or "409AI" amount.

  4. Verify the amounts in the NON QUAL DEF COMP TAX fields in the Total Other Taxes window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Other Taxes.

  5. If the TP reports additional taxes identified as "NQDC" on Form 1040, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ It may be necessary to mark the "NQDC" or "409AI" IR(s) with status code "N" or "D" and update the OTHER MISCELLANEOUS TAXES PER RETURN (update with the new per return field information) and RECOMPUTED fields to show the amount the TP reported. DO NOT change the amounts in the NON QUAL DEF COMP TAX fields in the Total Other Taxes window.

  6. PARAGRAPH 174 automatically generates when the additional tax is assessed. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. Mark "NQDC" or "409AI" elements with Send Indicator "S" when the additional tax is being adjusted.

4.19.3.14.8  (08-26-2016)
Net Investment Income Tax (NIIT) - Form 8960

  1. The Health Care and Education Reconciliation Act of 2010 added a Net Investment Income Tax (NIIT) for tax years 2013 and subsequent. The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates, and trusts. In general, net investment income includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities (COD "D" ), and income from businesses in which the TP is not an active participant.

  2. Taxpayers file Form 8960, Net Investment Income Tax - Individual, Estates, and Trusts, to report the NIIT.

  3. The NIIT is computed/recomputed when the TP has investment income and their modified adjusted gross income (MAGI) exceeds the following:

    • $200,000 for single or head of household

    • $250,000 for married filing jointly or qualifying widow(er)

    • $125,000 for married filing separately

  4. If Form 8960 was filed with the return, input/verify the following entries in the Net Investment Tax window.

    • NET INVEST TAX PER RETURN - Form 8960, line 17

    • TOTAL INVEST INCOME PER RETURN- Form 8960, line 8

      Note:

      The AUR system populates the "Total Invest Income Per Return" field. When entering/verifying Form 8960, line 8, do not include net non-passive income (Schedule E Part II columns h, i, and j and Part III, columns e and f). If the TP includes non-passive income on Form 8960, line 8, follow the TP's intent.

      Note:

      Taxpayers may not correctly include their annuities from a nonqualified plan on Form 8960. If the TP reports a 1099R IR that contains a COD "D" but does not include the amount on Form 8960, line 3, ensure the amount is included in the TOTAL INVEST INCOME field of the Net Investment Tax window.

    • TOTAL DEDUCTIONS - Form 8960, line 11. Ensure this amount includes EWPEN claimed on Form 1040, line 30.
      Per return amounts should be manually adjusted when necessary, to exclude reported investment income on which the TP paid SE tax.

  5. If Form 8960 was not filed with the return, input/verify the following entries in the Net Investment Tax window:

    • NET INVEST TAX PER RETURN - amount from Form 1040, line 60 identified as from Form 8960

    • TOTAL INVEST INCOME PER RETURN - reported taxable interest, ordinary dividends, capital gains/loss from Form 1040, line 13, rent and royalty income/loss from Form 1040, line 17, non-qualified annuities (COD “D”), Form 4797, if the amount is not included on Schedule D, Schedule E, Part II, columns f and g and Schedule E Part III, columns c and d. DO NOT include reported investment income on which the TP paid SE tax.

    • TOTAL DEDUCTIONS - amount from Form 1040, line 30 (EWPEN)

  6. If a manual computation of the NIIT is required, enter the manually computed NIIT in the MANUAL NET INVEST INCOME TAX field (Form 8960, line 17).

  7. PARAGRAPH 173 automatically generates when there is a change to the NIIT.

4.19.3.14.9  (08-26-2016)
Additional Medicare Tax (AdMT)

  1. Additional Medicare Tax went into effect on January 1, 2013. For tax years 2013 and subsequent, TPs are subject to an additional 0.9 percent Medicare Tax when the total of an individual's Medicare wages, Railroad Retirement Tax Act compensation and self-employment income exceeds the following:

    • $250,000 for married TPs who file jointly

    • $125,000 for married TPs who file separately

    • $200,000 for TPs who file single, head of household, or qualifying widower

  2. Additional Medicare Tax is calculated by completing Form 8959, Additional Medicare Tax. The additional tax is computed using Form 8959 Parts I, II, III and IV and is reported on Form 1040:

    TY 2013 TY 2014 TY 2015
    line 60 line 62 line 62
  3. If the employer withheld too much Medicare Tax, the overpayment is claimed as a prepayment credit, see IRM 4.19.3.15.1.4, Additional Medicare Tax (Withholding Reconciliation), for additional information.

  4. Additional Medicare Tax needs to be computed/recomputed if Medicare wages, Railroad Retirement Tax Act compensation and self-employment income are U/R.

  5. The Additional Medicare Tax window automatically displays when there is a Form 8959 attached to the return or when no Form 8959 is present and the total of an individual's Medicare wages, Railroad Retirement Tax Act compensation and self-employment income exceeds the amounts (1) above.

    Note:

    If the Additional Medicare Tax window does not automatically display, manually access the window when either of the conditions in (5) are present.

  6. Create an IR(s) for the AdMT calculation when:

    1. There is a Form W-2 attached, for which there is no IR. Create all elements (income types and EIN field) of the Form W-2.

    2. There is an amount(s) on a paper Form W-2 in Box 12, coded "B" for Uncollected Medicare tax on tips, or coded "N" for Uncollected Medicare tax on the taxable cost of group-term life insurance over $50,000. Include the EIN field and the MCTXW element for the coded amount(s) from Form W-2, Box 12 in the created IR.

    3. The taxpayer includes an ELF payer document for which there is no IR, create an IR if necessary. Include all elements on the ELF payer document(s), except W/H, MCTXW and amounts from the ELF Form W-2 in Box 12, coded "B" for Uncollected Medicare tax on tips, or coded "N" for Uncollected Medicare tax on the taxable cost of group-term life insurance over $50,000. Do not give credit or allow additional credit for MCTXW on an ELF payer document for which there is no IR.

    Reminder:

    Entry in the EIN field is required to calculate AdMT correctly.

  7. If an ELF payer document reflects more MCWGE than the IR, create a MCWGE IR for the difference, (i.e., the IR shows MCWGE of $29,000 and the ELF payer document reflects $32,000 a MCWGE should be created for $3,000). Input status code "R" to allow the system to accurately compute the AdMT.

  8. Input/verify the following entries on the Additional Medicare Tax window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Additional Medicare Tax window. Ensure the TP's intent is followed when AdMT is computed/recomputed as to rounding, dropping cents, or using dollars and cents. Always verify that the system computes the correct excess AdMT in accordance with the TP's intent.

    • MEDICARE WAGES AND TIPS - Form 8959, line 1

      Caution:

      If the TP includes amounts from Form W-2, Box 12 on Form 8959, line 19, see (6) above.

    • UNREPORTED TIPS FORM 4137 - Form 4137, line 6

    • WAGES FROM 8919 - Form 8919, line 6

    • RRTA COMPENSATION & TIPS - Form 8959, line 14 plus any amounts from Form W-2, Box 14 identified as RRTA

      Note:

      The system populates the SELF-EMPLOYMENT INCOME field.

  9. Although Additional Medicare Tax is figured separately for each type of income, the threshold amount for self-employment income in Part II is reduced by the total wages in Part I (but not below zero), which results in the total wage and self-employment income being subject to the 0.9 percent AdMT. However, the threshold for railroad retirement compensation is not reduced by other income, which can result in total earnings that are over the threshold but not subject to the 0.9 percent tax.

  10. If the AdMT window computes a $1 change (following taxpayer’s intent), create a MCWGE IR so the total MCWGE IR amounts match the Medicare Wage amount on Form 8959, line 1.

  11. PARAGRAPH 172 automatically generates when there is a change to Additional Medicare Tax. See IRM 4.19.3-7, CP PARAGRAPHS.

  12. When the change to Additional Medicare Tax is due to an incorrectly completed Form 8959 take the following action:

    If TY Then
    2013 Send a Special Paragraph using the following verbiage as an example: "We adjusted the amount you claimed as Additional Medicare Tax withheld on Form 1040, line 60, because it appears you incorrectly completed Form 8959, Additional Medicare Tax."
    2014 and 2015 Send PARAGRAPH 143.

4.19.3.14.10  (08-26-2016)
Excess Advance Premium Tax Credit (EAPTC)

  1. Beginning in TY 2014, Health Insurance Marketplaces report advance payments of the Premium Tax Credit (APTC) to the IRS on Form 1095-A, Health Insurance Marketplace Statement. For TY 2014 these documents are not available to be brought into the AUR system.

  2. Eligible TPs can choose to receive the benefit of APTC, which helps to cover the cost of insurance premiums. TPs who receive the benefit of APTC must reconcile the APTC paid on their behalf with the amount of the premium tax credit (PTC) they are allowed. The computation of the PTC and the reconciliation of PTC and APTC are done using Form 8962, Premium Tax Credit (PTC).

  3. TPs whose PTC exceeds their APTC have a net premium tax credit. Net premium tax credit reduces a TP’s tax liability and, if more than the tax liability, results in a refundable credit. Refer to IRM 4.19.3.15.6, Net Premium Tax Credit (PTC) (TY 2014 and Subsequent), for additional information.

  4. TPs whose APTC is more than their PTC have excess APTC (EAPTC). TPs report EAPTC on Form 1040, line 46, Form 1040A, line 29, or Form 1040NR, line 44.

  5. PARAGRAPH 153 automatically generates when EAPTC repayment is adjusted due to a change to modified adjusted gross income. Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.14.11  (09-04-2015)
Health Care - Individual Shared Responsibility Payments (SRP)

  1. Based on the Affordable Care Act of 2010 (ACA) individuals must either

    • Have minimum essential health coverage for each month beginning after December 31, 2013, or

    • Qualify for an exemption, or

    • Beginning in TY 2014, make a shared responsibility payment (SRP) when filing their federal income tax return

  2. The SRP does not apply to an individual for a month, if that month falls within the first coverage gap during the year of less than three consecutive months, or if another coverage exemption applies.

  3. Individuals may qualify for an exemption from making the shared responsibility payment even if they do not have minimum essential coverage for a given month.

  4. Taxpayers will either:

    • Indicate coverage by checking the full-year coverage check box (the dotted line of Form 1040, line 61, Form 1040A, line 38, or Form 1040EZ, line 11), or

    • Indicate they qualify for an exemption by attaching Form 8965, Health Coverage Exemptions, or

    • Make a Shared Responsibility Payment.

  5. When the taxpayer reports they had a full year of coverage and checked the box on their return or if it is added from an amended return, IDRS CC TXMOD will display "1" for full year coverage in the COVERAGE-IND field. If this is later changed or adjusted, a TC 290.00 with item Reference Number 869 may be present.

  6. The SRP amount is reported on Form 1040, line 61, Form 1040A, line 38, or Form 1040EZ , line 11, and is posted to MFT 35 as a TC 240 with penalty reference number (PRN) 692.

    Note:

    A TC 971 AC 530 will post to MFT 30 with the SRP amount in the memo field. This amount is not included in the TC 150 amount shown on MFT 30.

  7. For TY 2014 AUR will not address SRP changes. If the TP response indicates that a change to SRP is needed/required, work the AUR issue and transfer the case to the lead.

4.19.3.14.12  (08-26-2016)
Miscellaneous Other Taxes

  1. The Total Other Taxes window is used to capture the following additional taxes:

    1. Lump Sum Distribution Tax from Form 4972.

    2. Premature Distribution Taxes (IRAs, MSAs, HSAs, etc.). See IRM 4.19.3.14.3, 10 Percent Tax on Early Distributions from Qualified Retirement Plans/25 Percent Tax on Early Distributions from SIMPLE IRAs, for premature distribution taxes from Qualified Retirement Plans. See IRM 4.19.3.14.4, 20 Percent Tax on Archer Medical Savings Account (AMSA) and Health Savings Account (HSA) Distributions, for additional taxes from Archer Medical Savings Accounts or Health Savings Accounts.

    3. Additional taxes on income received due to participation in a nonqualified deferred compensation plan that does not meet the requirements under IRC 409A. See IRM 4.19.3.14.7, Additional Taxes on Income from Nonqualified Deferred Compensation Plan (IRC Section 409A), for additional information.

    4. Excess Contributions Taxes (Form 5329, Parts III through VIII).

    5. Household Employment Tax.

    6. Net Investment Income Tax (NIIT) applies to tax years 2013 and subsequent. See IRM 4.19.3.14.8, Net Investment Income Tax (NIIT) for additional information.

    7. Additional Medicare Tax applies to tax years 2013 and subsequent. See IRM 4.19.3.14.9, Additional Medicare Tax (AdMT) for additional information.

    8. Other Miscellaneous Taxes.

  2. Additional Tax from Lump Sum Distributions (Form 4972) included on Form 1040, line 44:

    1. If the amount of additional tax reported on the return remains the same: input/verify the amount in the ADDITIONAL TAX PER RETURN field.

    2. Enter the per return amount in the ADDITIONAL TAX RECOMPUTED field.

    3. If there is an amount of additional Form 4972 tax reported on the return, the Lump Sum Tax window in Case Analysis must be computed. See IRM 4.19.3.7.10.8, Lump-Sum Distributions, and IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Lump Sum Tax.

    4. After computing the Lump Sum Tax window: input/verify the amount in the ADDITIONAL TAX PER RETURN field of the Total Other Tax window.

    5. Delete the amount in the ADDITIONAL TAX RECOMPUTED field (Do not input zero (0); leave field blank). When the Total Other Tax is computed, the NEW recomputed additional tax displays in the ADDITIONAL TAX RECOMPUTED field. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Other Taxes.

  3. Excess Contributions/Accumulation Tax (Form 5329, Parts III - VIII) - Input/verify the sum of Form 5329, Part III, line 17; Part IV, line 25; Part V, line 33; Part VI, line 41; Part VII, line 49 and Part VIII, line 53 included on Form 1040,

    TY 2013 TY 2014 TY 2015
    line 58 line 59 line 59

    Note:

    These additional taxes on excess contributions are posted to the MFT 29 account and correspond to the TC 896 with the literal "OFF to IRA" shown on the Tax Account screen. During case analysis phase, ensure that the PER RETURN and RECOMPUTED fields reflect the same amount. See (6) below if a change to the RECOMPUTED field is needed.

  4. Input/verify the amount of the tax listed in the table below reported on Form 1040,

    Other Tax TY 2013 TY 2014 TY 2015
    Household Employment Tax (Schedule H) line 59a line 60a line 60a
    First Time Home Buyer Credit Repayment (Form 5405 line 59b line 60b line 60b
  5. Other Miscellaneous Taxes - Use these fields to capture any additional taxes included in the Form 1040, the dotted portion of the line shown in the table below, not already accounted for with its own field in the Total Other Taxes window. Examples of additional taxes not accounted for with its own field include:

    TY 2013 TY 2014 TY 2015
    line 60 line 62 line 62
    1. Additional tax from Qualified Tuition Plans and/or Coverdell ESAs.

    2. Additional tax on Medicare Advantage MSA distributions.

    3. Recapture of certain credits.

    4. Recapture of federal mortgage subsidy.

    5. Section 72(m)(5) excess benefits tax.

    6. Uncollected Social Security and Medicare or RRT tax on tips (UT) or group-term life insurance.

      Note:

      This tax may impact the determination of excess SSTAX. See IRM 4.19.3.15.2, Social Security Tax/Tier I Railroad Retirement Tax, for further information.

    7. Golden Parachute Payments.

    8. Tax on accumulation distribution of trusts.

    9. Excise tax on insider stock compensation from an expatriated corporation.

    10. Additional Tax from Form 8889, Health Savings Account, Part III.

  6. Input/verify the PER RETURN and RECOMPUTED amounts in the appropriate fields. It may be necessary to enter an amount in the RECOMPUTED field that differs from the PER RETURN amount. This may be due to:

    • An original processing error,

    • A TP error that is discovered during Analysis, and/or

    • The TP provides information during response phase that changes the tax.

      Caution:

      For TY 2014 and subsequent, changes were made in the Total Other Taxes window to add PER RETURN fields for SIMPLE, ARCHER MSA, HSA, 5%, and NQDC. The AUR system is unable to determine what type of miscellaneous tax was reported, in order to correctly display amounts in the appropriate PER RETURN and/or RECOMPUTED fields for SIMPLE, ARCHER MSA, HSA, 5%, and/or NQDC. If an amount was reported for any of these taxes, delete that amount from the OTHER MISCELLANEOUS TAXES C field and move it to the appropriate PER RETURN and/or RECOMPUTED field(s).

    Note:

    If, based on the TP’s response, an adjustment to excess contributions tax (Form 5329 Part III through VIII) is needed, manually adjust the TP’s MFT 29 account through IDRS. See IRM 21.6.5.4.11.9, Internal Individual Retirement Account File (IRAF), for further instructions on adjusting IRAF accounts.

