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4.119.4  BMF Underreporter (BMF-AUR) Program (Cont. 2)

4.119.4.7 
Analysis of Income Types

4.119.4.7.13 
Partnership/Trust/S-Corporation (Conduit Income) - General

4.119.4.7.13.3  (09-02-2016)
Partnership/Trust/S-Corporation (Conduit Income) - Miscellaneous

  1. If Conduit Income is U/R, enter the following on the Letter 2030:

    1. Select the PARTNERSHIP/TRUST/SMALL BUSINESS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Conduit Income IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.7.14  (09-02-2016)
Form 1041 Qualified Education Program Payments - General

  1. Qualified Education Program Payments consist of Qualified Tuition Program (QTP) and are reported to IRS on Form 1099-Q. Amount indicators on the Form 1099-Q reflects Gross Distribution (Box 1); Earnings (Box 2); and Qualified Tuition Basis (Basis) (Box 3).

  2. Form 1099-Q IRs may display a distribution type based on the information in Form 1099-Q, Box 5. The following distribution types are for information only.

    1. PRIVATE BOX CHECKED.

    2. STATE BOX CHECKED.

    3. COVERDELL ESA. BOX CHECKED.

  3. Qualified Education Program Payments are reported on Form 1099-Q and displays on IDRS CC:IRPTR as Amount Type (IRPTR Literal) QTP EARNGS.

    Note:

    QTP DIST & QTP BASIS is for information purposes only.

4.119.4.7.14.1  (09-02-2016)
Form 1041 Qualified Education Program Payments - Analyzation

  1. If the IR shows TRUSTEE ROLLOVER BOX CHECKED the distribution is nontaxable. Do not pursue the issue.

  2. Only pursue net positive EARNGS. When there are multiple Form 1099-Q IR(s), combine positive EARNGS with any negative EARNGS. If the combined net EARNGS is negative, do not pursue the EARNGS issue.

  3. Generally, QTP distributions are nontaxable if they are less than the designated beneficiary's qualified education expenses. The taxable amount is reported on Form 1041, line 8. Consider the Form 1099-Q distribution(s) reported when:

    1. The taxpayer identifies the amount reported on line 8 as the taxable portion of the Form 1099-Q distribution.

    2. The taxpayer indicates the designated beneficiary's qualified education expenses were greater than the Form 1099-Q distribution.

  4. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instructions.

4.119.4.7.14.2  (09-02-2016)
Form 1041 Qualified Education Program Payments - Miscellaneous

  1. If Qualified Education Program Payments is U/R, enter the following on the Letter 2030:

    1. Select QUALIFIED EDUCATION PROGRAM PAYMENTS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Qualified Education Program Payments IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

  2. Include PARAGRAPH 9 when Qualified Education Program Payments is U/R.

4.119.4.7.15  (09-02-2016)
Real Estate Sales - General

  1. Real estate transactions are the proceeds from the transfer (sale or exchange) of real estate.

  2. Real estate transactions are identified with Document Type "1099-S" and are displayed on IDRS CC:IRPTR as Amount Type (IRPTR Literal) REAL ES SL.

    Note:

    BYR RE TAX is displayed for information only.

4.119.4.7.15.1  (09-02-2016)
Real Estate - Analyzation

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  3. Compare Real Estate Sales amounts with entries on:

    Form 1041 Form 1120
    1. Form 1041, line 8. Taxpayers are instructed to identify any amounts reported on Form 1041, line 8. DO NOT give credit for any unidentified amounts reported on line 8, unless there is a $1 match.

    2. Form 1040, Schedule C, line 1 or 6 or C-EZ line 1 ONLY when the Business Activity relates to Real Estate activities. Consider any other Business income related IRs when determining the total amount to compare to Form 1040, Schedule C, line 1 or 6 or C-EZ line 1.

    3. Form 4797, Sale of Business Property, lines 1, 2(d), 10(d), or 20.

    4. Form 6252, Installment Sale Income, lines 5 or 21.

    5. Form 1041, Schedule D, or Form 8949.

    6. Form 8824, Like-Kind Exchanges, line 15.

    1. Form 1120, line 10. Taxpayers are instructed to identify any amounts reported on Form 1120, line 10. DO NOT give credit for any unidentified amounts reported on line 10, unless there is a $1 match.

    2. Form 1120, line 1a (Gross Receipts) ONLY when the taxpayer name or Business Activity on Form 1120, Schedule K lines 2a - c relates to Real Estate activities See IRM 4.119.4.7.10, Form 1120 Gross Receipts or Sales (Bartering/Payment Card Transactions/Attorney's Proceeds/Fishing Proceeds/Medical Payments/Nonemployee Compensation) – General, for additional information on information returns that are related to Gross Receipts or Sales. Consider any other Gross Receipts related IRs when determining the total amount to compare to Form 1120, line 1a.

    3. Form 4797, Sale of Business Property, lines 1, 2(d), 10(d), or 20.

    4. Form 6252, Installment Sale Income, lines 5 or 21.

    5. Form 1120, Schedule D, Part I, line(s) 1 - 3 column (d) or Part II line(s) 8 - 10, column (d).

    6. Form 8949, lines Part I line 1 column (d) or Part II line 1 column (d).

    7. Form 8824, Like-Kind Exchanges, line 15.

  4. If the amounts reported on these Forms or Schedules are equal to or greater than the REAL ES SL IR(s) amounts, consider the issue resolved. If the amounts reported are less, consider the difference U/R.