  7. If the system computes a negative amount for Total Other Taxes, an error message displays: "Computation resulted in a negative amount for Total Other Taxes. Return to Case Analysis and rework the case." Take the following action to correct the case:

    1. Verify the amounts in the Total Other Taxes window.

    2. Verify the IR(s) that are subject to the 5 percent, 10 percent, 15 percent, 20 percent 25 percent or 50 percent premature distribution tax have been correctly screened.

    3. See IRM 4.19.3.14.3 (8), 10 Percent Tax on Early Distributions from Qualified Retirement Plans or 25 Percent Tax on Early Distributions from SIMPLE IRAs, and/or IRM 4.19.3.7.28.1, HSA, AMSA and MAMSA Distributions - Analysis, for further instructions.

4.19.3.15  (08-26-2016)
Changes to Payments

  1. Payments are refundable credits that are applied against the tax liability and are reported by the TP on Form 1040, Form 1040A, or Form 1040EZ, see table below for line numbers.

    Form TY 2013 TY 2014 TY 2015
    1040 lines 62 through 71 lines 64 through 73 lines 64 through 73
    1040A lines 36 through 40 lines 40 through 45 lines 40 through 45
    1040EZ lines 7 through 8a lines 7 through 8a lines 7 through 8a
  2. Payments which may require adjusting in AUR processing are:

    1. Federal Income Tax withheld - commonly referred to as Withholding (W/H). This amount is withheld from a TP's wages, pensions and annuities, gambling winnings, etc., and is deposited with IRS by the payer to ensure payment of the TP's income tax liability.

    2. Excess Social Security Tax or Tier 1 Railroad Retirement Tax withheld (SSTAX) - These taxes are withheld from a TP's wages and are deposited directly by the employer. The TP may, if certain conditions are met, claim a credit for amounts withheld in excess of the amounts listed in the table below.

      TY 2013 TY 2014 TY 2015
      $7,049.40 $7,254 $7,347
    3. Additional Medicare Tax withheld (Form 8959) - This amount may be claimed if the employer withheld too much Medicare Tax.

    4. Earned income credit (EIC) - there are specific conditions that must be met to qualify. Depending on the number of children and if specified conditions are met, the TP may claim up to a maximum of the amounts listed in the table below.

      Number of children TY 2013 TY 2014 TY 2015
      3 or more $6,044 $6,143 $6,242
      2 $5,372 $5,460 $5,548
      1 $3,250 $3,305 $3,359
      0 $487 $496 $503
    5. Additional Child Tax Credit (Schedule 8812) - the TP may be able to claim this credit if he/she has qualifying children and certain conditions are met.

    6. American Opportunity Credit (Form 8863) - the credit is claimed when the TP has qualified education expenses.

4.19.3.15.1  (08-26-2016)
Withholding - General

  1. Withholding may be reported by payers on Form W-2 and Form 1099 series and appear on these IRs with the literal "W/H" in the INCOME TYPE field.

  2. W/H appears as TC 806 on the Tax Account screen.

    Caution:

    Changes to W/H can also post as TC 807, TC 802 and as TC 290 with RC 051. If the change to W/H posts as TC 290 with RC 051 send a Special Paragraph using the following verbiage as an example "The other taxes as shown on this notice include the previous change made to your federal income tax withheld."

  3. Taxpayers claim W/H payments on:

    Form TY 2013 TY 2014 TY 2015
    1040 line 62 line 64 line 64
    1040A line 36 line 40 line 40
    1040EZ line 7 line 7 line 7

    Caution:

    For tax years 2013 and subsequent Additional Medicare Tax as computed on Form 8959 may be included with the W/H amount on Form 1040.

  4. 99INT, 99DIV or 1099B IRs may reflect W/H. If there is an indication that the amount is jointly owned with someone other than the TP's spouse or the filing status is "3" :

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

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

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

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

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

      Note:

      Use the IR as the most accurate information even if the case does not meet referral criteria or if the referral is returned.

    2. An amended indicator is displayed in the AMD IND field on the Case Analysis screen. Consider an amended IR the most accurate information.

  6. For ELF returns, the income amounts on ELF payer documents displayed in the TRDB window are considered more accurate than the IR when:

    1. The TP includes an ELF payer document for which there is no IR. Create an IR if necessary.

      Exception:

      Do not give credit for W/H claimed on an ELF payer document for which there is no IR.

    2. The ELF payer document shows more income than the IR. Assume the TP is reporting correctly per an amended document. All elements on the ELF payer document(s), excluding W/H, are considered more accurate than the IR elements.

      Exception:

      Do not allow additional credit for W/H claimed on an ELF payer document that is more than the IR.

  7. For ELF returns, consider the IR more accurate than the ELF payer document when the income amount on the ELF payer document is equal to or less than the IR. All elements of the IR, including W/H, are considered more accurate than the ELF payer document elements.

  8. When there is a system identified W/H discrepancy, math verify W/H from all Form W-2 and Form 1099 documents attached to the return, making sure that each information document is used only once.

    Caution:

    Be alert for erroneous refunds. See IRM 4.19.3.4.11.1 (6), Recovering Erroneous Refunds, for additional information.

  9. If the total W/H discrepancy is less than $1, drop the W/H issue. This instruction applies even if there are other unresolved issues that will result in either ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ when math verifying (e.g., determine whether he/she has rounded, dropped cents, or used dollars and cents).

4.19.3.15.1.1  (08-26-2016)
Withholding - Analysis

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ unless:

    1. Another IR from the same payer is present showing income, or

    2. The W/H amount in question is shown on an information document attached to the return.

  2. Do not allow any W/H changes that result from the TP not claiming W/H from a Conduit (SBK-1, TRK-1 or PTK-1) IRs. See IRM 4.19.3.7.12.1 (6), Conduit Income - Analysis, for further information. If, after accessing the Withholding window, the system is allowing additional underclaimed W/H from ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , take the following action:

    1. Ungroup the W/H.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ " ≡ ≡ "≡ ≡ " ≡

    3. Access the Withholding window.

  3. If the TP excludes wages per Notice 2014 - 7 but claims the W/H on the IR allow the W/H. See IRM 4.19.3.7.1.1(2) c, Wages - Analysis, for additional information.

  4. Schedules K-1 may contain BWH. If the TP attaches a Form 1041 - Schedule K-1 showing BWH identified on line 13 with a code "B" or a Form 1065 - Schedule K-1 and an amount on line 15 with a code "O" OR a Form 1120S - Schedule K-1 and an amount on line 13 with code "O" consider the Schedule K-1 as documentation to support the additional W/H amount claimed on the return.

  5. If the TP attaches Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of US Real Property Interests, and/or Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, ensure that the system accounts for any federal income tax withheld from these sources, when determining any overall changes to W/H.

  6. 1042S IRs are systemically marked with status code "X" . If, after going through the W/H window, any O/C W/H matches the W/H element(s) from Form 1042-S (within tolerance) remove the status code "X" from the corresponding W/H element(s) and re-access the W/H window.

    Note:

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

  7. When the TP is claiming additional W/H and/or excess FICA and attaching a Stock Option Transaction statement to support the additional amount(s) claimed, take the following action:

    1. The W/H and/or FICA shown on these documents are already included in the Form W-2 and cannot be claimed again.

    2. DO NOT accept any Stock Option Transaction Statements as documentation to account for the W/H and/or excess FICA discrepancy.

    3. When disallowing the additional amounts claimed, send a Special Paragraph using the following verbiage as an example: "The federal withholding and/or social security tax withheld shown on your stock option statement(s) has already been included in the federal withholding and/or social security tax withheld on your Form W-2. We have disallowed the additional amount(s) claimed."

  8. If the W/H amounts exceeds 50 percent of the income shown on the same IR or the related income on another IR, complete the Form 13549, Campus Fraud Lead Sheet, to be forwarded to the Campus Fraud Coordinator (CFC) to determine the validity of the payer information.

  9. If there are no IRs with W/H, wages are U/R, and there is a TC 806/807 present on the Tax Account screen, the Withholding window must be completed. Create an IR for zero (0) to access the Withholding window.

  10. Ensure that the TP's intent is followed when W/H is computed as to rounding, dropped cents, used dollars and cents, etc. Always verify that the system has computed the correct W/H in accordance with the TP's intent.

    Example:

    The system shows U/C W/H amount as $997, due to rounding, and the IR amount is $1,000. Add the $1,000 to the W/H per return and enter the sum in the VERIFIED WITHHOLDING field.

  11. The net change to W/H is computed by the system and is displayed in the W/H SST ADJ field on the Case Analysis screen.

    Note:

    The Withholding window must be accessed when an IR with U/R income reflects W/H or the conditions in (4) through (6) above exist.

    1. Select the Withholding window.

    2. Input/verify the appropriate entries on the Withholding window.

  12. If the system does not compute W/H correctly:

    Caution:

    If O/C W/H was adjusted using a TC 290 RC 051, the system cannot calculate the W/H change correctly.

    1. Enter a "Y" in the W/H VERIFIED INDICATOR field.

    2. Enter the total amount of W/H to allow in the VERIFIED WITHHOLDING field.

      Note:

      If there should be no change to W/H, the WITHHOLDING PER RETURN and VERIFIED WITHHOLDING fields must be the same. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Withholding.

  13. If W/H per return differs from W/H on the Tax Account screen and there are equal numbers of IRs on the Case Analysis screen and information documents attached to the return, and the payers and the income type are the same, use the W/H window to determine the change. Reasons contributing to this condition are:

    1. A math error, transposition of figures, illegible information document(s), displaced decimal point, and/or transcription error, etc.

    2. The TP may have claimed an amount from the Social Security Tax Withheld box of the information documents instead of the Federal Income Tax Withheld box on Form W-2.

    3. The TP may have claimed an amount from the Form 8959, line 24.

    4. The payer(s) may have been identified as having submitted erroneous information and are included in Payer Agent data.

    5. The TP may have received a corrected information document that is not identified as amended on the Case Analysis screen.

  14. Pursue O/C W/H not supported by IR(s) as shown on the Case Analysis screen, even if the TP is reporting additional income for which there is no IR.

    1. On paper filed returns, allow additional W/H as shown on unaltered payer documents attached to the tax return. If necessary, create an IR. See IRM 4.19.3.15.1 (5), Withholding - General and/or IRM 4.19.3.4.8.1, Identifying and Developing Fraud in AUR, if the attached documents appear to be altered or fraudulent.

    2. If the W/H equals or exceeds 50 percent of the O/R income, see (7) above.

  15. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Therefore, there are instances when information documents attached to the return do not appear as IRs on the Case Analysis screen.

    1. If income and/or W/H shown on the information documents attached to the return is not reported, pursue the issue(s).

    2. Send PARAGRAPH 139, see IRM 4.19.3-7, CP PARAGRAPHS.

  16. Do not adjust W/H when the TP claims it correctly, but indicates on the return that the income is not reported because it was not received until the subsequent year. W/H is deductible when reported to IRS by the payer, while income is taxable when received by the TP.

4.19.3.15.1.2  (08-26-2016)
Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous

  1. If the system computes a tax change above tolerance and W/H and/or SSTAX is an issue, a notice MUST BE issued.

  2. If W/H is the only issue and the W/H change is confirmed and appropriate, an adjustment should be made without issuing a notice. W/H changes due to the following conditions are considered confirmed and appropriate:

    Caution:

    If the system computes a tax change ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See (4) below for further instructions.

    1. Form(s) W-2, and/or 1099, attached to the tax return, verify the correct W/H amounts.

      Exception:

      Form SSA-1099 instructs the TP not to submit the form to IRS. Consider U/C W/H confirmed and appropriate if it matches the SSA IR and the TP has correctly reported the gross benefit amount on Form 1040, line 20a (Form 1040A, line 14a).

    2. Based on attached documents, the TP claimed an amount from the wrong box.

    3. Based on attached statements, the TP clearly made a math error in determining the total amount of allowable W/H.

    4. Overclaimed W/H is due to the TC 806 amount equaling the amount of Estimated Payments (TC 660) shown on the Tax Account screen and the TP reported the ES payment amount on the line designated for W/H.

      Note:

      If the discrepancy is due to IRS Data Transcription error, see IRM 4.19.3.4.11, Erroneous Refunds, for further information.

    5. W/H was disallowed during Original Processing because Form(s) W-2 and/or 1099 were not attached to the return AND the W/H on the IRs matches ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ the amount previously disallowed.

    Note:

    W/H on ELF returns is not considered confirmed and appropriate. Issue appropriate Notice.

  3. If the change to W/H is not confirmed and appropriate, as a general rule, issue:

    1. A CP 2501 (PC 30) for cases with questionable U/C W/H and an overall refund.

    2. A CP 2000 (PC 55) for any other situation.

  4. In order to adjust excess SSTAX, MCTXW, or confirmed and appropriate changes to W/H, without issuing a notice (i.e., PC 20) take the following actions:

    Note:

    W/H on ELF returns is not considered confirmed and appropriate. Issue appropriate Notice.

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

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

    3. Complete and commit Return Value screen. The system will prompt the user that a PC 20 may be used to close the case.

    4. Input the appropriate entries on the Assessment window (steps 5-14). See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Assessments - Case Analysis/Responses.

      Note:

      Any adjustments to penalties (ex: Failure to File (FTF), Failure to Pay (FTP), etc.) would not be subject to deficiency procedures since adjustments to W/H, excess SSTAX and/or MCTXW are not included on the Statutory Notice.

    5. Blocking Series 5X.

    6. Leave the IRS RECD DATE field blank.

      Note:

      Do not enter a CREDIT INTEREST DATE on W/H, SSTAX and/or MCTXW adjustments with a TC 290-.00 (zero). Delete if present.

    7. TC 290-.00.

    8. Source Code "2" .

    9. Reason Code "051" for W/H or "055" for excess SSTAX. Reason Code "136" for Additional Medicare Tax from Form 8959.

    10. Priority Code "3" must be input when making refund adjustments.

    11. Reference Code 806 (amount) for U/C W/H or MCTXW Reference Code 807 (amount) for O/C W/H or MCTXW.

    12. CRN 252 as a positive money amount for U/C excess SSTAX or a negative money amount for O/C SSTAX.

    13. Source document attached "Y" . If it is an ELF return and the only issue is excess SSTAX enter a "N" .

    14. Enter three characters or more in the REMARKS field.

    15. Commit the Assessment window after all fields are verified as correct.

    16. After committing and exiting the Assessment window, issue a Letter 2893C (using dollars only) including appropriate paragraphs to inform the TP of the adjustment.

    17. Close the case using PC 20.

    Reminder:

    If a subsequent review of the case determines that a notice should be issued (i.e., the PC 20 action was incorrect), the user MUST manually delete the Letter 2893C.

  5. If the TP partially reports income and/or W/H (i.e., based on attached payer documents), send PARAGRAPH 139. However, if the IR is fully U/R for both income and W/H, PARAGRAPH 139 is not needed. See IRM 4.19.3-7, CP PARAGRAPHS.

  6. When it appears the TP claimed a W/H amount from the wrong box on Form W-2, send PARAGRAPH 106. See IRM 4.19.3-7, CP PARAGRAPHS.

  7. PARAGRAPH 43 automatically generates when the net result of changes to W/H, excess SSTAX, MCTXW, EIC and Additional Child Tax Credit is a NEGATIVE amount. See IRM 4.19.3-7, CP PARAGRAPHS.

  8. PARAGRAPH 28 automatically generates when allowing additional U/C W/H. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. PARAGRAPH 27 automatically generates when disallowing O/C W/H. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. If W/H from Social Security benefits is an issue and there is an indication that the TP is a resident alien, see IRM 4.19.3.7.33, Resident/Non-Resident Aliens (R/NR)/(DualStatus), for additional instructions.

4.19.3.15.1.3  (02-11-2014)
Withholding and ITIN Filers

  1. A TP not eligible for an SSN must use an individual TP identification number (ITIN) when filing his/her return. The TP provides an SSN to the employer in order to obtain employment. Thus, the employer withholds income tax on the TP's wages under the SSN the TP provided, and any Form W-2 (and possibly Form 1099) filed with the IRS will contain the SSN.

    Note:

    These cases should NOT be sent to either the IDTVA (the SSN should have been updated with a TC 971 AC 525 during processing) or Fraud, as the Internal Revenue Code recognizes these as legal tax returns.

    1. When the TP files his/her return and claims the credit for income tax withheld, the TP will need to demonstrate he/she truly earned wages for which the W/H is being claimed before the IRS can allow the credit, see (2) below for what documentation to accept.

    2. When the name on the return doesn't match the name on the W-2, allow the W-2 if the wages can be verified. If the wages cannot be verified, continue normal processing.

    3. When the W-2 or other information return does not contain an SSN; such as all zero’s or "applied for" is reflected, allow the W/H if the name on the return matches the name on the Form W-2 and the wage income is reported.

    4. When the TP used an SSN that is invalid and the W/H for the TP has been reported under the invalid SSN, research IDRS CC IRPTR, both validation codes 1 and 2, and IDRS CC IRPTRI (use TIN type 4 and Doc code 21) to determine if the wages and W/H are reported. If you are able to verify the wages and W/H has been reported, allow the W/H. If the wages and W/H cannot be verified, continue normal processing.