  5. Ensure that amounts reported on Forms and Schedules are properly carried forward to page 1 of the tax return.

  6. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.15.2  (09-02-2016)
Real Estate - Miscellaneous

  1. If Real Estate Sales is U/R, enter the following on the Letter 2030:

    1. Select REAL ESTATE SALES from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Real Estate Sales IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

  2. Include PARAGRAPH 18 when Real Estate Sales are U/R.

4.119.4.7.16  (09-02-2016)
Form 1120 Rents - General

  1. Rental income is compensation for the use of property by someone other than the owner.

  2. Rents display on IDRS CC:IRPTR with the following Amount Type and Document Type:

    Income Type Amount Type (IRPTR Literal) Document Type
    Rents RENTS 1099-MISC
    Net Rental Real Estate Income NET RENTAL K-1 1041
    Other Rental income OTH RENTAL K-1 1041
    Net Rental Real Estate Income REAL EST K-1 1065
    Other Net Rental income OTHER RENT K-1 1065
    Net Rental Real Estate Income REAL EST K-1 1120S
    Other Net Rental Income OTHER RENT K-1 1120S

4.119.4.7.16.1  (09-02-2016)
Form 1120 Rents - Analyzation

  1. Compare Rental Information Return amounts with entries on:

    1. Form 1120, line 6.

    2. Form 1040, Schedule F, Part I or Part III. lines 2, 8 or 43. The amount must match within $1 or be clearly identified as Rental Income.

    3. Form 1120, line 10. The amount must match within $1 or be clearly identified as Rental Income.

    4. Form 1120, line 1a when the taxpayer name or Business Activity as shown on Form 1120, Schedule K, lines 2a – 2c relates to rental activity (i.e., Rental, Real Estate, Property Management, Warehouse Storage, Leasing, Rental Equipment, etc.). See IRM 4.119.4.7.10, Form 1120 Gross Receipts or Sales (Bartering/Payment Card Transactions/Attorney's Proceeds/Fishing Proceeds/Medical Payments/Nonemployee Compensation) - General, for additional information. Consider any other Gross Receipts related IRs when determining the total amount to compare to Form 1120, line 1a.

      Exception:

      Do not give credit for any amounts reported on Form 1120, line 1a when the taxpayer has reported an amount on Form 1120, line 6 (Gross Rents).

  2. When more than one information return containing Rental Income are present and the taxpayer does not provide a breakdown:

    1. Group all rent IRs together.

    2. Compare the group total amount to the total reported rents.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  3. When an attachment or statement indicates Nominee income see IRM 4.119.4.4.7, Nominee Recipient, for further instructions.

4.119.4.7.16.2  (09-02-2016)
Form 1120 Rents - Miscellaneous

  1. If Rental Income is U/R, enter the following on the Letter 2030:

    1. Select RENTS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Rent IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.7.17  (09-02-2016)
Form 1041 Rents and Royalties - General

  1. Rent and Royalties income is compensation for the use of property or rights by someone other than the owner.

  2. Rent and Royalties display on IDRS CC:IRPTR with the following Amount Type and Document Type:

    Income Type Amount Type (IRPTR Literal) Document Type
    Rents RENTS 1099-MISC
    Net Rental Real Estate Income NET RENTAL K-1 1041
    Other Rental income OTH RENTAL K-1 1041
    Net Rental Real Estate Income REAL EST K-1 1065
    Other Net Rental Income OTHER RENT K-1 1065
    Net Rental Real Estate Income REAL EST K-1 1120S
    Other Net Rental Income OTHER RENT K-1 1120S
    Royalties ROYALTIES 1099-MISC
    Royalties ROYALTIES K-1 1065
    Royalties ROYALTIES K-1 1120S

4.119.4.7.17.1  (09-02-2016)
Form 1041 Rents and Royalties - Analyzation

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

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

  2. Compare RENTS or ROYALTIES amounts with entries on:

    1. Form 1040, Schedule E, Part I, lines 3 and 4.

    2. Form 1041, line 5.

    3. Form 1040, Schedule C, Part l, line 1 or Schedule C-EZ, Part II, line 1. If the taxpayer is in the business of rental property, or it can be determined from the payer name or business activity that the income is from the same source. When screening for Rents/Royalties income on Form 1040, Schedule C, also consider any additional Business Income IR(s) to determine the U/R amount.

    4. Consider the IRs reported if the gross amount on Form 4835 is large enough to include the Rent/Royalty amount. As long as distributions from Amount Types (IRPTR Literal) TX GRANT, PATRONAGE, NONPAT DIS, RTAIN ALLC, AG SUBS, MRKGAINCCC, and CROP INS are accounted for first. Otherwise, issue a Letter 2030 for the full amount of the IR(s).

    5. Form 1041, Schedule D, or Form 8949. If income is identified as Coal and Timber royalties, patents, rights of way, or easements. If the payer is identified and the amount is larger accept, if the payer is identified and the amount is smaller give credit and pursue the difference.

  3. RENTS or ROYALTIES for the following entries must match within $1 or be CLEARLY IDENTIFIED:

    1. Form 1040, Schedule C, Part 1, line 6.

    2. Form 1040, Schedule E Part ll.

    3. Form 1040, Schedule F, Part I or Part III. Do not pursue IRs when the amount matches Form 1040, Schedule F, lines 2, 8 or 43 within $1, or a larger amount is present and is identified as rent or royalty.

    4. Form 1041, line 8.

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      Note:

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

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

  5. If a breakdown of Rents and Royalty Income is not shown on the return and there is more than one IR:

    1. Group by income type RENTS or ROYALTIES as applicable.

    2. Compare the group total amount to the total reported rents or royalties.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  6. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.17.2  (09-02-2016)
Form 1041 Rents and Royalties - Miscellaneous

  1. If Rents and Royalties is U/R, enter the following on the Letter 2030:

    1. Select RENTS or ROYALTIES from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Rents or Royalties IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.7.18  (09-02-2016)
Form 1120 Royalties - General

  1. Royalties are compensation for the use of property, usually copyrighted works, patented inventions, or natural resources, by someone other than the owner.

  2. Royalties display on IDRS CC:IRPTR with the following Amount Type and Document Type:

    Income Type Amount Type (IRPTR Literal) Document Type
    Royalties ROYALTIES 1099-MISC
    Royalties ROYALTIES K-1 1065
    Royalties ROYALTIES K-1 1120S

4.119.4.7.18.1  (09-02-2016)
Form 1120 Royalties - Analyzation

  1. Compare Royalties amounts with entries on:

    1. Form 1120, line 7.

    2. Form 1040, Schedule F, Part I or Part III, lines 8 or 43. The amount must match within $1 or be clearly identified as Royalties.

    3. Form 1120, line 10. The amount must match within $1 or be clearly identified as Royalties.

    4. Form 1120, line 1a when the taxpayer name or Business Activity as shown on Form 1120, Schedule K lines 2a - c relates to Mining, Independent Artists (including Writers and/or Performers), Advertising or Publishing (including Software Development and/or Film Production) activities. See IRM 4.119.4.7.10, Form 1120 Gross Receipts or Sales (Bartering/Payment Card Transactions/Attorney's Proceeds/Fishing Proceeds/Medical Payments/Nonemployee Compensation) - General, for additional information. Consider any other Gross Receipts related IRs when determining the total amount to compare to Form 1120, line 1a.

      Exception:

      Do not give credit for any amounts reported on Form 1120, line 1a when the taxpayer has reported an amount on Form 1120, line 7 (Gross Royalties).

  2. When more than one information return containing Royalties are present and the taxpayer does not provide a breakdown:

    1. Group all Royalties together.

    2. Compare the group total amount to the total reported Royalties.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  3. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instructions.

4.119.4.7.18.2  (09-02-2016)
Form 1120 Royalties - Miscellaneous

  1. If Royalties are U/R, enter the following on the Letter 2030:

    1. Select ROYALTIES from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Royalty IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.7.19  (09-02-2016)
Securities Sales and Cost Basis - General

  1. Securities Sales are the proceeds from transactions involving stocks, bonds, options, other debt obligations, commodities or forward contracts.

  2. Cost Basis represents the purchase price of the securities sale.

  3. Securities Sales are identified on IDRS CC:IRPTR with Document Type 1099-B and Amount Type (IRPTR Literal) PROCEEDS.

    Note:

    Prior to Tax Year 2014 Amount Type PROCEEDS displayed as STOCK&BOND.

  4. Cost Basis is identified on IDRS CC:IRPTR with Document Type 1099-B and Amount Type (IRPTRL Literal) COST&BASIS.

    Note:

    Amount Type ADJUSTMENT is for information purposes only. Prior to Tax year 2014 Amount Type ADJUSTMENT displayed as SALE&LOSS.

    Note:

    Payers report COST&BASIS on "covered securities" (e.g., the sale of a stock transaction that was purchased in 2011 or later). Therefore, not all Form 1099-B IRs will contain a COST&BASIS.

4.119.4.7.19.1  (09-02-2016)
Securities Sales and Cost Basis - Analyzation

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  2. Generally, Form 1099-B PROCEEDS IRs contain a CUSIP (Committee on Uniform Security Identification Procedures) number. This number is usually nine characters long, consisting of alpha and/or numeric characters. The CUSIP number identifies the issuer of the transaction and the type of transaction. Alpha characters in the 7th and/or 8th position(s) of the CUSIP number denote fixed income obligation securities. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ When the taxpayer has reported these amounts, the IRs must be taken into consideration when determining the U/R amount.

    1. Be careful when determining the position of the CUSIP number containing the alpha characters. The first six digits represent the issuer number and the 4th and 5th and/or 6th positions may contain alpha character(s).

    2. Pursue PROCEEDS IRs whose entity includes nontaxable Municipal Bond, tax free exchange or tax free unless the CUSIP number meets the conditions provided above.

  3. Some PROCEEDS IR(s) appear to be duplicates because the account numbers, the amounts, AND the source (paper or tape) are identical. DO NOT consider these IR(s) as duplicates if the transaction (sales) dates shown on the IR(s) are different.

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

    Example:

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

  5. Form 1041 or Form 1120, Schedule D, line 1a and/or line 8a is used to report an aggregate total of stock transactions that don't require a breakdown on Form 8949, Sales and Other Dispositions of Capital Assets.HOWEVER the taxpayer can also complete a Form 8949 for other transactions that are then reported on Form 1041 or Form 1120 Schedule D line 1b, 2, 3, 8b, 9 and/or 10.

    1. Utilize the instructions in (6) and (7) below when screening cases where the taxpayer has reported transactions on Form 1041 or Form 1120, Schedule D line 1a and/or 8a AND also includes a Form 8949 to report other transactions.

    2. Attempt to resolve specific IRs by comparing them to the specific transactions reported on Form 8949BEFORE grouping to match against the aggregate total reported on Form 1041 or Form 1120, Schedule D line 1a and/or 8a.

  6. If Form 1041 or Form 1120, Schedule D is present without Form 8949 compare PROCEEDS amounts with entries on:

    1. Form 1041 or Form 1120, Schedule D, Part I, line(s) 1a through 3, column (d).

    2. Form 1041 or Form 1120, Schedule D, Part II, line(s) 8a through 10, column (d).

      Note:

      Use the IR payer name or item description to identify the transactions reported on the tax return.

      Note:

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

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

      Reminder:

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

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

      ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  7. If the Form 8949, or attachment includes a breakdown of transactions by payer name, sales date or item description:

    Caution:

    If the Form 8949 or attachment does not provide sufficient detail to match against the IRs (e.g., The description of property is listed as: securities, various, various stock sales, etc.), group any remaining outstanding IRs against the total proceeds reported on Form 8949 Part I, line 1, column (d) or Part II, line 1, column (d).

    1. Compare Form 8949 Part I, line 1, column (d) or Part II, line 1, column (d) entries to the PROCEEDS and give credit for identified reported amounts.

    2. If there are multiple IRs with the same payer name or item description, compare the total to the identified amount(s) reported on the return.

    3. Do not give credit for any amounts reported on the Form 8949 when the payer name or item description does not match the IR, unless there is a dollar match.

    4. Ensure that any amounts reported on attachments/forms are properly included as income on page one of the return.

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

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

      Reminder:

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

    7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  8. Form 1041 only - If PROCEEDS are U/R and the taxpayer reports a capital loss of $3,000 or more include PARAGRAPH 8.