      Note:

      IDRS CC IRPTRI allows you to query a case by payer TIN (EIN) and displays all the information returns the payer filed. Currently IRPTRI displays Form W-2, Form 1099-R and Form 1099-MISC.

  2. The TP can document the W/H by providing the following:

    • Form W-2, Wage and Tax Statement, or

    • Form W-2 G, Certain Gambling Winnings, or

    • Form 1099-R, Distribution from Pensions, Annuities, Retirement, or Profit Sharing Plans, IRAs, Insurance Contracts, etc, or

    • Similar documentation (i.e., year ending pay stub)

  3. If the W/H amount appears to be altered, see IRM 4.19.3.4.8.1, Identifying and Developing Fraud in AUR.

  4. Examine all documents and related information before making adjustments or answering TP inquiries.

  5. If allowing the W/H on the ITIN holders return, prepare Form 9409, IRS/SSA Wage Worksheet, (for the SSN) to remove the information from the true SSN owners account. See IRM 4.19.3.20.7.4 (5), Referrals to prepare a Form 9409.

4.19.3.15.1.4  (08-26-2016)
Additional Medicare Tax (Withholding Reconciliation)

  1. Additional Medicare Tax of 0.9 percent went into effect on January 1, 2013. Employers are required to begin withholding Additional Medicare Tax in the pay period in which wages or compensation for the year exceeded $200,000.

  2. Medicare Tax is reported by payers on Form W-2 and appears with the literal "MCTXW" in the INCOME TYPE field on the IR. Income Identify Code "MT" displays on the Case Analysis screen for Medicare Tax amounts.

  3. If the employer withheld too much Medicare Tax the TP may claim the overpayment by completing Form 8959, Part V and including the amount with the W/H amount on Form 1040, see table below for line numbers.

    TY 2013 TY 2014 TY 2015
    line 62 line 64 line 64
  4. Additional Medicare Tax withheld needs to be computed when MCTXW is a discrepant item. The net change to excess MCTXW is computed by the system and is displayed in the W/H SST ADJ field of the Case Analysis screen.

    Caution:

    Do not use status code "N" or "D" in the SSWAG, MCWGE or SSTIP literal when screening valid Wage IRs. Use of status code "N" or "D" may result in an incorrect Additional Medicare Tax withheld calculation.

  5. Create an IR(s) for all elements (income types and EIN field) when there is MCTXW on an attached Form W-2 but there is no IR present.

    1. Entry in the EIN field is required to calculate the Additional Medicare Tax Withheld window correctly.

    2. If the taxpayer includes an ELF payer document for which there is no IR, create an IR if necessary. All elements on the ELF payer document(s), excluding W/H and MCTXW, are considered more accurate than the IR elements. Do not give credit for, or allow additional credit for, MCTXW on an ELF payer document for which there is no IR.

  6. Enter a status code of "U" on the MCTXW element. The Additional Medicare Tax Withheld window displays.

  7. Input/verify the following entries in the Additional Medicare Tax Withheld window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Additional Medicare Tax Withheld window.

    • MEDICARE TAX WITHHELD WAGES - Form 8959, line 19

    • MEDICARE TAX WITHHELD RRTA - Form 8959, line 23

    • MEDICARE TAX WITHHELD PER RETURN - Form 8959, line 24

  8. During the screening phase,≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡

  9. Ensure that the TP's intent is followed when Additional Medicare Tax withheld is computed/recomputed as to rounding, dropping cents, or using dollars and cents. Always verify that the system computes the correct Additional Medicare Tax withheld in accordance with the TP's intent.

  10. If the system is not computing Additional Medicare Tax withheld and a change needs to be allowed, do the following:

    1. Enter a "Y" in the VERIFIED INDICATOR field of the Additional Medicare Tax Withheld window.

    2. Enter the total amount of Additional Medicare Tax withheld to allow in the VERIFIED MEDICARE TAX WITHHOLDING field.

  11. If the system computes an excess change when no change should be made, enter a "Y" in the VERIFIED INDICATOR field and verify that the MEDICARE TAX WITHHELD PER RETURN field and VERIFIED MEDICARE TAX WITHHOLDING fields are the same.

  12. If the system computes a tax change and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , a notice MUST BE issued.

  13. If an Additional Medicare Tax withheld increase/decrease is the only issue ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on a paper return, PC 20 should be used. Return Value must be completed before accessing the Assessment window for the system to allow input of PC 20. For additional instructions on inputting PC 20, see IRM 4.19.3.15.1.2 (4), Withholding, SSTAX, and Additional Medicare Tax Withheld Miscellaneous.

  14. When Additional Medicare Tax withheld is the only issue and the TP files an ELF return, see IRM 4.19.3.4.2 (7) and (8), Comparison of IRP Information Returns With Return Information, to determine when to consider the IRs more accurate than the ELF Form W-2 data. Take the following action:

    1. O/C Additional Medicare Tax withheld: Follow the procedures for paper in (13) above.

    2. U/C Additional Medicare Tax withheld: Issue a CP 2501. Include a Special Paragraph using the following verbiage as an example: "Please provide us with copies of Form(s) W-2 to support the amount of Additional Medicare Tax withheld."

  15. When there is a change to Additional Medicare Tax withheld and a notice is issued, PARAGRAPH 27 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.15.2  (08-26-2016)
Social Security Tax/Tier 1 Railroad Retirement Tax

  1. Social Security Tax/Tier 1 Railroad Retirement Tax are reported by payers on Form W-2 and is identified on the Case Analysis screen by the literal "W-2" in the DOC TYPE field and appear on the W-2 IR with the literal "SSTAX" in the INCOME TYPE field. Income Identify Code "FT" displays on the Case Analysis screen for SSTAX amounts. If it is determined that the amount is for (Tier 2) railroad retirement tax, change the Income Identify Code to "RT" .

    Note:

    Excess Tier 2 Railroad Retirement tax cannot be claimed as a credit on the return. The TP must use Form 843, Claim For Refund and Request for Abatement.

  2. Excess SSTAX amounts appear as TC 766 with CRN 252 on the Tax Account screen.

  3. Taxpayers claim excess SSTAX withheld on Form 1040,

    TY 2013 TY 2014 TY 2015
    line 69 line 71 line 71
  4. Excess SSTAX may be claimed as a prepayment credit if ALL of the following conditions are met (joint filers must be considered separately).

    1. The TP worked for two or more employers.

    2. The TP received Social Security wages or Railroad wages of the amount listed in the table below or more (the maximum wage base for both social security and RRT). If the SSWAG is less than the maximum social security wage base amount, the system displays the following message: "An Employer may have withheld social security tax at an incorrect rate. Do not refund excess SST to the taxpayer" .

      TY 2013 TY 2014 TY 2015
      $113,700 $117,000 $118,500
    3. The TP has SST and/or RRT Tier 1 withholding plus any uncollected SSTAX on Tips or Group-Term Life insurance in excess of the amounts listed in the table below.

      TY 2013 TY 2014 TY 2015
      $7,049.40 $7,254.00 $7,347.00

      Note:

      The TP must include any Uncollected SSTAX on Tips (Form W-2, box 12 Code A) or Uncollected SSTAX on Group-Term Insurance (Form W-2, box 12 Code "M" ) in the total tax on Form 1040, see table below for line number, (identified on the dotted line portion with "UT" ) before this amount can be considered in determining any excess SSTAX. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Excess Social Security Tax and Railroad Retirement Tax (SSTAX), for further information.

      TY 2013 TY 2014 TY 2015
      line 60 line 62 line 62

      Note:

      Any SSTAX withheld in excess of the above amounts from the same employer does not qualify as excess SSTAX. However, if there is an indication that the employer used "Reporting Agent" , see (13) below for further instructions.

  5. SSTAX needs to be computed if the conditions in (3) above are present or if SSTAX is a discrepant item. The net change to excess SSTAX is computed by the system and is displayed in the W/H SST ADJ field of the Case Analysis screen.

    Caution:

    Do not use status code "N" or "D" in the SSWAG, MCWGE or SSTIP literal when screening valid WAGES IRs. Use of status code "N" or "D" may result in an incorrect excess SSTAX calculation.

  6. Create an IR(s) if there is SSTAX for which a Form W-2 is attached, but an IR is not present.

    Note:

    Entry in the EIN field is required to calculate the excess SSTAX window correctly.

  7. Input/verify the appropriate entries on the Excess SST window. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Excess Social Security Tax and Railroad Retirement Tax (SSTAX).

    Caution:

    If the TP claimed "UT" tax on the dotted portion for Form 1040, see table below for line number, ensure ONLY the Form W-2, box 12 Code(s) A and M are included in the PRIMARY TIER 1/SS TIP TAX and/or SECONDARY TIER 1/SS TIP TAX fields of the Excess SST window.

    TY 2013 TY 2014 TY 2015
    line 60 line 62 line 62
  8. Ensure that the TP's intent is followed when excess SSTAX is computed/recomputed as to rounding, dropping cents, or using dollars and cents. Always verify that the system computes the correct excess SSTAX in accordance with the TP's intent.

  9. If excess SSTAX is an issue and a Form W-2 is attached to the return from a Railroad, create an IR for the Tier 1 RRT (use Income Identify Code "FT" ) amount in Box 14, Form W-2, so the system can correctly compute the excess amount.

  10. If the system is not computing an excess SSTAX and a change needs to be allowed, do the following:

    1. Enter a "Y" in the EXCESS SST/RRT VERIFIED INDICATOR field.

    2. Enter the total amount of excess SSTAX to allow in the VERIFIED EXCESS field.

  11. If the system computes an excess change when no change should be made, enter a "Y" in the EXCESS SST/RRT VERIFIED field and verify that the EXCESS SST/RRT field and VERIFIED EXCESS SST/RRT fields are the same.

  12. If the TP is claiming additional excess SSTAX and attaching a Stock Option Transaction statement to support the additional amount(s) claimed, disallow the deduction. See IRM 4.19.3.15.1.1 (6), Withholding - Analysis, for further instructions.

  13. When it appears that a Parent Company and one or more of its subsidiaries are responsible for the excess amount of SSTAX, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ when determining if an adjustment is necessary. A Parent Company or a subsidiary can generally be identified by:

    1. Two or more WAGES IRs with similar payer names AND different TINs OR

    2. An indication that the payer utilized different/multiple payroll agents (i.e., Reportng Agent). This information is often included along with the payer name on the Form W-2. The payer name and TIN could be identical.

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Make the appropriate entries in the EXCESS SST window so that the TP's intent is followed.

  14. If the system computes a tax change and ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , a notice MUST BE issued.

  15. If an excess SSTAX increase/decrease is the only issue ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on a paper return, PC 20 should be used. Return Value must be completed before accessing the Assessment window for the system to allow input of PC 20. For additional instructions on inputting PC 20, see IRM 4.19.3.15.1.2 (4), Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous.

  16. When excess SSTAX is the only issue and the TP files an ELF return, see IRM 4.19.3.4.2 (7) and (8), Comparison of IRP Information Returns With Return Information, to determine when to consider the IRs more accurate than the ELF Form W-2 data, take the following action:

    Note:

    Be aware of tax preparation software problems that may lead to reporting inconsistencies on ELF returns. For example, ELF Form W-2, box 12 shows Code "A" amount, but the occupation is not TIPS related or the ELF Form W-2, box 12 Code "A" or "M" amount matches another item (such as deferred compensation).

    1. O/C excess SSTAX: Follow the procedures for paper in (15) above.

    2. U/C excess SSTAX: If the SSWAG element multiplied by the percentage in the table below equals the SSTAX element, allow the system calculated excess SSTAX amount and make the adjustment using PC 20. See IRM 4.19.3.15.1.2 (4), Withholding, SSTAX and Additional Medicare Tax Withheld - Miscellaneous, for further instructions.

      TY 2013 TY 2014 TY 2015
      6.2 percent (.062) 6.2 percent (.062) 6.2 percent (.062)
    3. U/C excess SSTAX: If the SSWAG element multiplied by the percentage in the table below does not equal the SSTAX element, issue a CP 2501. Include a Special Paragraph using the following verbiage as an example: "Please provide us with copies of Form(s) W-2 to support the amount of social security tax withheld."

      TY 2013 TY 2014 TY 2015
      6.2 percent (.062) 6.2 percent (.062) 6.2 percent (.062)
  17. When there is a change to excess SSTAX and a notice is issued:

    1. PARAGRAPH 151 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

    2. If disallowing excess SSTAX withheld from a single employer, send PARAGRAPH 137. See IRM 4.19.3-7, CP PARAGRAPHS.

  18. PARAGRAPH 43 automatically generates when the net result of changes to W/H, excess SSTAX, EIC and Additional Child Tax Credit is a NEGATIVE amount. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.15.3  (08-26-2016)
Earned Income Credit (EIC)

  1. EIC enables certain eligible TPs to offset tax liability or to get a refund even if no tax was withheld from their pay.

  2. Previously allowed EIC appears on the Tax Account screen as TC 764 or TC 768.

    Note:

    If the credit was partially or fully reversed, the reversed amount appears with TC 765.

  3. Exam has a Revenue Protection Strategy to validate EIC on returns where the eligibility issue is questioned. When the EIC recertification indicator (EIC RCT IND) field on the Tax Account screen is other than zero or blank, the warning message "EIC credit problem" appears in the MESSAGE window. When EIC RCT IND field shows an entry and:

    1. The TP either did not claim EIC (i.e., no TC 768 is present) or the EIC was disallowed (TC 768 reversed by TC 765) enter a "Y" in the TP NOT QUALIFIED field of the EIC window to prevent the system from allowing any EIC.

      Note:

      If the EIC RCT IND field is other than zero or blank and the TC 768 was fully reversed with a TC 765, the system displays the following error message: "EIC disallowed - enter "Y" in the TP NOT QUALIFIED field."

    2. The TP claimed EIC (TC 768) that was fully allowed, follow system prompts to make any changes to EIC, based on U/R income. Ensure that the TP NOT QUALIFIED field is blank. DO NOT correspond for the missing Form 8862, Information to Claim Earned Income Credit After Disallowance.

    Note:

    An EIC RCT IND of blank or "0" displays when there was no recertification issue or it has been resolved and the TP is eligible for EIC.

  4. The system computes the Schedule EIC based on the assigned Income Identify Code and certain income types.

  5. Verify that the correct Income Identify Code is in the INC CD field for all income types that qualify as earned income. See Exhibit 4.19.3-9, Income Identify Codes. Earned income includes anything of value (money, goods, or services) received from an employer for services performed, regardless of whether it is taxable. If TP reports unearned income as earned income follow the instructions in (15) below. Examples of earned income are:

    • Wages, salaries, tips and other employee compensation

    • Net earnings from self-employment, even if less than $400

      Note:

      Net losses from self-employment reduce earned income and the deductible part of SE tax reduces AGI and earned income.

    • Gross income received as a statutory employee

    • Strike benefits reported on Form W-2

    • Disability retirement benefits (until TP reaches minimum retirement age). See (15) below.

    • Gulf Oil Spill Payments (GOS or GCCF) as earned income on Schedule EIC.

  6. The TP has the option of including nontaxable combat pay in their earned income when computing EIC. The TP makes this election by entering their nontaxable combat pay on

    Form TY 2013 TY 2014 TY 2015
    1040 line 64b line 66b line 66b
    1040A line 38b line 42b line 42b
    1040EZ line 8b line 8b line 8b


    If the TP elects to include nontaxable combat pay in their EIC determination, take the following action:

    Caution:

    Ensure that the election was not disallowed during original processing. If the election was disallowed, TP notice code 165 should be present in the MATH ERROR CODE field on the Tax Account screen

    1. If the election was disallowed, follow system prompts in the Earned Income Credit window to calculate the change to EIC. See (15) below for conditions requiring the verification of the TAXABLE EARNED INCOME field.

    2. If the election was allowed, include the amount of nontaxable Combat pay with other taxable earned income in the TOTAL EARNED INCOME field.

    Note:

    Follow the TP’s intent with regard to the election. Do not recalculate the new EIC amount with and without the non-taxable combat pay amount to determine the better option.

  7. Earned income does NOT include the following:

    • Interest or dividends

    • Welfare benefits

    • Veteran's benefits

    • Pensions and annuities (except certain disability pensions received before minimum retirement age and reported on line 7 of Form 1040, Form 1040A, or line 1 of Form 1040EZ)

    • Social Security and Railroad Retirement benefits

    • Workers' compensation

    • Unemployment compensation

    • Income exempt from SE tax as a result of filing and approval of Form 4029 (relating to members of certain religious faiths)

      Note:

      Wages, salaries, tips, and other employee compensation received by these TPs are earned income, even if they are exempt from Social Security (FICA) taxes.