  9. If the taxpayer does not file a Form 1041 or Form 1120 Schedule D, Form 8949 or a breakdown of securities sales is not provided and there is more than one Securities Sales IR, take the following action:

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

    2. Group the remaining IRs by Amount Type PROCEEDS and compare the total to the gross amounts reported on Form 1041, line 4 or Form 1120, line 8.

      Exception:

      Do not give credit for amounts on Form 1041, line 4 or Form 1120, line 8 if the amounts listed are clearly identified as a different income type.

    3. If the PROCEEDS group total is smaller, consider the issue resolved.

    4. If the PROCEEDS group total is larger, consider the difference underreported.

    5. Group any COST&BASIS Amount Types, consider the difference underreported and enter zero as the reported amount.

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

      ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
  10. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.19.2  (09-02-2016)
Securities Sales and Cost Basis - Miscellaneous

  1. When PROCEEDS is U/R, enter the following on the Letter 2030:

    1. Select SECURITIES SALES from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Securities Sales IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

  2. Send PARAGRAPH 13 when Securities Sales are U/R.

  3. When COST&BASIS is U/R, enter the following on the Letter 2030:

    1. Select COST BASIS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount as a negative in the "Shown on return" field.

    3. Enter the total of all U/R Cost Basis IR amounts PLUS the "Shown on return" amount as a negative in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

  4. Form 1041 only - Include PARAGRAPH 8 when applicable.

4.119.4.7.20  (09-02-2016)
Substitute Payments in Lieu of Dividends or Interest - General

  1. Substitute Payments in lieu of dividends or interest are made by a broker who transfers a taxpayer’s securities for use in a short sale or in securities lending transaction and receives certain substitute dividend or interest payments on the taxpayer’s behalf while the short sale or securities lending transaction is open.

  2. Substitute Payments in lieu of dividends or interest are identified with Document Type "1099-MISC" and displays on IDRS CC:IRPTR as Amount Type (IRPTR Literal) SUB PAYMTS.

4.119.4.7.20.1  (09-02-2016)
Substitute Payments in Lieu of Dividends or Interest - Analyzation

  1. Compare Amount Type SUB PAYMTS. with entries on Form 1041, line 8 or Form 1120, line 10. Taxpayers are instructed to identify any amounts reported on Form 1041, line 8 or Form 1120, line 10. DO NOT give credit for any unidentified amounts reported on line 10, unless there is a $1 match.

  2. When more than one information return containing Substitute Payments in Lieu of Dividends or Interest amounts are present and the taxpayer does not provide a breakdown:

    1. Group all Substitute Payments in Lieu of Dividends or Interest together.

    2. Compare the group total amount to the total reported.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  3. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.20.2  (09-02-2016)
Substitute Payments in Lieu of Dividends or Interest - Miscellaneous

  1. If Substitute Payments in Lieu of Dividends or Interest is U/R, enter the following on the Letter 2030:

    1. Select PAYMENTS IN LIEU OF DIVIDENDS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Substitute Payments in Lieu of Dividends or Interest IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.7.21  (09-02-2016)
Taxable Grants - General

  1. A grant is subsidized financing paid by a federal, state, or local programs for energy conservation or production projects, and is income to the recipient.

  2. Taxable grants are reported on Form 1099-G.

  3. Taxable grants are identified on IDRS CC:IRPTR as Amount type (IRPTR Literal) TX GRANT.

4.119.4.7.21.1  (09-02-2016)
Form 1041 Taxable Grants - Analyzation

  1. If the payer is the US Department of Agriculture, compare Taxable Grant amount(s) with entries on:

    1. Form 1040, Schedule F, lines 4a (line 4b if line 4a is zero or blank) or line 39a (line 39b if line 39a is zero or blank).

    2. Form 1040, Schedule F, lines 8 or 43. The amount must match within $1 or be clearly identified as grants.

    3. Form 1040, Schedule E, Part I, line 3. Group all farm related Amount Types from all IR(s) with any other rental related Amount Types IR(s) present.

      Exception:

      Do not allow credit for any amount reported on Form 1040, Schedule E, Part I, line 3 if the taxpayer has reported farming income elsewhere on the return.

    4. Form 4835, line 3a (line 3b if line 3a is zero or blank).

    5. Form 1041, line 6.

      Note:

      Give credit for amounts reported on Form 1041, line 8 when identified as Gross Farm Income ONLY when Form 1040, Schedule F or Form 4835 is not attached.

      Note:

      If agriculture payments are present, consider these amounts when determining the U/R.

    6. Form 1041, line 8. Taxpayers are instructed to identify any amounts reported on Form 1041, line 8. DO NOT give credit for any unidentified amounts reported on line 8, unless there is a $1 match.

    7. Form 1040, Schedule E, Part V, line 42:

      If the amount reported on Schedule E, Part V, line 42 is Then
      Equal to or greater than the sum total of all farm related Amount Types from all IR's Consider the income discrepancy resolved.
      Less than the sum total of all farm related Amount Types from all IR's Pursue the IR amount(s) in full DO NOT give credit for any amount reported on this line.

      Exception:

      Do not allow credit for any amount reported on Form 1040, Schedule E, Part V, line 42 when the taxpayer has reported farm income elsewhere on the return.

  2. When more than one information return containing Taxable Grants amounts are present and the taxpayer does not provide a breakdown:

    1. Group all Taxable Grants together.

    2. Compare the group total amount to the total reported.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  3. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.21.2  (09-02-2016)
Form 1120 Taxable Grants - Analyzation

  1. Compare Taxable Grants with entries on Form 1120, line 10. Taxpayers are instructed to identify any amounts reported on Form 1120, line 10. DO NOT give credit for any unidentified amounts reported on line 10, unless there is a $1 match.

  2. If the payer is the US Department of Agriculture, compare Taxable Grant amount(s) with entries on:

    1. Form 1040, Schedule F, lines 4a (line 4b if line 4a is zero or blank) or line 39a (line 39b if line 39a is zero or blank).

    2. Form 1040, Schedule F, lines 8 or 43. The amount must match within $1 or be clearly identified as grants.

    3. Form 4835, line 3a (line 3b if line 3a is zero or blank).

    4. Give credit for amounts reported on Form 1120, line 10 when identified as Gross Farm Income ONLY when Form 1040, Schedule F or Form 4835 is not attached.

      Note:

      If agriculture payments are present, consider these amounts when determining the U/R.

    5. Form 1120, line 1a when the taxpayer name or Business Activity as shown on Form 1120, Schedule K, lines 2a – 2c relates to farming activity. See IRM 4.119.4.7.10, Form 1120 Gross Receipts or Sales (Bartering/Payment Card Transactions/Attorney's Proceeds/Fishing Proceeds/Medical Payments/Nonemployee Compensation) - General, for additional information. Consider any other Gross Receipts and farming related IRs when determining the total amount to compare to Form 1120, line 1a.

      Exception:

      Do not give credit for any amounts reported on Form 1120, line 1a when the taxpayer has reported farming income on Form 1120, line 10.

  3. When more than one information return containing Taxable Grants amounts are present and the taxpayer does not provide a breakdown:

    1. Group all Taxable Grants together.

    2. Compare the group total amount to the total reported.

    3. If the group total is smaller, consider the issue resolved.

    4. If the group total is larger, consider the difference underreported.

  4. When an attachment or statement indicates Nominee income. See IRM 4.119.4.4.7, Nominee Recipient, for further instruction.

4.119.4.7.21.3  (09-02-2016)
Taxable Grants - Miscellaneous

  1. If Taxable Grants are U/R, enter the following on the Letter 2030:

    1. Select TAXABLE GRANTS from the drop down menu in the "Your income and deductions" field.

      Exception:

      Form 1041 only - When giving credit for amounts reported on Form 1040, Schedule E, Part I, line 3, select RENTS from the drop down menu in the "Your income and deductions" field.

    2. Enter the gross reported amount in the "Shown on return" field.

    3. Enter the total of all U/R Taxable Grants IR amounts PLUS the "Shown on return" amount in the "As corrected by IRS" field.

      Caution:

      It may be necessary to include any additional amounts identified on the return.

    4. Verify the "Difference" field matches the U/R amount.

4.119.4.8  (09-02-2016)
Net Operating Loss (NOL) Recovery

  1. Net Operating Loss (NOL) Recovery cases are identified as returns claiming an NOL deduction on Form 1120, line 29a and a prior year BMF AUR adjustment.

  2. Cases that meet the above criteria are identified on the DCI as Subfile N and/or identified with treated code NOL1.

  3. Refer cases in Subfile N or identified with a NOL1 to the Lead Tax Examiner.

4.119.4.9  (09-02-2016)
Form 1120 Recomputation of Tax

  1. Most corporations figure their tax by using the tax rate schedule.

    Note:

    The Tax Rate Schedule shown below is valid for tax years 2013 - 2015.

    If taxable income is over But not over Tax is Of the
    amount over
    $0 $50,000 15% $0
    $50,000 $75,000 $7,500 + 25% $50,000
    $75,000 $100,000 $13,750 + 34% $75,000
    $100,000 $335,000 $22,250 + 39% $100,000
    $335,000 $10,000,000 $113,900 + 34% $335,000
    $10,000,000 $15,000,000 $3,400,000 + 35% $10,000,000
    $15,000,000 $18,333,333 $5,150,000 + 38% $15,000,000
    $18,333,333 ---------- 35% 0

4.119.4.9.1  (09-11-2015)
Form 1120 Qualified Personal Service Corporation (QPSC) Tax Rate

  1. A corporation is considered a Qualified Personal Service Corporation (QPSC) when it meets both of the following conditions:

    1. Substantially all of the corporation’s activities involve the performance of services in the fields of: health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting AND

    2. At least 95% of the corporation’s stock is directly or indirectly owned by its: employees, retired employees, and the estate or legatees of those persons, or any other person who acquired such stock by reason of the death of an employee or retired employee (but only for the 2-year period beginning on the date of the death of such individual).

  2. A QPSC is taxed at a flat rate of 35% on their taxable income.

    Note:

    Due to Original Processing errors, it is possible that the taxpayer indicated that they are a QPSC but did not use the 35% tax rate to calculate their base tax.

  3. A taxpayer is identified as a QPSC when they check the qualified personal service corporation box on Form 1120, Schedule J, line 2.

    Note:

    When the taxpayer checks this box the tax return is flagged and the following codes are uploaded to Masterfile: ALBM CD 400 and CONTROL GRP CD 2.

    Note:

    If the taxpayer also checks the "member of a controlled group" box 1 on Form 1120, Schedule J, the QPSC takes priority.

  4. When the taxpayer has checked the "qualified personal service corporation" box on Form 1120, Schedule J, line 2 take the following actions:

    1. Verify that the "PSC" box on the DCI contains a "check mark."

    2. If the "PSC" box on the DCI is blank, enter a "check mark" in the "PSC" box on the DCI.

    Reminder:

    Take into consideration any prior adjustments for tax and taxable income when preparing a notice. If information was received after the original return was filed (e.g., amended return was filed) indicating the corporation is no longer a QPSC, remove the PSC check mark on the DCI.

  5. When issuing a Letter 2030, use the QPSC rate to determine tax when there is an indication that the taxpayer is a QPSC.

  6. Include PARAGRAPH 35 on the Letter 2030 when the taxpayer indicated they are a QPSC but did not use the 35% tax rate to calculate their base tax.

  7. Based on the taxpayer’s response, it may be necessary to recalculate the QPSC tax to the applicable tax schedule rate.

4.119.4.9.2  (12-11-2014)
Form 1120 Schedule O, Consent Plan and Apportionment Schedule for a Controlled Group

  1. A corporation that is a member of a controlled group uses Form 1120, Schedule O, Consent Plan and Apportionment Schedule for a Controlled Group, to report the distribution of taxable income and income tax (including certain tax benefits) between all members of the group. The Schedule O includes all of the control group members and lists them in Part II and Part III.