    • Alimony

    • Child support

    • Income excluded per Notice 2014 - 7 (may be referred to as Medicare waiver or difficulty of care payments or IHSS)

  8. To qualify for EIC the TP must be other than FS 3 and have earned income and AGI totaling less than:

    Number of qualifying children TY 2013 TY 2014 TY 2015
    1 $37,870 ($43,210 if married filling jointly) $38,511 ($43,941 if married filling jointly) $39,131 ($44,651 if married filling jointly)
    2 $43,038 ($48,378 if married filing jointly) $43,756 ($49,186 if married filing jointly) $44,454 ($49,974 if married filing jointly)
    3 or more $46,227 ($51,567 if married filing jointly) $46,997 ($52,427 if married filing jointly) $47,747 ($53,267 if married filing jointly)
    0 $14,340 ($19,680 if married filing jointly) $14,950 ($20,020 if married filing jointly) $14,820 $20,330 if married filing jointly)


    For TPs with no qualifying children they must also meet all of the following conditions:

    • Be at least age 25 but under age 65

    • Not entitled to be claimed as a dependent on parent's or someone else's return

    • Be a resident of the US for more than one-half of the tax year

    If the TP was allowed EIC during processing and the system displays a message that EIC was disallowed due to the TP's age, use IDRS CC INOLES to verify the age. Update the AGE field in the Case Analysis screen if necessary.

    Note:

    U.S. military personnel on extended active duty outside the U.S. are considered to live in the U.S. during that duty period for EIC purposes.

  9. When Schedule EIC is not attached to the original return (i.e., EIC was allowed based on the filing of Schedule EIC with the Form 1040X), it may be necessary to match the EIC claimed against the EIC Table, to determine the correct entry in the NUMBER OF QUALIFYING CHILDREN field in the EIC window (0, 1, 2 or 3).

  10. If TP did not claim EIC on the original return and any of the following conditions exist, enter a "Y" in the TP NOT QUALIFIED field.

    1. The TP's principal home is outside the United States, unless on extended active duty in the U.S. military.

    2. The TP does not have a full 12-month tax year (unless the TP died during the year).

    3. The TP excludes or deducts amounts earned in a foreign country (Form 2555 or Form 2555-EZ is filed).

    4. The TP filed Form 4563, Exclusion of Income from Bona Fide Residents of American Samoa.

    5. There is an indication the TP was contacted during original processing and was asked to provide a completed Schedule EIC and TC 764 or TC 768 is not present on the Tax Account screen, or a completed Schedule EIC is not attached.

    6. EIC was disallowed due to the Revenue Protection Strategy.

  11. Earned income credit must be recomputed when there is U/R income and the investment income is:

    TY 2013 TY 2014 TY 2015
    $3,300 or less $3,350 or less $3,400 or less

    The INVESTMENT INCOME PER RETURN displays the total investment income as computed by the system. This is a required field. The Investment Income Manual Calculation Worksheet is available on the AUR Portal at http://serp.enterprise.irs.gov/databases/portals.dr/aur-portal/default.htm and can be used to verify the INVESTMENT INCOME PER RETURN field amount. Investment income includes the total of the following:

    Note:

    The Investment Income Manual Calculation Worksheet must always be used when the TP files a Schedule E and/or Form 4797.

    Caution:

    Do not include U/R amounts in the manual calculation.

    1. Taxable interest - Form 1040 or Form 1040A, line 8a.

    2. Tax-exempt interest - Form 1040 or Form 1040A, line 8b.

    3. Dividend income - Form 1040 or Form 1040A, line 9a.

    4. Capital gain net income - Form 1040, line 13 (or Form 1040A, line 10), if greater than zero (0). Any gain reported on Form 4797, line 7, (or line 9, if an amount appears there) should be subtracted from the Schedule D total.

    5. Royalty income - Schedule E, line 4 in excess of the total related expenses on line 20 of Schedule E.

    6. Income from passive activities - Schedule E, line(s) 26, 29a (column g), 34a (column d), and 40 in excess of the losses from passive activities included on Schedule E, line(s) 26, 29b (column f), 34b (column c), and 40.

      Note:

      See Schedule E instructions to determine if Schedule E, line 26 or 40 income is from a passive activity.

    7. Net income from rentals of personal property not used in a business (rental income on Form 1040, line 21, minus the "PPR" amount deducted on Form 1040, line 36).

  12. The AGI used in calculating EIC is the amount of AGI from Form 1040, line 37, or Form 1040A, line 22, or Form 1040EZ, line 4.

  13. When EIC needs to be recomputed, and the TP has not used the optional method to figure his/her SE tax, input the appropriate entries in the Earned Income Credit window of the Return Value screen. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Earned Income Credit.

    Note:

    If the TP used the optional method to figure SE tax see (16) below.

  14. The TOTAL EARNED INCOME field displays the total earned income as computed by the system. The system determines earned income per return by combining the following items:

    1. Amount reported from Form 1040 or Form 1040A, line 7 or Form 1040EZ line 1, PLUS,

      Caution:

      If the TP reports unemployment as earned income (i.e., reported as wages) and the amount is shown in the EIC window AND there are no WAGES IRs present, create a WAGES IR for ZERO. This will allow the system to accurately calculate the EIC.

    2. Amount reported on Schedule SE, line 3 (for both TPs), MINUS,

    3. The deductible part of SE tax.

  15. The TOTAL EARNED INCOME is a required field. If any of the following conditions exist, the system derived field must be verified:

    Note:

    To verify the TOTAL EARNED INCOME field, the Earned Income Manual Calculation Worksheet, on the AUR Portal at http://serp.enterprise.irs.gov/databases/portals.dr/aur-portal/default.htm, Earned Income Manual Calculation Worksheet, can be used. Do not include U/R amounts in the manual calculation.

    1. The TP reports earned income on a line other than Form 1040 or Form 1040A, line 7 (ex: Wages on Form 1040, line 21 or disability pensions (COD 3) on Form 1040, line 16b, etc.).

    2. TP includes unearned income on Form 1040 or Form 1040A, line 7 (example: UNEMP, IRA, income excluded per Notice 2014 - 7, etc.).

      Note:

      See IRM 4.19.3.4.2 (4), Comparison of IRP Information Returns With Return Information, for additional information.

    3. Taxable scholarship or fellowship grant not reported on Form W-2 but included on Form 1040 or Form 1040A, line 7.

    4. Income earned by an inmate ("PRI" and amount on the dotted line portion of Form 1040 or Form 1040A, line 7 or Form 1040EZ, line 1).

    5. Amount received as a non-qualified deferred compensation ("DFC" and amount on the dotted line portion of Form 1040 or Form 1040A, line 7 or Form 1040EZ, line 1).

    6. Nontaxable Combat pay.

    7. Schedule SE includes either the Optional method or includes church employee income.

    8. Net Schedule C/C-EZ or F gain or loss and Schedule SE was not filed.

    9. Statutory Wages reported on Schedule C/C-EZ.

    10. Ministers Housing allowance reported on Schedule SE.

  16. If either/both TP(s) used the optional method to figure SE income and SE tax, claimed EIC, and there is U/R SE income a special calculation may be necessary to determine the correct entry for the TOTAL EARNED INCOME field. Use the U/R SE income and Schedule SE, Part II to determine if the TP is still eligible to use the optional method. If the TP is still eligible to use the optional method:

    1. Manually recompute the new Schedule SE, line 4b amount using the U/R SE income.

    2. Add any other reported earned income (include the spouse's earned income if applicable) to the amount from Section B, Long Schedule SE, line 4b as filed or as adjusted.

    3. Subtract the U/R SE income from the amount in step 2 above and enter the result in the TOTAL EARNED INCOME field.

    If the TP is no longer eligible to use the optional method:

    1. Add the amount(s) from Schedule C, line 31 or Schedule F, line 34.

    2. Add any other reported earned income for the primary/secondary TP as applicable (see (15) above), to the amount from Section B, Long Schedule SE, line 4b as filed or as adjusted.

    3. Enter the result in the TOTAL EARNED INCOME field.

  17. The maximum allowable amount of EIC

    Number of children TY 2013 TY 2014 TY 2015
    3 or more $6,044 $6,143 $6,242
    2 $5,372 $5,460 $5,548
    1 $3,250 $3,305 $3,359
    0 $487 $496 $503
  18. A notice must be issued for all changes to EIC unless the case is closed below tolerance.

  19. PC 20 is not valid for EIC adjustments.

  20. PARAGRAPH 19 automatically generates when there is a change to EIC. See IRM 4.19.3-7, CP PARAGRAPHS.

  21. PARAGRAPH 184 automatically generates when investment income exceeds the maximum allowable amount. See IRM 4.19.3-7, CP PARAGRAPHS

  22. PARAGRAPH 43 automatically generates when the net result of changes to W/H, excess SSTAX, EIC, Additional Child Tax Credit and AOC is a NEGATIVE amount. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.15.4  (08-26-2016)
Additional Child Tax Credit (ACTC)

  1. Additional Child Tax Credit (ACTC) enables certain qualifying TPs to offset tax liability or to get a refund if no tax is owed.

  2. Previously allowed ACTC appears on the Tax Account screen as a TC 766 (with Reference Code 336).

  3. If the credit was partially or fully reversed, it shows as a TC 767 (with Reference Code 336).

  4. The TP is eligible for the credit if both of the following apply:

    1. The TP claims qualifying child(ren).

      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).

    2. The TP does not claim the full allowable amount of Child Tax Credit on

      Form TY 2013 TY 2014 TY 2015
      1040 line 51 line 52 line 52
      1040A line 33 line 35 line 35
  5. If U/R income results in the TP being eligible for the full allowable amount of Child Tax Credit, the previously allowed ACTC is adjusted accordingly.

  6. If U/R income change results in full disallowance of the Child Tax Credit, verify the ACTC is correct.

  7. If ACTC was previously claimed or allowed during original processing, and there is a Schedule 8812 present, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . In Return Value, follow system prompts to allow AUR to compute the appropriate amount of credit.

  8. If the TP did not qualify for ACTC during original processing and U/R income now makes the TP eligible, manually select the Additional Child Tax Credit window after the Child Tax Credit window - whether or not a Schedule 8812 has been submitted.

  9. Additional Child Tax Credit can be affected by U/R income that changes:

    • Amounts of Social Security Tax, Railroad Retirement Tax and Medicare Tax withheld

    • Deductible part of SE tax

    • Social Security Tax on Tips

    • Uncollected Social Security and Medicare Tax on Wages

    • Earned Income Credit

    • Child Tax Credit

  10. The Child Tax Credit window must be accessed before the Additional Child Tax Credit window, to ensure the number of qualifying child(ren) are correct. See IRM 4.19.3.13.4 (11), Child Tax Credit, for further information.

    Caution:

    If the TP claimed the Residential Energy Credit, Adoption Credit and the Additional Child Tax Credit, use the manual Child Tax Credit field in the Child Tax Credit window to ensure the TP receives the correct amount.

  11. Taxpayers are instructed to include nontaxable combat pay in earned income on Schedule 8812, line 4a when they either did not elect to include this pay in computing EIC or did not claim EIC and to include the nontaxable combat pay on line 4b. If Schedule 8812, line 4b contains an amount, manually determine the Additional Child Tax Credit Now amount and enter in the MANUAL ADDL CHILD TAX CREDIT field.

    Note:

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

  12. Input/verify the RETURN AMT field of the Additional Child Tax Credit window using the TC 766 (reference code 336) amount from the Tax Account screen. Enter dollar amount ONLY - drop the cents, do not round. Input/verify the remaining fields. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Additional Child Tax Credit. Failure to follow this instruction will cause an Unpostable condition. There may be a $1 difference on the Summary screen, DO NOT adjust this amount.

    Note:

    The Additional Child Tax Credit window MUST be accessed after the EIC window. If the window is accessed out of sequence, a warning message displays.

  13. A notice must be issued for all adjustments to ACTC unless the case is closed below tolerance. PC 20 is not valid for adjustments to ACTC.

  14. PARAGRAPH 36 automatically generates when the ACTC is disallowed because the TP becomes eligible for the full amount of Child Tax Credit. See IRM 4.19.3-7, CP PARAGRAPHS.

  15. PARAGRAPH 37 automatically generates when the TP originally claimed ACTC and there is a change to the ACTC. See IRM 4.19.3-7, CP PARAGRAPHS.

  16. PARAGRAPH 43 automatically generates when the net result of changes to W/H, excess SSTAX, EIC, ACTC and AOC is a NEGATIVE amount. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.15.5  (08-26-2016)
American Opportunity Credit

  1. The American Opportunity Credit is refundable. The maximum credit is $2,500 per student.

  2. Previously allowed AOC appears on the Tax Account screen as a TC 766 (with reference code 260).

  3. The credit is computed using Form 8863 and is reported on

    Form TY 2013 TY 2014 TY 2015
    1040 line 66 line 68 line 68
    1040A line 40 line 44 line 44
  4. The TP is not entitled to any of the credit 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.

    5. They are a graduate student for the entire AUR year. See IRM 4.19.3.13.5.1, Education Credits - Responses for additional information.

    6. If the MAGI is equal to or greater than the upper limit listed in the table in (5) below.

  5. The amount of the credit begins to decrease (phase out) when the MAGI exceeds the lower limit and is eliminated (disallowed) when the MAGI equals or exceeds the upper limit shown in the table below:

    Fling status TY 2013 TY 2014 TY 2015
    1, 4, and 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
  6. PARAGRAPH 38 automatically generates when there is a change to American Opportunity Credit. See IRM 4.19.3-7, CP PARAGRAPHS.

    Note:

    If decreasing American Opportunity Credit due to lack of substantiation, toggle off PARAGRAPH 38 in the Summary screen.

  7. PARAGRAPH 43 automatically generates when the net result of changes to W/H, excess SSTAX, EIC, ACTC and AOC is a NEGATIVE amount. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.15.6  (08-26-2016)
Net Premium Tax Credit (PTC)

  1. Beginning in TY 2014, taxpayer (or their spouses) who are enrolled in health insurance through the Health Insurance Marketplace may be eligible to claim the premium tax credit. The refundable credit claimed on Form 1040, line 69 or Form 1040A, line 45, is the amount of Premium Tax Credit (PTC) minus the amount of Advance Premium Tax Credit (APTC). Taxpayers complete Form 8962, Premium Tax Credit (PTC), to determine the amount of eligible credit.

    Caution:

    Be alert for processing changes which added APTC/PTC. Math Error Code 558 may be present on these cases although Form 8962 was not filed with the return.  Take actions to recalculate APTC/PTC and include on the notice, when appropriate.

    Note:

    Telephone assistors may request that the TP respond in writing if a recomputed notice is needed and a recalculation of PTC (there is a change to AGI) is required.

    Note:

    For TY 2014, Form 8962, Part 5, Alternative Calculation for Year of Marriage, is not included in AUR TRDB. If Part 5 information is needed for a recalculation it can be accessed on EUP.

  2. AUR will adjust per changes to MAGI. If there is no AGI change, do not recalculate PTC. Enter “PER RETURN” amounts from the Premium Tax Credit window in the corresponding fields in the  “AMS AMOUNTS” column.

  3. To recalculate PTC take the following actions:

    1. Screen the case to Return Value.

    2. Access the Premium Tax Credit window. The amount shown in the "MODIFIED AGI" field will be needed to recalculate PTC.

    3. Access IDRS.

    4. Access AMS.

    5. Access the TP’s account on AMS.

    6. Select ACA Tools.

    7. Select the "8962 PTC Calc" .

    8. Once AMS populates the PTC calculator worksheet with the TP’s information, verify all AMS pre-populated fields. Make corrections as needed.

    9. Input the MODIFIED AGI amount from AUR in the Adjusted Gross Income field of the PTC calculator worksheet and change all other amounts present in the income section of the PTC calculator to zero.

      Note:

      If the field amounts are not changed to zeroes the AUR MAGI will duplicate amounts.

      Reminder:

      If the TP reports SS/RR, the SS/RR window MUST be worked (even if SS/RR is not an issue) in order for the MAGI to be correct.

      Note:

      If the TP provides new annual or monthly premium amounts or if there is a change to the filing status or number of exemptions, input the correct amount(s) in the PTC calculator worksheet.

    10. Scroll to the bottom of the worksheet, check the "calculate without CDR validation box" and click the "Calculate" button.

    11. Print the calculation, reset the PTC Calculator worksheet, and return to AUR.

      Exception:

      In some cases the change to MAGI does not cause a change to APTC/PTC. If there is no change to ATPC/PTC, do not print the calculation. Select the following standard case note to document the case: Change to AGI. Accessed AMS to recalculate PTC/APTC. No change to PTC or APTC.

    12. In the Premium Tax Credit window, verify/input the "PER RETURN" amounts for "TOTAL PTC" , "TOTAL ADVANCE PYMT OF PTC" , "NET PTC" and "EXCESS APTC REPAY" , as appropriate.

    13. Using the printed calculation from the AMS PTC calculator, enter amounts in the "AMS Amounts" column of the AUR Premium Tax Credit window for "TOTAL PTC" , "TOTAL ADVANCE PYMT OF PTC" , "EXCESS ADVANCE PYMT OF PTC" , "REPYMT LIMITATION" , and "EXCESS ADVANCE PYMT ABOVE LIMITATION" .