  2. For each member of the control group, taxable income is allocated to the following tax rate brackets:

    • 15% tax rate - limited to $50,000

    • 25% tax rate - limited to $25,000

    • 34% tax rate - limited to $9,925,000

  3. For each member of the control group, certain tax benefits are allocated to the following tax rate brackets:

    • 5% tax rate - limited to $11,750

    • 3% tax rate - limited to $100,000

  4. Taxpayers filing Form 1120, Schedule O are instructed to check Form 1120, Schedule J, box 1.

    Note:

    If the taxpayer also checks the "qualified personal service corporation" box on Form 1120, Schedule J, line 2, the QPSC indicator takes priority.

  5. If the taxpayer uses a Schedule O to determine tax, refer to the Lead Tax Examiner who will determine if the case should be transferred to the TCO when a response (or no response to Letter 2531) requires a Letter 2030 (or recomputed Letter 2030).

    Reminder:

    Issue a Letter 2531 as the initial taxpayer contact. See IRM 4.119.4.6, Determination of Letter 2531 Issuance.

  6. Include PARAGRAPH 36 when issuing a notice.

4.119.4.10  (09-11-2015)
Form 1120 Non - Refundable Credits

  1. Non-Refundable credits are used to reduce tax. They include the following credits reported on:

    1. Form 1118, Foreign Tax Credit-Corporations, reported on Form 1120, Schedule J, line 5a.

    2. Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit, reported on Form 1120, Schedule J, line 5b.

    3. Form 5735, American Samoa Economic Development Credit, reported on Form 1120, Schedule J, line 5b.

      Note:

      Although not listed on Form 1120, Schedule J, the Form 1120, reporting instructions direct the taxpayer to include any credit from Form 5735 on Schedule J, line 5b.

    4. Form 3800, General Business Credit, reported on Form 1120, Schedule J, line 5c.

    5. Form 8827, Credit for Prior Year Minimum Tax-Corporations, reported on Form 1120, Schedule J, line 5d.

    6. Form 8912, Credit to Holders of Credit Bonds reported on Form 1120, Schedule J, line 5e.

  2. Include PARAGRAPH 40 when the tax return shows any entries on Form 1120 Schedule J lines 5a - 5e (other than zero).

4.119.4.10.1  (09-11-2015)
Form 1120 Carryforward Credits

  1. The following credits are carryforward credits:

    1. Form 1118, Foreign Tax Credit-Corporations, Schedule K (Foreign Tax Carryover Reconciliation Schedule).

    2. Form 3800, General Business Credit.

    3. Form 8827, Credit for Prior Year Minimum Tax-Corporations.

      Note:

      Taxpayer can claim the unused portion of a carryforward credit on their subsequent year's tax return.

      Note:

      Both Form 3800, General Business Credit and Form 8827, Credit for Prior Year Minimum Tax-Corporations, have a refundable credit component which can be claimed on Form 1120, Schedule J, line 19c.

  2. Based on the taxpayer's response it may be necessary to revise the amount of carryforward credits claimed. Ensure that carryback/carryforward guidelines are followed if the taxpayer responds requesting change(s) to the amount of previously reported credit(s). See IRM 4.119.4.21.7.3, NOL Carryback/Carryforward, for additional instructions.

4.119.4.11  (09-02-2016)
Form 1120 Other Taxes

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

  2. These other taxes may include:

    • Additions to Base Tax - Taxpayers subject to deferred tax under IRC 1291 or IRC 197(f) are instructed to add the amount(s) to base tax on the dotted portion of Form 1120, Schedule J, line 2

    • Form 4626, Alternative Minimum Tax – Corporations

    • Form 1120 Schedule PH, U.S. Personal Holding Company (PHC) Tax

      Reminder:

      If the taxpayer filed Schedule PH, refer to the Lead Tax Examiner who will determine if the case should be transferred to the TCO when a response (or no response to Letter 2531) requires a Letter 2030 (or recomputed Letter 2030).

    • Form 4255, Recapture of Investment Credit

    • Form 8611, Recapture of Low-Income Housing Credit

    • Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts

    • Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method

    • Form 8902, Alternative Tax on Qualifying Shipping Activities

    • Other taxes reported on Form 1120, Schedule J, line 9f

  3. Based on the taxpayer’s response Other Taxes may change.

4.119.4.12  (09-02-2016)
Form 1041 Recomputation of Tax

  1. Most estates and trusts figure their tax by using the tax rate schedule below:

    Tax Year 2015: If the taxable income is over: But not over: The tax is: Of the amount over:
    $0 $2,500 15% $0
    $2,500 $5,900 $375 + 25% $2,500
    $5,900 $9,050 $1,225 + 28% $5,900
    $9,050 $12,300 $2,107 + 33% $9,050
    $12,300 --------- $3,179.50 + 39.6% $12,300
    Tax Year 2014: If the taxable income is over: But not over: The tax is: Of the amount over:
    $0 $2,500 15% $0
    $2,500 $5,800 $375 + 25% $2,500
    $5,800 $8,900 $1,200 + 28% $5,800
    $8,900 $12,150 $2068 + 33% $8,900
    $12,150 -------- $3,140.50 + 39.6% $12,150
    Tax Year 2013: If the taxable income is over: But not over: The tax is: Of the amount over:
    $0 $2,450 15% $0
    $2,450 $5,700 $367.50 + 25% $2,450
    $5,700 $8,750 $1,180 + 28% $5,700
    $8,750 $11,950 $2,034 + 33% $8,750
    $11,950 ------- $3,090 + 39.6% $11,950
  2. Estates and trusts may also figure their tax by using the Capital Gains tax rate. Generally the taxpayer completes Form 1041, Schedule D, Part V to determine their tax using this method. However, if the taxpayer reports qualified dividends on Form 1041, line 2b(2) and does not have to complete Schedule D, Part I or Part II, they can use the Qualified Dividends tax Worksheet instead.

    1. When issuing a Letter 2030, complete the Capital Gains Tax Rate Calculation Worksheet.

    2. Always enter the reported qualified dividends reported on Form 1041, line 2b(2) in the worksheet, even if the taxpayer did not file a Schedule D.

      Note:

      Qualified Dividends are used in determining the proper Capital Gains tax rate.

4.119.4.13  (09-11-2015)
Form 1041 Non - Refundable Credits

  1. Non-Refundable credits are used to reduce tax. They include the following credits reported on:

    1. Form 1116, Foreign Tax Credit, reported on Form 1041, Schedule G, line 2a.

    2. Form 3800, General Business Credit, reported on Form 1041, Schedule G, line 2b.

    3. Form 8801, Credit for Prior Year Minimum Tax-Individuals, Estates and Trusts, reported on Form 1041, Schedule G, line 2c.

    4. Form 8912, Credit to Holders of Tax Credit Bonds, reported on Form 1041, Schedule G, line 2d.

  2. Include PARAGRAPH 40 when the tax return shows any entries on Form 1041 Schedule G lines 2a -2d (other than zero).

4.119.4.13.1  (09-11-2015)
Form 1041 Carryforward Credits

  1. The following credits are carryforward credits:

    1. Form 3800, General Business Credit.

    2. Form 8801, Credit for Prior Year Minimum Tax-Individual, Estates and Trusts.

    Note:

    Taxpayer can claim the unused portion of a carryforward credit on their subsequent year's tax return.

  2. Based on the taxpayer's response it may be necessary to revise the amount of carryforward credits claimed. Ensure that carryback/carryforward guidelines are followed if the taxpayer responds requesting change(s) to the amount of previously reported credit(s). See IRM 4.119.4.21.7.3, NOL Carryback/Carryforward, for additional instructions.

4.119.4.14  (09-11-2015)
Form 1041 Other Taxes

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

  2. These other taxes may include:

    • Tax on Lump-Sum Distributions Form 4972

    • Alternative Minimum Tax-Estates and Trusts Form 1041 Schedule I

    • Net Investment Income Tax - Individuals, Estates, and Trust - Form 8960 See IRM 4.119.4.14.1, Form 1041 Net Investment Income Tax - Individuals, Estates, and Trusts, Form 8960, for further instructions

    • Recapture taxes are reported on a Form 4255, Recapture of Investment Credit ,or Form 8611, Recapture of Low-Income Housing Credit

    • Household Employment Taxes. Form 1040 Schedule H

  3. Based on the taxpayer’s response Other Taxes may change.

4.119.4.14.1  (09-02-2016)
Form 1041 Net Investment Income Tax - Individuals, Estates, and Trusts, Form 8960

  1. The Health Care and Education Reconciliation Act of 2010 added a Net Investment Income Tax (NIIT) under section 1411 of the Internal Revenue Code for tax years 2013 and subsequent. The NIIT applies at a rate of 3.8% to certain Net Investment Income (NII) of individuals, estates and trusts.

  2. The NIIT tax applies to estates and trusts that have undistributed net investment income and their adjusted gross income (AGI) exceeds:

    Tax year 2015 $12,300
    Tax year 2014 $12,150
    Tax year 2013 $11,950
  3. Taxpayers figure their Adjusted Gross Income (AGI) by reducing the total income reported on line 9 by the following:

    1. The total of lines 12 (Fiduciary fees) 14 (Attorney, accountant and return preparer fees) and 15a (Other deductions not subject to the 2% floor) to the extent they are costs incurred in the administration of estate or trust.

    2. The domestic productions activities deduction (reported on Form 8903, Domestic Production Activities Deduction) claimed on 15a.

    3. Net Operating Loss deduction claimed on line 15b.

    4. Income Distribution deduction claimed on line 18.

    5. Exemption amount claimed on line 20.

  4. Net investment income includes:

    • Interest

    • Dividends

    • Capital Gains

    • Non-qualified Annuities (Distribution code D)

    • Royalties

    • Rents

  5. The NIIT tax is computed using Form 8960, Net Investment Income Tax – Individuals, Estates and Trusts.

  6. NIIT is based on investment income and Adjusted Gross Income (AGI). Therefore, NIIT must be considered whenever the taxpayer has investment income (reported or unreported) and U/R that causes the new AGI to exceed:

    Tax year 2015 $12,300
    Tax year 2014 $12,150
    Tax year 2013 $11,950
    1. When issuing a Letter 2030, always complete the NIIT Calculation worksheet.

    2. Include PARAGRAPH 33.

  7. See IRM 4.119.4.21.10, Adjustments, when inputting an assessment that requires an adjustment to NIIT.

4.119.4.15  (09-17-2014)
Withholding (W/H) - General

  1. Withholding is identified on IDRS CC:IRPTR as Document Form 1099 and Form W-2 series as Amount Type (IRPTR Literal) FED TAX WH.

    Note:

    Form 1120S Schedule K-1 with Amount Type (IRPTR Literal) CREDIT and CREDIT CD 1 = O (letter O not zero) indicates Backup withholding (BUWH).

  2. Withholding (W/H) and backup withholding (BUWH) are treated the same way in the Document Matching program. Any withholding claimed needs to be supported by Information Return data.

  3. Taxpayers claim Withholding on:

    1. Form 1120, Schedule J, line 17.

    2. Form 1041, line 24e.

  4. Payments and Refundable Credits (including withholding) are reported on Form 1120, Schedule J, lines 12 through 21 appear on the IDRS CC:TXMOD with a TC 766:

    1. Subsequent adjustments to withholding display with a TC 766 (additional withholding) or TC 767 (reduction in withholding) without a Credit Reference Number (CRN).

    2. Subsequent adjustments to other refundable credits display with a TC 766 (addition credit) or TC 767 (reduction in credit) with the applicable CRN identifying the credit.