      Caution:

      These end results or "AMS Amounts" are the amounts from the AVS column.

    14. Continue with Return Value calculations. AUR will calculate the PTC change amount and include it in the Summary screen.

    15. Leave the printed AMS PTC calculation as part of the AUR case file.

      Note:

      For virtual cases print a Form 4251 as cover for AMS worksheet.

  4. PTC allowed on the original return posts with TC 766, credit reference 262. Recalculate Form 8962, Premium Tax Credit (PTC), using the "8962 PTC Calc" , found in the AMS ACA tools. When adjusting PTC related data, use the following reference numbers, as appropriate:

    • 262 - adjusts the PTC refundable credit (Form 8962, line 26)

    • 865 - adjusts the Advance Payment of Premium Tax Credit (TOTAL APTC as shown on IDRS) (Form 8962, line 25)

    • 866 - adjusts the Total PTC (Form 8962, line 24)

    • 867 - adjusts the Excess Advance PTC Repayment (APTC TX LIAB as shown on IDRS) (Form 8962, line 29)

    • 868 - adjusts the Repayment Limitation ( LIMIT AMT as shown on IDRS) (This is to record the amount being waived. Form 8962, the difference between line 27 and line 28 if line 27 is greater than 28.)

  5. When adjusting PTC related data, use the following reason codes, as appropriate:

    1. 151 - PTC

    2. 152 - Excess Advance PTC Repayment

  6. PARAGRAPH 62 automatically generates when PTC is adjusted due to a change to modified adjusted gross income. See Exhibit 4.19.3-7, CP PARAGRAPHS.

    Note:

    Currently AUR will only adjust PTC based on AGI changes, therefore, PARAGRAPH 90 will not be used.

4.19.3.16  (09-01-2003)
Penalties and Interest

  1. The following instructions are used in calculating the various penalties and interest amounts for AUR processing.

    Caution:

    Per IRC 6751(b)(1) asserting accuracy-related penalties generally requires written managerial approval, see IRM 4.19.3.20.1.4, Accuracy-Related Penalties. Leave a case note with a brief explanation as to why the penalty is asserted/assessed.

4.19.3.16.1  (01-27-2015)
Failure to File (FTF) Penalty

  1. Individual tax returns are due by April 15 or the approved extension date unless April 15 or the approved extension date falls on a Saturday, Sunday, or a legal holiday; then the return is due on the next succeeding day that is not a Saturday, Sunday, or a legal holiday or by the approved extension date. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ An additional FTF may be due because of AUR processing.

    Note:

    See IRM 20.1.2, Failure to File/Failure to Pay Penalties, for procedures regarding the recomputation of FTF penalty.

  2. The AUR system does not compute additional FTF penalty if there was a prior full or partial abatement (TC 161 or TC 167). TC 167 is a computer generated abatement of the penalty. Master File recomputes a TC 167. Only a TC 160/161 manual computation of the penalty restricts recomputation.

    Exception:

    Additional FTF penalty is computed if the original FTF penalty was abated ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The abated amount is added to the additional FTF penalty.

  3. The AUR system does not compute FTF penalty if the original return was "R" coded. This code appears in the filing status area of the return, and indicates the TP was not subject to FTF penalty because he/she proved reasonable cause for filing late.

  4. If a FTF penalty was assessed, it appears on the Tax Account screen as a TC 160 or TC 166. If the penalty was partially or fully reversed, it shows as TC 161 or TC 167.

    Note:

    If the tax on a late filed balance due return is decreased or if the net result of changes to W/H, excess SSTAX, EIC, and/or other credits is a decrease in balance due, any unpaid balance is reduced and the FTF penalty is also reduced. If the return is adjusted to become a refund return, and TC 160/166 is present on the Tax Account screen, it is reversed with a TC 161.

  5. The FTF penalty percentage is generally 5 percent of the unpaid balance, with an additional 5 percent for each month or part of a month that the return is filed late, but not to exceed 25 percent. The unpaid balance is the difference between the amount required to be shown on the return and the amount paid (including W/H payments and estimated tax) on or before the due date plus any credit to which the TP is entitled. The FTF penalty is based on the unpaid balance shown on the return unless there is a deficiency. For returns filed more than 60 days after the due date, a minimum penalty is assessed. The minimum penalty is not less than $135 or 100 percent of the unpaid balance, whichever is less.

    Exception:

    If the failure to file was determined to be fraudulent, the FTF penalty percentage is 15 percent per month, not to exceed 75 percent. DO NOT adjust this amount.

  6. The FTF penalty for a month is reduced by the amount of any FTP for the return for that month. When the FTF penalty is based only on the unpaid balance on the return and when no payments are made after the date prescribed for payment of tax, the effect is that the FTF penalty is limited to 4.5 percent a month. (Payments made after the prescribed date reduce the FTP but not the FTF penalty.)

  7. The system computes or recomputes the FTF penalty when applicable. See IRM 20.1.2.2.7.3 , Limitation Under IRC 6651(c)(1), for additional information.

    Exception:

    If certain conditions are present, the AUR system is unable to compute the additional FTF penalty. When these conditions are present, the system displays the following message: "Warning: Manual Failure to File Penalty Calculation Required. Transfer Case to Designated UID for Manual Computation" Follow local procedures to complete the FTF Penalty Worksheet. The FTF Penalty Worksheet and FTF Job Aid are available on the AUR Portal at http://serp.enterprise.irs.gov/databases/portals.dr/aur-portal/default.htm.

    Note:

    The FTF penalty is automatically corrected on IDRS when there is a change to pre-payments on a late-filed return. If a pre-payment change is confirmed and appropriate (PC 20 closure), no other action is needed to adjust the FTF penalty.

  8. It may be necessary to limit the penalty to an amount, including zero (0), other than what the system computes. Manually input the limited penalty in the ADDITIONAL FAILURE TO FILE PENALTY field. See IRM 4.19.3.16.8, Limited Penalties, for further instructions.

  9. PARAGRAPH 35 automatically generates when FTF penalty is proposed. See IRM 4.19.3-7, CP PARAGRAPHS.

  10. When a manual assessment is done and the FTF penalty is decreased, see IRM 4.19.3.20.10.1 (11) Note, The Assessment Window, for special instructions.

4.19.3.16.2  (09-30-2014)
Failure to Pay (FTP) Penalty

  1. If a FTP penalty was assessed, it appears on the Tax Account screen as TC 270 or TC 276. If the penalty was partially or fully reversed, it shows as TC 271 or TC 277.

  2. FTP penalty must be manually adjusted when a TC 270/271 is on the tax module as the system is restricted from recomputing the penalty.

  3. The AUR system does not recompute the penalty. The National Computing Center recomputes the penalty if applicable. PARAGRAPH 43 automatically generates Exhibit 4.19.3-7, CP PARAGRAPHS to advise the TP that he/she may receive a separate notice for the recomputation of FTP.

  4. The FTP penalty must be restricted with a

    • TC 270 for zero if W/H and excess SSTAX are not being adjusted, but one of the other refundable credits (see (5) below for a list of refundable credits) is being adjusted, and the net AUR adjustment is an increase in liability.

    • TC 270 or 271 for the appropriate amount after manually recomputing the FTP penalty if W/H or excess SSTAX is being adjusted, and any other refundable credit (see (5) below for a list of refundable credits) is also being adjusted, unless the net AUR adjustment is a decrease in liability.

  5. The following refundable credits may affect the FTP:

    • W/H

    • Excess SSTAX

    • Additional Medicare Tax withheld

    • EIC

    • Additional Child Tax Credit

    • American Opportunity Credit

    • Fuel Tax Credit

    • Credit for Prior Year Alternative Minimum tax

    • Health Coverage Tax Credit

4.19.3.16.3  (08-26-2016)
Estimated Tax (ES) Penalty

  1. If an ES penalty was assessed, it appears on the Tax Account screen as TC 170 or TC 176. If the penalty was partially or fully reversed, it shows as TC 171 or TC 177.

  2. The AUR system does not recompute the ES penalty. The Estimated Tax Penalty window displays on the Return Value screen ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the penalty has not been fully reversed. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Estimated Tax Penalty window. Enter the total amount of Estimated Tax Penalty previously charged in the ESTIMATED TAX PENALTY NOW field in the Estimated Tax Penalty window. PARAGRAPH 77 automatically generates. See IRM 4.19.3-7, CP PARAGRAPHS.

    ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡
  3. Use the following chart to determine if additional action is necessary.

    If And Then
    There is any change to W/H or excess SSTAX The module contains a TC 176 that is not followed by a TC 170 or TC 171; ES Penalty is recomputed.
    There is a change to W/H or excess SSTAX of more than the amount listed in the table in (2) above The module contains a TC 170 with same DLN as the return ES Penalty is recomputed.
    There is a change to W/H or excess SSTAX of more than the amount listed in the table in (2) above The module does not contain a TC 170 or 176 ES Penalty is recomputed.
    There is a change to W/H or excess SSTAX The module contains a TC 171, or a TC 170 with a DLN other than the return DLN, ES penalty MUST be addressed with a TC 170 or 171, or using a priority code 8.

    Note:

    Failure to address the ES penalty in this situation will cause the adjustment to unpost (UPC 158-0).

4.19.3.16.4  (09-01-2003)
Social Security (SS) Tip Tax Penalty

  1. Cash and charge tips of $20 or more received in any month (working for one employer) are subject to social security tax.

  2. If the TP did not report any or all of these tips to the employer, he/she must file Form 4137, Social Security Tax and Medicare Tax on Unreported Tip Income, attach it to his/her return, and pay the SS tax. The TP must also file Form 4137 if he/she is reporting any part of the allocated tips shown on his/her Form W-2 as income on Form 1040, line 7.

  3. In addition, if a TP fails to report any or all of these tips to the employer, he/she may be liable for a SS tip tax penalty equal to 50 percent of the SS tax on Tips.

  4. Do not issue a CP 2000 solely for SS Tip Tax and/or SS Tip Tax Penalty.

  5. If a CP 2000 is issued, the system automatically generates the 50 percent penalty on social security tax on unreported tip income.

  6. It may be necessary to limit the penalty to an amount, including zero (0), other than what the system computes. Manually input the limited penalty in the SS TIP TAX PENALTY field. See IRM 4.19.3.16.8, Limited Penalties, and IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - SST on Tips window, for further instructions.

  7. PARAGRAPH 15 automatically generates when the system generates the 50 percent penalty on social security tax on unreported tip income. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.16.5  (08-26-2016)
Accuracy-Related Penalty Due to Substantial Understatement of Tax

  1. If the TP substantially understates his/her tax liability, he/she may be liable for the substantial understatement penalty. An understatement is the EXCESS amount of tax required to be shown on the return over the actual amount shown on the return as reduced by any rebate. An item for which the TP either has substantial authority or has a reasonable basis and has made an adequate disclosure is treated as if it were shown on the return. Substantial authority is discussed in (8) below, and adequate disclosure is discussed in (9) below.

    Note:

    The Substantial Understatement Penalty may be proposed on returns that are also subject to the Failure to File Penalty.

  2. An understatement is substantial if it exceeds 10 percent of the tax required to be shown on the return and is greater than $5,000.

    Example:

    The amount of tax required to be shown on the return (new Total Tax) is $125,500 and the amount of the understatement (new Total Tax minus amount shown on return) is $8,500. 10 percent of the tax required to be shown on the return is $12,550 ($125,500 x .1). The Substantial Understatement Penalty DOES NOT apply because, while the understatement exceeds $5,000 it DOES NOT exceed 10 percent of the tax required to be shown on the return, which in this case is $12,550.

    Example:

    The amount of tax required to be shown on the return (new Total Tax) is $15,500 and the amount of the understatement (new Total Tax minus amount shown on return) is $6,500. 10 percent of the tax required to be shown on the return is $1,550 ($15,500 x .1). The Substantial Understatement Penalty DOES apply because the understatement exceeds both $5,000 and $1,550, which is 10 percent of the tax required to be shown on the return in this case.

  3. The substantial understatement penalty is 20 percent of the portion of the underpayment due to a substantial understatement of income taxes required to be shown on the return.

  4. Any portion of an underpayment may be subject to only one accuracy penalty even though that portion may be attributable to both a substantial understatement of tax and negligence. However, one portion of an underpayment may be attributable to a substantial understatement of tax and a different portion to negligence. See IRM 4.19.3.16.6, Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Disregard Penalty).

    1. If both penalties apply to the same underpayment, only one 20 percent penalty is imposed.

    2. The system determines the greater of the two penalties and displays it on the CP 2000.

    3. The system selects the appropriate notice paragraph(s) when penalties apply.

  5. The substantial understatement penalty displays on the system prior to issuance of the CP 2000. After a CP 2000 is issued, the substantial understatement penalty displays on the CP 2000 History window in the ACCURACY RELATED PENALTY field.

  6. Reference IRM 20.1.5, Return Related Penalties, for procedures regarding the computation of the penalty.

  7. When the TP's account is assessed through the Assessment window, a Reference Code 680 displays for the substantial understatement penalty. In certain situations it may be necessary to enter or delete the Reference Code 680. See IRM 4.19.3.20.10.1 (18), The Assessment Window, for more information.

  8. The penalty does not apply if the TP attaches evidence of SUBSTANTIAL AUTHORITY as a basis for the tax treatment of an item that resulted in an understatement of his/her tax liability. Examples of substantial authority are:

    • Internal Revenue Code

    • Temporary, Proposed and Final Regulations

    • Court Cases

    • Revenue Rulings

    • Revenue Procedures

    • Tax Treaties with Accompanying Regulations and Official Explanations

    • Committee Reports (Congressional Intent)

    • Blue Book (Joint Committee Explanations)

    • Private Letter Rulings

    • Technical Advice Memoranda and Expedited Technical Advice Memoranda

    • Actions on Decisions

    • General Counsel Memoranda

    • IRS information including press releases, notices, announcements and other administrative pronouncements published in the Internal Revenue Bulletin

      Note:

      See IRM 20.1.5, Return Related Penalties, for additional information.

  9. The Substantial Understatement penalty does not apply if the TP has a reasonable basis for the treatment of the item and has made an Adequate Disclosure on the tax return or in a statement attached to the return. The following are situations where the understatement is considered adequately disclosed:

    1. A TP who is disputing the tax liability or treatment of income and has REASONABLE BASIS for the treatment of the issue and completes Form 8275, Disclosure Statement, or if the position is contrary to regulation, completes Form 8275-R, Regulation Disclosure Statement.

      Note:

      For definition of reasonable basis see Treasury Regulation 1.6662-3(b)(3). IRC 6664(c) also provides an exception to the imposition of any accuracy-related penalty if the TP shows there was reasonable cause and the TP acted in good faith. See IRM 20.1.5.6.1, Reasonable Cause, and Exhibit 20.1.5-7, Determining Reasonable Cause and Good Faith.

    2. The item at issue is disclosed on the TP's return and is listed in Rev. Proc. 2005-75 (or its successor). If the revenue procedure does not include an item, disclosure is adequate with respect to that item only if made on a properly completed Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement.

  10. If the tax examiner determines to suppress the substantial understatement penalty in full (i.e., income reported, reasonable cause, etc.), enter a zero (0) in the SUBSTANTIAL UNDERSTATEMENT PENALTY field on the Limit Penalties window. If the tax examiner determines to suppress the penalty in part (i.e., income reported, reasonable cause, etc.), enter the applicable amount in the SUBSTANTIAL UNDERSTATEMENT PENALTY field on the Limit Penalties window.

  11. The Limit Penalties window contains additional fields to track instances where the TP requests waiver of the Substantial Underpayment Penalty and whether the request has been granted or denied. Waiver requests MUST be in writing and signed by the TP or valid POA. When the TP makes this request and the tax examiner determines:

    1. The request is granted, check the box next to the PENALTY WAIVED field in the Limit Penalties window.

      Note:

      Only check the box when the penalty is still applicable, but is being suppressed (see (10) above). Do not check the box if the penalty is no longer applicable (i.e., recomputed notice and the revised tax increase is now $5,000 or less or less than 10 percent of the tax required to be shown on the notice).

    2. The request is denied or only partially waived, check the box next to the PENALTY NOT WAIVED field in the Limit Penalties window.

      Note:

      The SUBSTANTIAL UNDERSTATEMENT PENALTY field must contain a value greater than zero in order to check the PENALTY NOT WAIVED field. Managerial approval is required when denying the TP's request. See IRM 4.19.3.20.1.4, Accuracy-Related Penalties, for additional information.

  12. See IRM 4.19.3.16.6 (5), Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Disregard Penalty), for reasonable cause criteria. Also see IRM 20.1.1, Introduction and Penalty Relief, for more information regarding reasonable cause criteria in general, and IRM 20.1.5, Return Related Penalties, for exceptions to the Substantial Understatement Penalty.

  13. PARAGRAPH 91 automatically generates when the substantial understatement penalty applies. See IRM 4.19.3-7, CP PARAGRAPHS.

  14. PARAGRAPH 92 automatically generates when both penalties apply. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.16.6  (08-26-2016)
Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Disregard Penalty)

  1. The negligence or disregard penalty is 20 percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations. The AUR system checks for certain characteristics of the case before applying the penalty. The penalty applies when there is a prior year TC 922 and the case is selected for the same income category as the prior year. Cases that meet the above criteria are deemed ≡ ≡ ≡ ≡ ≡ ≡ ≡ and are assigned to Subfile G or L or any other Subfile with a secondary Subfile G or L. The AUR program applies this penalty when a ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ contains a "2" or "3" in the TC 922 HIST field of the Tax Account screen. For instructions on completing the Negligence screen, see IRM 4.19.3.16.7, Determine Negligence Status Screen.

  2. The negligence disregard penalty is proposed as applicable on ALL U/R income or O/C deduction issues, if the issues result in an underpayment of tax.

  3. Any portion of an underpayment may be subject to only one accuracy penalty even though that portion may be attributable to both negligence and a substantial understatement of tax. However, one portion of an underpayment may be attributable to negligence and a different portion to a substantial understatement of tax. See IRM 4.19.3.16.5, Accuracy-Related Penalty Due to Substantial Understatement of Tax.

    1. If both penalties apply to a given underpayment, only one 20 percent penalty may be imposed.

    2. The system determines the greater of the two penalties and displays it on the notice.

  4. The amount of an underpayment attributable to disregard of rules or regulations is reduced by any portion of the underpayment for which the TP has made an adequate disclosure. A disclosure can be adequate only if it is made on Form 8275 or, if the position is contrary to a regulation, on Form 8275-R.

  5. The negligence or disregard penalty is NOT assessed if reasonable cause exists for the U/R or O/C item. Examples are:

    • Death (TP or immediate family member)

    • Serious Illness (TP or immediate family member)

    • Disaster (i.e., fire, floods, tornadoes)

    • An isolated computational or transcription error

    • Unavoidable absence (TP)

    • Inability to obtain records due to reasons beyond the TP’s control

    The determination of whether the taxpayer acted with reasonable cause and in good faith should be made on a case-by-case basis, taking into account all the relevant facts and circumstances. See IRM 20.1, Penalty Handbook, for further information.

  6. The system automatically suppresses the negligence penalty ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ it displays in the MANUAL NEGLIGENCE PENALTY field on the Limited Penalty window and in the ACCURACY-RELATED PENALTY field on the Notice Summary screen.

  7. When the TP's account is assessed through the Assessment window, a Reference Code of "680" displays for the negligence penalty. In certain situations it may be necessary to change or delete the Reference Code 680. See IRM 4.19.3.20.10.1 (18), The Assessment Window, for more information.

  8. PARAGRAPH 92 automatically generates when both penalties apply. See IRM 4.19.3-7, CP PARAGRAPHS.

  9. PARAGRAPH 86 automatically generates when the negligence penalty applies. See IRM 4.19.3-7, CP PARAGRAPHS.

4.19.3.16.7  (09-01-2013)
Determine Negligence Status Screen

  1. The AUR system identifies cases on which the Accuracy-Related Penalty Due to Negligence may be assessed. After all IRs are marked with a status code and the Return Value option is selected, the Determine Negligence Status screen displays if applicable. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Penalties.

  2. The IRs displayed here are the IRs that have a status code of "U" entered on the Case Analysis screen. The total U/R of each IR displays in the TOTAL U/R AMOUNT field. IRs that are grouped in Case Analysis display only one IR from the group, but the group U/R total displays in the TOTAL U/R AMOUNT field.

  3. The NEGLIGENCE U/R AMOUNT field shows the total U/R for each IR. If reasonable cause applies, the displayed amount needs to be changed to reflect only the U/R attributable to negligence. Use the criteria in IRM 20.1.5.6.1, Reasonable Cause, to determine if reasonable cause applies. See (7) below when the TP requests waiver of the Accuracy Related Penalty due to Negligence.

    1. If the TP did not provide reasonable cause for ANY of the U/R IRs, the TOTAL U/R AMOUNT field must equal the NEGLIGENCE U/R AMOUNT field.

    2. If the TP provided reasonable cause for ALL of the U/R IRs, enter a "Y" in the ACCURACY PENALTY OVERRIDE field.

    3. If the TP provided reasonable cause for SOME of the U/R IRs, determine the negligence amount for each income type by subtracting the reasonable cause amount from the TOTAL UR AMOUNT field and enter the result in the NEGLIGENCE UR AMOUNT field.

  4. Based on the information entered on the Determine Negligence Status screen, the system computes the accuracy penalties and PARAGRAPH 86 or 91 automatically generates, as appropriate. See IRM 4.19.3-7, CP PARAGRAPHS.

  5. When the Determine Negligence Status screen is initially displayed and the U/R income is marked as either ALL negligent or ALL subject to reasonable cause, the Determine Negligence Status screen does not automatically display again. To display the Determine Negligence Status screen again, manually select it from the menu. This action is not necessary unless you changed your initial determination and need the Determine Negligence Status screen to display for a second (or more) time(s) while in the same working session of a case.

  6. Reference IRM 20.1.5, Return Related Penalties, for procedures regarding the computation of the penalty.

  7. The Limit Penalties window contains additional fields to track instances where the TP requests waiver of the Negligence Penalty and whether the request has been granted or denied. When the TP makes this request and the tax examiner determines:

    Note:

    Waiver requests MUST be in writing and signed by the TP or valid POA.

    1. The request is granted, check the box next to the PENALTY WAIVED field in the Limit Penalties window.

      Note:

      Only check the box when the penalty is still applicable, but is being suppressed (see IRM 4.19.3.16.5 (10), Accuracy Related Penalty Due to Substantial Understatement of Tax). Do not check the box if the penalty is no longer applicable (i.e., case is being closed no change).

    2. The request is denied or only partially waived, check the box next to the PENALTY NOT WAIVED field in the Limit Penalties window.

      Note:

      The NEGLIGENCE PENALTY field must contain a value greater than zero in order to check the PENALTY NOT WAIVED field. Managerial approval is required when denying the TP's request. See IRM 4.19.3.20.1.4, Accuracy-Related Penalties, for additional information.

4.19.3.16.8  (09-01-2009)
Limited Penalties

  1. The Limit Penalties window is used to fully or partially abate the Social Security Tip Tax Penalty, the Failure to File Penalty, and/or the Manual Accuracy Related Penalty. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Penalties. This window is used only in special circumstances when the system computed penalties need to be overridden.

  2. Manually select the Limit Penalties window only after all other applicable windows in Return Value are assessed. The system computed penalties display in the appropriate fields. If the amounts are incorrect or need to be abated, make the necessary changes.

  3. Once a penalty is manually limited, it stays limited as long as the manually input amount is present. To allow the system to compute the penalty, the manually computed penalty must be deleted, leaving the field blank.

4.19.3.16.9  (09-30-2014)
Computer Generated Interest for CP 2000

  1. Interest on CP 2000 Notices is generated by the IDRS interest program.

  2. Interest is charged on the portion of the deficiency that exceeds the refund amount from the original due date of the return.

  3. Certain conditions require the interest be computed manually. See IRM 4.19.3.16.10, Manually Computed Interest for the CP 2000, for further instructions.

  4. Interest is suspended from the day after the close of the 36-month period and resumes on the 21st day after a notice is sent, if the IRS fails to notify the TP of additional taxes within 36 months of the later of:

    • The original statutory due date of the return (i.e., April 15th) or,

    • The date of a timely filed return (including extensions).

    Note:

    This provision DOES NOT apply to late filed returns.

4.19.3.16.10  (08-26-2016)
Manually Computed Interest for the CP 2000

  1. There are certain restrictive conditions on an account which cause the IDRS interest program to reject the CP 2000 without computing the interest. When these conditions are present, the interest must be computed manually.

    Note:

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

  2. The following conditions require a Manual Interest computation.

    1. Freeze Code "-I" on the account, or

    2. Freeze Code "I-" on the account,

      Note:

      If the above conditions are present, the system displays an alert in the Return Value screen.

    3. TC 971 AC 064 is present.

      Note:

      The condition in (c) above does not generate a "-I" freeze, therefore no system message displays.

    4. Freeze Code "-C" with a Combat Zone Indicator 2, including refund cases.

      Note:

      Based on the procedures for "-C" freeze the system will reject any "-C" freeze case that is not processed using the manual interest calculation.

      Caution:

      The system does not display a message for the condition listed in (d) above.

    5. Two agreement dates. See IRM 20.2.5.6.1, Reasons to Manually Compute Interest, for an extended list.

  3. Input IPC MI. See IRM 4.19.3.9 (22), Return Value Screen, for further instructions.

    Exception:

    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" .

  4. Cases with IPC MI are batched in BT 61 (Manual Interest batch). These cases are worked by designated tax examiners.

  5. Compute the interest on the proposed balance due (refund ONLY when" I-" freeze code is present). As necessary, refer to IRM 20.2, Interest.

  6. The interest is computed to reflect 30 days from the locally designated notice date.

    Note:

    If the TC 776 is reversed, process the case normally. An entry is not required in the MANUAL INTEREST field.

  7. If a notice is issued (PC 55, 57, 59, 95, IPC RN or SR), input the manually computed interest in the MANUAL INTEREST field of the Return Value screen or the Summary screen. Ensure Manual Interest calculation complies with IRC 6404(g). See IRM 4.19.3.16.9 (4), Computer Generated Interest for the CP 2000.

  8. Per IRC 6631 the TP must be provided with a breakdown of how the interest is calculated. Interest is generally computed to the full paid date, 30 days from the agreement date, or the 23C date of the assessment, whichever is the earliest. At the point of assessment, manual interest must be recomputed and a letter sent to the TP.

    1. Prepare Letter 3535 (http://core.publish.no.irs.gov/letters/pdf/l3535--2002-03-00.pdf).

    2. Compute the manual interest.

    3. Print the computation and attach to Letter 3535.

      Note:

      Users of command code (CC) COMPA may only send COMPAD prints to TPs as an explanation of the manual interest computation.

    4. Access the assessment window.

    5. Make the appropriate entries in the assessment window. See IRM 20.2.5.6.3, Non-Restricting Transaction Code (TC) 340, for additional information on what entries are required.

    6. Use PC 68, 88, or 94 as appropriate.

  9. If case requires a recomputed notice (IPC RN or SR) take the following actions:

    1. Prepare Letter 3535 (http://core.publish.no.irs.gov/letters/pdf/l3535--2002-03-00.pdf).

    2. Compute the manual interest.

    3. Print the computation and attach to Letter 3535.

      Note:

      Users of command code (CC) COMPA may only send COMPAD prints to TPs as an explanation of the manual interest computation.

    4. Prepare the letter for mailing (address and stuff envelope), leave in the case file for clerical to mail.

    5. Input IPC RN/SR as appropriate.

  10. All reject conditions are listed in IRM 2.3, IDRS Terminal Responses, under Command Code INTST or ICOMP.

4.19.3.17  (09-01-2009)
Automated Underreporter (AUR) Rejects

  1. For reject cases, AUR generates a weekly listing with the SSN and Reject Code.

  2. These cases are worked based on the reject condition codes listed in IRM 4.19.2.9.22, Reject Listings.

4.19.3.17.1  (09-30-2014)
Batch Type 84001 - 299 (Screening Cases with New Actions)

  1. During batch assembly by the control function, the system identifies cases with new Payer Agent information and new transactions received from Master File subsequent to the tax examiner's evaluation of the case.

  2. Each of these cases should be reviewed for possible closure. More than one condition may exist on the case.

  3. If the case contains new Payer Agent information, review new Payer Agent information and rework the case as necessary.

  4. If the case contains new transactions (from Master File) which may affect the case, rework the case if necessary.

  5. If a new address is present for the spouse and the last address change cycle is 201X52 or later (the address change cycle is located next to the STREET/CITY field), use the Update Address window to input the spouse's address. Rework the case to generate another CP 2000.

  6. For No Response BT 84300-499, see IRM 4.19.3.19.1, No Response BT 84.

4.19.3.17.2  (09-01-2008)
Letter Rejects

  1. When letters are sent to the TP (e.g., Letter 2626C, Letter 4314C, etc.) and errors are discovered during review, or IDRS incompatibility causes the letter to reject, the letters or cases are returned to the tax examiner who issued the letter.

4.19.3.17.3  (09-01-2004)
Stop Notice Functionality

  1. Use the Stop Notice window if it is determined that a notice should not be mailed to the TP. When an SSN is entered on the Stop Notice window, the system automatically assigns the appropriate "not mailed" PC.

    1. This option MUST be used no later than 2 Fridays before the scheduled notice date.

    2. PCs 34, 54, 58, 60, 79, and 81 (notice not mailed PCs) are systemically assigned when SSNs are committed to the Stop Notice window.

  2. Correct the information on the Case Analysis screen and/or the Return Value window.

    1. Make the necessary changes (U/R amount, paragraphs, IRs that need to be included on the notice, etc.).

    2. If a notice is being amended, enter an "A" in the AMENDED field on the Summary screen.

    3. Re-enter the PC.

  3. PCs 34, 54, 58, 60, 79, or 81 (the stop notice/notice-not-mailed PCs) moves the case(s) into the appropriate Unit Suspense batch.

  4. The notice-not-mailed PCs 34, 54, 58, 60, 79, and 81 must be followed by an appropriate PC in order to release the case(s).

4.19.3.18  (09-01-2004)
CP 2501 and CP 2000 Information

  1. The following instructions are used to process a TP response to the CP 2000/CP 2501 in the AUR Program.

4.19.3.18.1  (09-30-2014)
CP 2501

  1. The CP 2501 is the notice sent to a TP to obtain additional information prior to issuing a CP 2000.

  2. Publication 1, Your Rights as a Taxpayer, is mailed as an enclosure with all CP 2501s.

  3. There is a single Summary screen. All cases are worked through Return Value and the Notice Summary screen must be completed through entering all necessary return amounts and all applicable PARAGRAPHS. See Exhibit 4.19.3-7, CP PARAGRAPHS.

  4. When PC 55 is committed and the U/R amount is $100,000 or more, the system displays a prompt to issue a CP 2501. See IRM 4.19.3.6, Determination of CP 2501 Issuance, for more information on when to issue a CP 2501.

4.19.3.18.2  (09-30-2014)
CP 2000

  1. The CP 2000 is sent to the TP to propose a change to income tax liability because of income that is not identified or does not appear to be fully reported on the tax return. It is also sent due to a difference in W/H, EIC, ACTC, or excess SSTAX.

  2. Publication 1, Your Rights as a Taxpayer, is mailed as an enclosure with all CP 2000s.

  3. See Exhibit 4.19.3-7, CP PARAGRAPHS.

4.19.3.18.3  (09-04-2015)
Notice Summary Screen

  1. For cases requiring a notice, the system compiles the data from the screens and windows used in the analysis of the case and displays it on the Notice Summary screen. The system does not allow entry of an applicable PC until the Notice Summary screen is accessed and committed.

    1. Select the Notice Summary screen.

    2. Review the displayed data. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Using the Summary Screen.

    3. If any data is incorrect, return to the applicable screen or window and make the appropriate corrections.

    4. Paragraphs are added or deleted on the Notice Summary screen by accessing the Paragraphs window.

    5. All data must be accurate, since the information on the Notice Summary screen is used to create the CP 2000 that is sent to the TP. See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Using the Summary Screen.

    6. Input the amount reported on the TP's return for each discrepant income type in the RETURN field. (This is a required field.)

      Note:

      To access the EZ information screen from the Notice Summary screen, click on the box titled "Form" .

    7. The system uses the amount entered to compute the REPORTED TO IRS field.

    8. The system will not allow a negative amount in RETURN and REPORTED TO IRS fields (except for income type IRA, EWPEN, MORT INT, Conduit, Security Sales, Dividend Capital Gains, Savings Bond Exclusion, and deductible part of SE tax discrepancies).

      Note:

      The AUR system does not allow amounts over $999,999,999 to be input. Cases with amounts of this size are referred to the manager or Technical Lead since they require special review and processing.

    9. If the REPORTED TO IRS and/or RETURN field(s) should be negative but the system will not allow a negative amount, use the following procedures: if the INCREASE OR DECREASE field is a positive amount (U/R income), enter zero (0) in the RETURN field; if the INCREASE OR DECREASE field is a negative amount (O/R income), enter the O/R amount (as a positive) in the RETURN field.

    10. If unable to issue a notice showing the exact figures reported on the return, a Special Paragraph must be sent to the TP explaining the adjustment.

  2. The Notice Indicator is used to identify the type of CP 2000 issued, and is blank for an initial contact.

    1. Use Indicator "2" to generate a CP 2000 that follows a CP 2501 to which the TP has responded.

    2. Use Indicator "3" to generate a CP 2000 that follows a CP 2501 to which the TP has not responded.

    3. Use Indicator "4" to generate a recomputed CP 2000 that displays a paragraph which explains to the TP that we used information supplied by him/her to refigure the amount of tax he/she now owes IRS.

    4. Use Indicator "5" to generate a recomputed CP 2000 that displays a paragraph which informs the TP that the documentation or explanation that he/she provided was not sufficient to allow us to waive the Accuracy-Related Penalty Due to Negligence/Substantial Understatement of Tax.

    5. Use Indicator "7" to generate a recomputed CP 2000 that displays a paragraph which applies when the TP refigures the amount of tax that he/she owes and provides either a signature (with or without full payment) or submits a payment for the revised tax increase and penalties in full. This paragraph indicates our agreement with the TP's calculations and informs him/her that the notice has been sent for informational purposes only.

    6. Use Indicator "8" for those instances when the TP partially agrees to the CP 2000 or Statutory Notice, explains the other discrepancies to our satisfaction, AND the Non-Refundable Credit window is used to make the system match the TP's figures ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The input of Notice Indicator "8" suppresses the generation of a subsequent notice to the TP and allows an assessment to be automatically generated.

      Caution:

      Notice Indicator "8" should only be used when the Non-Refundable Credit window is used to make the system match the TP's figures ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ In these situations issue a letter to the TP confirming that we used the information/computation they provided to make the assessment to their account.

    7. Use Indicator "1" to generate a recomputed CP 2000 following a Statutory Notice. In this instance, the TP sent us additional information to refigure the tax. The TP's 90-day period for petitioning the U.S. Tax Court has not expired.

    8. Use Indicator "0" (zero) to generate a recomputed CP 2000 following a Statutory Notice. Indicator "0" notices are sent to the TP as information only notices. The TP's 90-day period for petitioning the U.S. Tax Court has expired and we have concluded our inquiry. For additional information see IRM 4.19.3.20.6, Partially Agreed Responses, and IRM 4.19.3.20.6.1, Recomputation Notice/Supplemental Report.

  3. Use the Amended Indicator "A" to indicate that a notice is amended.

  4. Notices requiring special handling are sorted into groups when a Sort Indicator displays or is input in the SORT field. Up to five (5) Sort Codes may be used.

    Note:

    Beginning with TY 2014 the valid Sort Codes are 1, 2, 3, 4 and 5.

    1. Input Sort Code "1" for cases requiring enclosures. If sending a recomputed notice and a Sort Code was on the notice, remove the Sort Code if it no longer applies.

      Exception:

      If sending enclosures under separate cover from the notice send PARAGRAPH 61. See Exhibit 4.19.3-7, CP PARAGRAPHS - DO NOT USE SORT CODE 1.

    2. Provide specific details for required clerical actions.

    3. Other Sort Codes may be designated by local management.

      Note:

      Use a single digit numeric Sort Code (other than "1" ).

  5. Input/verify the total of all payments credited toward the TP's current AUR account received after the initial contact notice in the AMOUNT PREVIOUSLY PAID field on the Notice Summary screen.

  6. When working cases in BT 61, Manual Interest, input/verify the manually computed interest in the MANUAL INTEREST field on the Notice Summary screen.

  7. When the Notice Summary screen is completed and committed, access the Process Code window and input the appropriate PC. If the notice should not be sent and another action is necessary, access the Process Code window and input the appropriate PC. See Exhibit 4.19.3-4, AUR Process Codes. For a list of Internal Process Codes (IPC), see Exhibit 4.19.3-3, AUR Internal Process Codes. Input these codes on the Process Code window when you complete all actions necessary for the current situation of the case (e.g., enter a research IPC if you are requesting research).

    • The system validates that proper actions have been taken before a PC or IPC is entered.

    • Entering a PC is required to complete working a case, except when a case is transferred to another user or yourself in the Unit Suspense batch.

    • The system does not allow you to release a work unit if a case that needs a PC is in the work unit.

4.19.3.18.4  (09-01-2008)
Amended/Corrected CP 2000/2501 Notices

  1. If a notice is incorrect, an amended/corrected notice can be generated. Multiple amended/corrected notices can be generated if necessary.

  2. If corrections are necessary, return to the applicable screen(s) or window(s) and make the appropriate correction(s).

  3. Enter an "A" in the AMENDED INDICATOR field on the Notice Summary screen.

  4. The system is updated to reflect the new amount(s) so that any subsequent notices or disclosure records are correct.

  5. A new notice date is assigned by the system.

  6. IR elements not sent on the original notice can be selected for inclusion on the amended/corrected notice. Mark the IR elements with Send Indicator "S" .

  7. A code "A" prints in the transaction code line on the response page of the notice to indicate that it is an amended notice.

  8. The amended notice capability is also used to update the interest computation if the original CP 2000 Notice was not mailed within five (5) days of the notice date.

4.19.3.18.5  (09-04-2015)
CP 2000/2501 History Screens

  1. The CP 2000/CP 2501 History screens display all the information contained on the notice sent to the TP(s). See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Viewing Notice History Screen.

  2. Select the Unit Case History from the Case Analysis menu to view the history of a case assigned to your unit.

  3. Select the Unit Case History from the Case History window from the Main menu to view the history of a case assigned to another unit.

  4. No update is allowed in any field on these screens.

  5. The CP 2000/CP 2501 History screen (as applicable), can only be used to view the notice history of a case.

  6. The CP 2000 History screen is the only screen that provides the total tax due plus interest (the bottom line, balance due/refund amount) as it appears on the notice.

4.19.3.19  (09-01-2003)
No Response/Undeliverables

  1. Generally, when there is no TP response to an AUR Notice, the case is systemically updated to the next phase.

  2. Prior to updating the case, if certain conditions are present, the system alerts the Clerical Function to build the case into a Batch that requires additional tax examiner review.

4.19.3.19.1  (08-26-2016)
No Response BT 84

  1. For screening cases with new transactions (Batch Type 84001 - 84299), see IRM 4.19.3.17.1, Batch Type 84001-299 (Screening Cases with New Actions) .

  2. The following instructions apply to all subsections of BT 84 unless otherwise specified.

  3. When there is an indication of identity theft in the message window, review IDRS CC ENMOD for current IDT indicators. Consider the following when determining appropriate action:

    If there are multiple current IDT indicators Then
    Input on various dates Process the case based on the most recent IDT indicator.
    Input on the same date, and these are the most recent IDT indicators
    1. Consider all these IDT indicators.

    2. If one indicates the case should be closed no change but another indicates some other action should be taken, i.e., transfer the case to the AUR IDT Liaison, take the other action. DO NOT close the case no change.

  4. When there is an indication of identity theft in the message window, take the following actions:

    Caution:

    If the TC 971 AC 501, 504, 505, 506 or 522 has been reversed with a corresponding TC 972 - continue normal AUR processing, DO NOT TRANSFER TO IDTVA.

    Note:

    The TRANS-DT on an existing AC 5XX must be less than three (3) years old to be considered "Current" . "Not current" or "expired" for purposes of IDT documentation is three (3) or more years old.

    If TC 971 has an AC of Then
    501 Research IDRS CC ENMOD to determine if the TRANS- DT on an existing AC 501 indicates documentation was received within the last three (3) years.
    If less than 3 years:
    1. Issue a Letter 2626C

    2. Include a paragraph to request a statement identifying the issues related to IDT.

    3. If the income issue(s) is affiliated with the secondary SSN which does not have the IDRS IDT indicator, include a paragraph to request both the IDT documentation and identification of the issues related to IDT.

    4. Input IPC 3L, 6L or 8L as appropriate.


    If more than 3 years:
    1. Issue a Letter 2626C .

    2. Include a paragraph to request IDT documentation.

    3. Include a paragraph to request a statement identifying the issues related to IDT.

    4. If the income issue(s) is affiliated with the secondary SSN which does not have the IDRS IDT indicator, include a paragraph to request both the IDT documentation and identification of the issues related to IDT.

    5. Input IPC 3L, 6L or 8L as appropriate.

    522 with the literals INCOME, MULTFL, INCMUL, IRSID, NODCRQ, NOFR or OTHER Research IDRS CC ENMOD to determine if the TRANS-DT on an existing AC 522 is current; within the last three (3) years.
    If less than 3 years:
    1. Transfer to the designated UID.

    2. Place in the designated area for the AUR IDT liaison.


    If not current; more than 3 years, continue normal AUR processing.
    522 with the literal PNDCLM Research IDRS CC ENMOD to determine if the TRANS-DT on an existing AC 522 is current; within the last three (3) years.
    If current; less than 3 years take the following actions:
    1. Research AMS/CIS to check for IDT documentation and/or a related scanned taxpayer response.

      Note:

      If TE does not have access to AMS/CIS, follow local procedures to ensure that AMS/CIS is researched for IDT documentation.

    2. If AMS/CIS includes a copy of a Form 14039 or a police report, transfer to the designated UID.

    3. Place in the designated area for the AUR IDT liaison.



    If AMS/CIS does not include a copy of a Form 14039 or police report or any IDT related TP response, then continue normal processing.

    If AMS/CIS does not include a copy of a Form 14039 or police report, but an IDT related scanned TP response is present, refer to IRM 4.19.3.20.1.25.3.1, IDT Claims - Responses.
    If TRANS-DT is not current; more than 3 years, continue normal AUR processing.
    504 with the literal RPM on the AUR tax year Close no change PC 52, 71 or 92. Do not send a Letter 1802C.
    506 on the AUR tax year Close no change PC 52, 71 or 92. Do not send a Letter 1802C .
    AC 504 with the literal RPM (not on the AUR tax year) or with literals SPCL1, SPCL2 or EAFAIL does not indicate identity theft. See IRM 25.23.2.20.1.2, TC 971 AC 504 - Miscellaneous Field Code SPCL1, SPCL2, RPM and EAFAIL.
    1. Continue normal AUR processing.

    2. Leave a case note acknowledging the AC 504 - SPCL1, SPCL2 or EAFAIL.

    504 with literals ACCT, BOTH, NKI or EMPL Research IDRS CC ENMOD to determine if the TRANS-DT on an existing AC 504 is current; within the last three (3) years.
    If less than 3 years:
    1. Transfer to the designated UID.

    2. Place in the designated area for the AUR IDT liaison.


    If not current; more than 3 years, continue normal AUR processing.
    505

    Note:

    Per IRM 25.23.2.20.2, IRS Data Loss Incidents - TC 971 AC 505, TP’s personally identifiable information (PII) was lost, breached, disclosed or stolen. The indicator may be present even when another AC is present on the account.

    Continue normal AUR processing.
    506 on other than the AUR tax year

    Caution:

    If the tax return in question meets the criteria outlined in the Refund Scheme Listing, IRP data, IRM 25.23.4-3, IRTPTR/IDRS Data Decision Tree, (i.e., the only UR income is social security benefits that do not indicate a filing requirement, etc.), it may be an indication that the return is bad (not filed by the SSN owner) and the address on the module may not be that of the actual TP. It may be necessary to research the TP’s address against prior year returns or IDRS CC ENMOD and reissue the notice/letter accordingly. Refer to Exhibit 4.19.3-19, Filing Requirements For Most People, for additional information.

    Note:

    Use the address from the SS/RR IR when the only UR income is social security benefits that do not indicate a filing requirement.

    1. Issue a Letter 2626C.

    2. Include a paragraph to request IDT documentation.

    3. Include a paragraph to request a statement identifying the issues related to IDT.

    4. If the income issue(s) is affiliated with the secondary SSN which does not have the IDRS IDT indicator, include a paragraph to request both the IDT documentation and identification of the issues related to IDT.

    5. Inform the TP they should contact the Federal Trade Commission at (877)438-4338 or http://www.ftc.gov/ and that they should make a report to their local police and the three major credit bureaus. For additional information, visit http://www.irs.gov/ keyword Identity Theft or see Pub 5027, Identity Theft Information for Taxpayers.

    6. Input IPC 3L, 6L, or 8L as appropriate.

      Note:

      The instructions in steps 1 - 6 above apply even if the case is ready to default.

    523

    Note:

    See IRM 25.23.2.20.3, TC 971 AC 523 - Reserved.

    Continue normal AUR processing. DO NOT TRANSFER TO IDTVA.
    524

    Note:

    Per IRM 25.23.2.20.4, Locking Decedent Accounts - TC 971 AC 524, as of 01/2011, AC 524 is used to lock the account of deceased taxpayers. The posted return is presumed to be legitimate until a response is received.

    Continue AUR processing following IRM 4.19.3.4.5, Deceased Taxpayers, and/or IRM 4.19.3.20.1.14, Decedents. DO NOT TRANSFER TO IDTVA.
    525 Close no change PC 52, 71 or 92. Do not send a Letter 1802C.
  5. AUR will make one written request to secure the needed information (IDT documentation and/or the specific issues related to the IDT claim). If not provided, research IDRS CC ENMOD for a current AUR initiated TC 971 AC 522 PNDCLM for the tax year in question. If present, reverse per IRM 4.19.3.20.1.25.3.1, IDT Claims - Responses, using NORPLY and continue normal AUR processing.

  6. If new transactions are present, the case has a new TC from Master File which may affect the case.

    Caution:

    Be alert for erroneous refund conditions. See IRM 4.19.3.4.11.1, Recovering Erroneous Refunds, for further information.

    1. If the TP submitted a full payment for the tax and related penalties, before issuance of a Statutory Notice, and there was no balance due prior to the notice, assume the payment was related to the proposed U/R assessment and input PC 53, 67 or 87, as appropriate, UNLESS the payment has a blocking series of 990-999 (IRC 6603 deposit). See IRM 4.19.3.20.1.15, Deposits to Stop the Accrual of Interest - Section 6603, for further information on IRC 6603 deposits.

      Caution:

      Full payment received after issuance of a Statutory Notice cannot be accepted as agreement to the tax increase. When sufficient time is left in the suspense period, issue a Letter 2626C to acknowledge payment and request missing signatures. If the suspense time frame has expired, input PC 90 to default the case.

    2. If the TP submitted a partial payment, do not request the payment document. Assume the payment relates to the proposed adjustment if the account was in Zero Balance prior to the notice, or the payment blocking series is 300-399. Issue a CP 2000 if the case is from a CP 2501 Cases with New Actions (BT 84300 - 499). Issue one Letter 2626C requesting TP's signature to consent if the case is a CP 2000 Cases with New Actions (BT 84500-799). If a Letter 2626C has already been issued for a partial payment, continue normal processing. Input the appropriate PC.

    3. If the partial payment new transaction is indicated during the Statutory Notice Default process (BT 84800 - 999), use PC 90 to assess by Default.

      Note:

      Beginning with TY 2013, BT 84449 - 84499, BT 84749 - 84799, and BT 84949 - 84999 were designated for processing identity theft cases with new transactions.

    4. If a Form 1040X was processed, order the Form 1040X, if necessary.

    5. If Tax Account screen shows a TC 977 with no corresponding TC 290, correspond with the TP to request a signed copy of the Form 1040X. See IRM 4.19.3.20.1.19, Form 1040X/Amended Return.

      Note:

      If there is an indication on Tax Account screen that the TC 977 is a CIS document, view the document using AMS.

    6. If the new TC contains a corresponding Freeze Code -C, -F, -I, -L, -U, Y-, -Z or Z-, see IRM 4.19.3.3.3.2, Freeze Codes, for instructions.

  7. If a Freeze Code "-V" or "-W" with cc of 81 or 84 is present (not reversed by TC 521 or 522), see IRM 4.19.3.20.1.10.1, Bankruptcy Procedures - Tax Examiner Instructions, for instructions.

  8. If there is a manual interest condition or a previous MI on the account:

    If the case is in And Then
    CP 2501 phase   Close the case with PC 51
    CP 2000 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Close the case PC 73.
    CP 2000 phase ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Continue processing.
    Stat phase   Transfer to the designated TE for Manual interest computation.
  9. If a TC 604 is present:

    1. and TC 971, AC 065, refer the case to the local Innocent Spouse coordinator.

    2. all others, refer to the local Bankruptcy Coordinator.

  10. If a Letter 2625C was issued to the payer and no response was received, and the TP disclaims knowledge of or denies receipt of the income ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ see IRM 4.19.3.20.7.4 (5), Referrals. If the TP disputes the amount of income in question ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  11. If new Payer Agent information was received, review new Payer Agent information and rework the case as necessary.

  12. If a new address is present for the spouse, use the following procedures.

    1. Use the Update Address window to input the spouse's address.

    2. Rework the case to generate an amended CP 2000.

    3. Input an Amended Indicator on the Summary screen, or if the latest PC on the Case History is PC 79, input a PC 75 to generate a Statutory Notice.

  13. If the CP 2000 History data is incomplete, an auto assessment for fully agreed is not possible. Input an assessment on the Assessment window. Close the case using PC 68, 88, or 94. (PC 67, 87, or 90 cannot be used on these cases.)

  14. If the tax increase is $1 million or more, review, and rework if necessary, to ensure the accuracy of the case. If the balance due is over $10 million dollars, at case closing:

    1. Photocopy ALL case contents.

    2. Print the Tax Account, Information Returns, Case Notes, Case History and CP 2000/CP 2501 Notice(s).

    3. Send the copies/prints to the Chief Financial Office staff at the following address:
      IRS
      CFO, Business Analysis and Support Section
      Stop S-2, 1035
      333 W. Pershing Rd
      Kansas City, MO 64108

    Reminder:

    Include a case note that the case information was sent to CFO.

  15. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ see IRM 4.19.3.12.4, Net Tax Increase/No Net Tax Increase/Tax Decrease Notices, for additional information. Use the following procedures:

    Exception:

    Beginning with TY 2013, BTs 84449 - 84499 were designated for processing identity theft cases with new transactions.

    1. Check the Case History for an indication of an undeliverable Action Code. If the Case History shows Action Code "U" , a newer address is available. Reissue the notice (PC 30A for CP 2501 or PC 55A for CP 2000) to the newer address. If the Action Code is blank or "T" (true undeliverable) follow the steps below.

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

    3. Issue a Letter 1802C with a Special Paragraph using the following verbiage as an example: "We did not make any adjustments to the tax or prepaid credits because you did not respond to our previous notice."

    4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡

      Note:

      Do not issue a Statutory Notice of Deficiency to address increases to EIC and/or ACTC. If PC 75 is entered, the system displays a warning message.

  16. When working BT 84300 - 499, if a CP 2501 was issued for questionable U/C W/H, the TP did not respond and there is a ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ :

    1. Check the Case History for an indication of an undeliverable Action Code. If the Case History shows Action Code "U" , a newer address is available. Reissue the CP 2501 Notice using an amended indictor "A" , to the newer address. If the Action Code is blank or "T" (true undeliverable) follow the steps below.

    2. Issue a Letter 1802C with a Special Paragraph using the following verbiage as an example: "We did not make any adjustments to the tax or prepaid credits because you did not respond to our previous notice."

    3. Close the case with PC 52.

    Caution:

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

  17. When working BT 84500 - 799, if a CP 2000 was issued for questionable O/C W/H, the TP did not respond and there is a ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ :

    Exception:

    Beginning with TY 2013 BTs 84549 - 84799, were designated for processing identity theft cases with new transactions.

    1. Check the Case History for an indication of an undeliverable Action Code. If the Case History shows Action Code "U" , a newer address is available. Reissue the CP 2000 Notice using an amended indicator "A" , to the newer address. If the Action Code is blank or "T" (true undeliverable) follow the steps below.

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

    3. Complete Return Value screen. If necessary adjust the Other Credits/Other Taxes window(s) so that the net tax increase is now zero (0). The only remaining issue should be the O/C W/H.

    4. Input/verify the appropriate entries on the Assessment window.

    5. Blocking Series 5X.

    6. TC 290-0.

    7. Reference Code 807 for the amount of O/C W/H.

    8. Close the case with PC 68.

    Caution:

    If the return is Virtual and there is no information (loose forms, schedules or correspondence), to be associated with the refile DLN, access the Assessment window, input the TC 290-0 and enter "N" in the SOURCE DOCUMENT ATTACHED? field.

  18. If a review of the splitting of the TPs' names on a joint account is needed, see IRM 4.19.3.20.11 (8), Instructions Specific to Statutory Notices/Responses, to make the proper adjustments to the UPDATE ADDRESS window.

  19. When working BT 84800 - 84999, do not input PC 75 after a Notice of Deficiency has been issued.

4.19.3.19.2  (09-04-2015)
Undeliverables

  1. The Address File updates weekly on the AUR system. New addresses loaded onto the system between the time a case is worked and the time the notice is printed automatically reflect the new address.

  2. The control function handles most undeliverable notices. However, when recomputed notices or additional correspondence are returned undeliverable, the cases can be assigned to a tax examiner for further review.

  3. The Case History Screen contains information about notice status.

    Field Description Indicator Description
    ACTION CODE - Indicates whether correspondence is remailed with a new address, is undeliverable and should be cancelled, or the notice was rejected.
    • T - True Undeliverable

    • M - Remail with new address

    • R - Rejected

    • U - New address/actions exist

    • C - Cancelled CP 2000 (notice information maintained)

    • S - Stat not mailed

    • D - Notice information deleted

    DELIVERY STATUS CODE - Indicates a response from United States Postal Service (USPS) concerning the status of the certified mailing (Stat notice).
    • A- Notice has been delivered by USPS and it has been signed for by the intended recipient or agent approved by the recipient.
      BLANK -CPS has not delivered any status update to AUR.

    • N-USPS delivery status for the mailed notice has not been received by CPS within a specified time period.

    • P-The notice has been surrendered to the USPS. Notice is pending delivery by USPS. This status updates in two (or more) weeks to one of the other delivery status codes listed.

    • S-The notice has been suppressed and not mailed by CPS.

    • U-Notice was Undeliverable by USPS.

    • X-Taxpayer refused delivery of the notice or it was unclaimed.

  4. If a new address is found from previous correspondence, input the appropriate change on the Update Address window (Undeliverables). See IRM 4.19.7, IMF Automated Underreporter (AUR) Technical System Procedures - Updating Address Information.

    Note:

    Use CAUTION when entering an address change because both the primary and secondary TP may have received a notice. Make sure to update the address for the proper TP (primary/secondary).

    1. Enter an "A" in the AMENDED field on the Notice Summary screen, if issuing a new CP notice.

    2. Re-enter the PC.

  5. If a new address is NOT found for an undeliverable notice, input the appropriate PC.

    Caution:

    Do not issue status/interim letters on undeliverable cases.

  6. If the Post Office returns certified mail as "unclaimed" or "refused" rather than undeliverable, continue processing the case using normal procedures. An additional address check is not necessary.

    Note:

    As the IRS receives weekly address update information from the Post Office, special instructions for forwarding orders expired are no longer needed.

4.19.3.20  (09-30-2014)
Taxpayer Responses

  1. Most TP explanations are self-explanatory. All returns in the AUR inventory were previously evaluated for unallowable items and audit potential. They were not selected for action in either event.

    1. When evaluating a TP's explanation for unreported income it is not necessary to verify everything the TP says. As a general rule, the issue of questionable items( those not clearly unallowable) will not be raised.

    2. The TP's explanation will generally be taken at face value, including schedules of expense submitted by the TP to offset unreported income. Consider the reasonableness of the explanation.

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

  2. Tax examiners analyzing a case worked in response phase will confine themselves to the issue(s) raised on the CP 2000/CP 2501 Notice. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Exception:

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

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

  4. Status code "J" displays on all IR elements not pursued on auto-generated notice cases.

  5. If a case is in BT 28, Auto Notice Fallout screening, process following normal AUR procedures.

4.19.3.20.1  (08-26-2016)
Taxpayer Responses - Overview

  1. The primary purpose of the AUR Program is to account for discrepancies between amounts on IRs and amounts on the tax return.

    Note:

    Due to virtual case processing some AUR cases will not have folders. When reference is made to "folders" be aware that a listing and/or other transmittal may be present.

  2. A TP's response to an AUR notice can be:

    1. A copy of the AUR notice (CP 2000/CP 2501).

    2. The TP response page (CP 2000/CP 2501).

    3. A signed Form 9465 or Form 433-D.

    4. A copy of the Notice of Deficiency (Statutory Notice).

      Note:

      THE STATUTORY NOTICE IS A LEGAL DOCUMENT. If the TP sends the original Statutory Notice OR the CP 2000 DO NOT make any marks or corrections on either. The TP is allowed 90 days (150 days if the notice is addressed to a person outside the U.S.) to petition the Tax Court. The TP cannot receive an extension of this statutory period.

    5. A letter, note, or fax.

    6. A letter from a third party.

    7. A Form 1040X or amended return.

    8. Form 3244, Payment Posting Voucher. Form 3244, is completed by Receipt and Control to record payment(s) received from the TP and posts a TC 640 payment.

    9. A telephone call.

    10. A Form 4442, Inquiry Referral, from Customer Service.

  3. If the TP's response indicates the TP's attorney submitted a qualified offer, uses the words "qualified offer" or mentions "IRC 7430(g)" , immediately fax the offer to "Chief, Branch 5, Office of the Associate Chief Counsel (Procedure & Administration)," at (855) 592-8972, requesting a determination of whether the offer is a qualified offer under IRC 7430. Along with the offer document include the following:

    Note:

    If during a phone call the TP/representative mentions they have filed a qualified offer, notify the AUR Coordinator immediately so that they can obtain the case file and take the necessary actions.

    Caution:

    Do not confuse a Qualified Offer with an Offer in Compromise.

    • a cover sheet with the name of the TP,

    • a brief description of the issue(s),

    • the type of tax and

    • the name and telephone number of a person in the campus who is the point of contact

    The subject line of the fax cover sheet should be "Purported Qualified Offer under Section 7430" . For more information about qualified offers, see IRC 7430(g), Treas. Reg. § 301.7430-7, Chief Counsel Notice 2010-007, and IRM 35.10.1, Awards of Litigation and Administration Costs and Fees. In general, a TP who submits a qualified offer and meets the other requirements of section 7430 may recover reasonable administrative and litigation costs from the IRS if the IRS does not accept the offer and the TP’s liability pursuant to a judgment in a court proceeding is equal to or less than the liability the TP would have incurred if the Service had accepted the offer.
    If the TP provides an explanation that allows the case to be closed, issue a Letter 1802C and close the case with the appropriate PC (52 for CP 2501, 71 for CP 2000, or 92 for Stat). Attach a copy of the Letter 1802C to the qualified offer that is being sent to Counsel.

  4. The TP's response (and all attachments) should be retained as part of the case file. If it can be determined that the TP has submitted original documents (i.e., birth certificate, death certificates, marriage license, etc.) make a copy for the case file and mail the originals to the TP with Form 3699, Return of Documents to Taxpayer, or a cover letter.

    Exception:

    Do not return original Form W-2, Form W-2C, and/or Form 1099-R that are required at the time of filing.

    Exception:

    Cases returned from IDTVA to AUR to continue processing may contain correspondence on AMS. Review AMS when related correspondence is indicated in the AUR case note. It is not necessary to print and maintain the imaged correspondence as part of the case file.

  5. Beginning October 1, 2015, IDTVA began scanning all correspondence into AMS/CIS.  It may be necessary to access AMS/CIS to review the information when working cases previously referred then reintroduced in the AUR Program.

    Note:

    Printing information from CIS is not required.

    Caution:

    Some original paper tax returns were scannedby IDTVA into AMS/CIS. If the paper return is missing from the case file, if necessary, access AMS/CIS to view the return when working the case. 

  6. If the TP includes his/her telephone number in the response to any notice (CP 2000/CP 2501, or Statutory Notice) take the following actions:

    1. Input/update the telephone number.

    2. If appropriate, call him/her to resolve the outstanding U/R issue(s) before sending any written correspondence. See IRM 4.19.3.20.2.4.1, Out Calls - Calling the Taxpayer, for additional information.

      Note:

      Only one attempt is required. An attempt must be made even when the TP provides only an evening phone number for a day shift tax examiner or a day phone number for a swing (night) shift tax examiner.

    3. See IRM 4.19.3.20.2.2, Disclosure, IRM 4.19.3.20.2.2.1, Disclosure Verification Screen, and guidelines regarding answering machines in IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail.

    4. Always identify yourself by title (e.g., Mr., Mrs. or Ms.) and last name or first and last name, employee identification (ID) Number, and as an IRS employee during telephone contact with the TP. Provide the TP with a telephone number to contact the Service about his/her case if needed. Always use courteous behavior when speaking to a TP via the telephone. See IRM 4.19.3.20.2, Telephone Responses, for additional telephone and mandatory Disclosure procedures that must be followed.

    5. Leave a case note to document action taken or when a phone call is attempted.

  7. When evaluating responses, review the Payer Agent information if Payer Agent Indicators are present on the Case Analysis screen for the IR(s) in question.

  8. While evaluating the TP's response, make changes to the Case Analysis and Return Value screens when appropriate. The system uses data from the screens and windows to display on the Summary screen. This action verifies that revised calculations of the U/R amount, adjustments, tax, credits, and balance due/refund amounts are accurate. It also leaves an audit trail of your actions and will make assessment information correct, if needed.

    Note:

    At the option of local management, the following suggested method may be used for processing a No Change case: All TP addressed IRs that are now resolved (i.e., no longer U/R) should be marked with status code "R" , "D" or "N" , and the Return Value screen should be committed (to account for any "other taxes or credits" issues), before entering a PC.

  9. If additional returns or adjustment documents were requested during case analysis and:

    1. The case is being closed with an assessment in the Underreporter blocking series, leave the documents with the AUR case file.

    2. The case is being closed without an assessment, refile them separately.

  10. If the TP writes in with a question or requests assistance on a non-AUR related matter:

    1. Photocopy the question/request.

    2. Notate TP name, SSN, and address on the photocopy.

    3. Forward the photocopy to the appropriate area for response.

    4. Follow Action 61/Policy Statement P-21-3 guidelines for responding to the TP. See IRM 4.19.3.20.1.5, Action 61/Policy Statement P-21-3.

  11. Any response may require a new address be entered on the Update Address window. The Clerical Function may update the address. See IRM 4.19.3.20.1.6, Address Updates.

    Caution:

    Because both the primary and secondary TP may have received a notice, use caution when entering an address. Make sure to update the proper TP (primary/secondary) address.

  12. If a notice is generated, but NOT YET MAILED to the TP, and information from the response makes it necessary to prevent the notice from being mailed, use the Stop Notice option. THIS OPTION MUST BE USED NO LATER THAN TWO FRIDAYS BEFORE THE SCHEDULED NOTICE DATE. See IRM 4.19.3.17.3, Stop Notice Functionality, for additional information.

  13. For any remittances received with responses, see IRM 4.19.3.20.1.17, Discovered Remittance and Voided Checks.

  14. When working with correspondence that has not been processed through the Clerical Function (i.e., a faxed response sent directly to a specific tax examiner), ensure that an IRS Received Date is recorded on the AUR system.

    Exception:

    A faxed Form 2848, Power of Attorney and Declaration of Representative, with no explanation is not considered correspondence for purposes of updating the AUR Received Date.

    To enter a received date, select the RCVD DATE option under the CONTROL and CASE options. Enter the SSN of the case followed by the IRS Received Date. The AUR Received Date automatically displays the current date. Commit the window. It is possible to enter multiple received dates.

    Caution:

    When entering an IRS RECD DATE for cases to be refiled, do not assign IPC RF, use IPC 6S or 8S to ensure the system retains the entered IRS Received date.

4.19.3.20.1.1  (09-01-2007)
Controlling Responses

  1. In the response phase, certain situations require specific procedures. The following instructions cover responses that need special handling, Lost Responses, and Refiling Cases.

    Note:

    See IRM 4.19.3.2.2, Lost Cases, for additional information on handling Lost Cases.

4.19.3.20.1.1.1  (09-30-2014)
Responses - Special Handling

  1. Responses associated with the wrong case folder - If the SSN on the response is assigned to the batch, but is enclosed in the wrong folder, take the following action:

    1. Remove the response from the case file (folder).

    2. Check Case History to see if the folder belongs in the batch. If yes, associate it to the correct work unit. If no, route the incorrect case file to the Clerical Function to refile.

    3. Contact clerical to obtain the correct case file for that response.

  2. If the case file is not obtained and the response cannot be worked (processing cannot continue) until the case file is located:

    Note:

    Ensure Action 61/Policy Statement P-21-3 requirements are followed.

    1. Print the Case History screen and attach it to the response.

    2. Enter IPC "LC" (Lost Case) on the Process Code window.

    3. Route the response to the Clerical Function.

  3. If the response is in the correct folder, the tax return is missing and appropriate action can be determined without the tax return continue normal processing.

  4. If the response is in the correct folder, the tax return is missing and appropriate action cannot be determined without the tax return:

    Note:

    Ensure Action 61/Policy Statement P-21-3 requirements are followed.

    1. Print the Case History screen.

    2. Notate "No Return" on the case folder.

    3. Enter IPC "LC" on the Process Code window.

    4. Route the folder to the Clerical Function.

    Note:

    The instructions in (4) above do not apply to Virtual returns.

4.19.3.20.1.1.2  (09-30-2014)
Lost Responses

  1. During the Response phase, a TP's response may be missing from the case file, the case may contain the wrong response or the case may contain an extra response.

  2. If the TP's response is missing, per the SSN assigned to the batch, notify the lead (who will search for the response in the batch). If the response is not located:

    1. Issue a Letter 2626C, apologize for the inconvenience and request the TP resubmit their response.

    2. Assign IPC 3L, 6L or 8L as appropriate.

  3. If the case contains the wrong response:

    1. Remove the wrong response and check the Case History to see if the response belongs to another case in the batch.

    2. If the response belongs in the batch, associate the response.

    3. If the response does not belong in the batch, print and attach the Case History and route to the assigned location or to clerical, as appropriate.

    4. See (2) above when the response for your case is not located.

  4. If the case contains an extra response:

    1. Remove the extra response and check the Case History to see if the response belongs to another case in the batch.

    2. If the response belongs in the batch, associate the response.

    3. If the response does not belong in the batch, print and attach the Case History and route to the assigned location or to clerical, as appropriate.


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