  5. Withholding reported on Form 1041, line 24e appears on IDRS CC:TXMOD with a TC 806. Subsequent adjustments to withholding display with a TC 806 (additional withholding) or TC 807 (reduction in withholding).

4.119.4.15.1  (09-17-2014)
Withholding W/H - Analyzation

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ unless:

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

    2. The withholding amount in question is shown on a valid payer information return document attached to the return.

  2. When a payer document(s) is included as part of the return and there is a corresponding IDRS CC:IRTPR information return(s) (i.e., payer name, document type and Amount Type and income amount matches), however the FED TAX WH amounts don’t match, consider the FED TAX WH on the IDRS CC:IRPTR IR more accurate UNLESS the Payer Agent Listing verifies that the IDRS CC:IRPTR information is not correct.

  3. Complete Form 13549 and refer to the BMF-AUR Fraud Coordinator for review, when payer document(s) included with the return appear to be altered.

    Note:

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

  4. For various reasons, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . There are instances when information documents attached to the return do not appear as IRs on IDRS CC:IRPTR print out.

    1. Consider the income and withholding from the attached document(s) as part of the review, unless it appears to be fraudulent. Consult with the BMF-AUR Functional Fraud Coordinator if appropriate.

    2. If income and/or withholding shown on the attached information documents is not reported, pursue the issue(s).

  5. Schedule(s) K-1 may contain BUWH that does not display on the information return. Consider attached Schedule(s) K-1 as documentation to support additional withholding (not shown on the IR) when:

    1. Schedule K-1 (Form 1041) contains an amount in box 13, with code "B" .

    2. Schedule K-1 (Form 1065) contains an amount in box 15 with code "O" .

    3. Schedule K-1 (Form 1120S) contains an amount in box 13 with code "O" .

      Note:

      Consider these amounts when determining overall allowable withholding.

  6. Withholding can be either overclaimed (O/C) or underclaimed (U/C):

    1. O/C W/H occurs when the taxpayer claims more withholding on the tax return than is supported by payer information returns. When disallowing O/C W/H amounts and issuing a notice, show all available withholding related Amount Types. This will assist the taxpayer to determine the additional documentation they need to provide.

    2. U/C W/H occurs when the taxpayer claims less withholding on the tax return based on withholding related Amount Types on the information returns. Allow the additional W/H from the IRs unless it can clearly be determine that the IR is invalid (e.g., not the taxpayer, Payer Agent issue, etc.).

  7. Use the following methodology to determine any discrepancies between withholding reported on the tax return and withholding reported by payer(s).

    1. Determine the W/H PER RETURN

      Form 1120 Form 1041
      Use the amount claimed on Form 1120, Schedule J, line 17. Then add/subtract any subsequent TC 766/767 (without any Credit reference numbers) that appear on IDRS CC:TXMOD. This total is the W/H PER RETURN amount.

      Reminder:

      TC 767 reduces TC 766.

      Caution:

      Do not consider the initial TC 766 that displays on IDRS CC:TXMOD. That amount may include other refundable credits claimed on the tax return.

      Combine all TC 806 and TC 807 that appear on IDRS CC:TXMOD. This total is the W/H PER RETURN amount.

      Reminder:

      TC 807 reduces TC 806.

    2. Determine the W/H NOW. Total all the withholding from payer IRs shown on IDRS CC:IRPTR. Also include any withholding from valid payer documents attached to the tax return. This total is the W/H NOW amount.

    3. Compare the W/H NOW to the W/H PER RETURN. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

      If Then
      The W/H NOW and W/H PER RETURN amounts are the same The withholding is reported.
      If the W/H NOW is more than the W/H PER RETURN The taxpayer has underclaimed their allowable W/H. The taxpayer is entitled to additional U/C withholding.
      If the W/H NOW is less than the W/H PER RETURN The taxpayer has overclaimed their allowable W/H. Disallow the difference as O/C withholding.
  8. If the taxpayer includes payer information return documents that correspond to every IDRS CC:IRPTR IR with a withholding related Amount Type and there is a withholding mismatch, the discrepancy may be due to:

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

    2. The taxpayer may have claimed an amount from the wrong box on the payer information return document.

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

    4. The taxpayer may have received a corrected information document that is not shown on the IDRS CC:IRPTR.

  9. Do not adjust withholding when the taxpayer claims it correctly, but indicates that the income is not reported because it was not received until the subsequent year. Withholding is allowed when reported to IRS by the payer, while income is taxable when received by the taxpayer.

4.119.4.15.2  (04-05-2016)
Withholding W/H - Miscellaneous

  1. A notice MUST BE issued when there is a tax change above tolerance and a withholding discrepancy.

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

    Caution:

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

    1. Form 1099 series, Form W-2 series and/or Schedule K-1 series, attached to the tax return, verify the correct withholding amounts. For example, the taxpayer clearly transposed numbers from the withholding box on the document.

    2. Based on attached payer information return documents, the taxpayer clearly claimed an amount from the wrong box.

    3. Based on attached payer information return documents, the taxpayer clearly made a math error in determining the total amount of allowable withholding.

    4. Withholding was disallowed during Original Processing because payer information return documents were not included with the return AND the W/H on the IRs matches the amount previously disallowed.

      Note:

      Underclaimed W/H due to a fully U/R IR (income and withholding) resulting in no tax change (e.g., due to negative TXI remaining negative after applying the U/R income) is not considered confirmed and appropriate.

      Note:

      Overclaimed W/H due to the taxpayer claiming more withholding than supported by the available information returns is not considered confirmed and appropriate unless one or more of the above conditions are present.

  3. If the change to W/H is not considered confirmed and appropriate issue:

    1. A Letter 2531 for cases with U/C W/H and an overall refund.

    2. A Letter 2030 for all other situations.

  4. If it is determined that the sole issue is a confirmed and appropriate W/H change:

    1. Input the adjustment using IDRS CC:ADJ54. See IRM 4.119.4.21.10, Adjustments, for further information.

      Reminder:

      Since the account is being adjusted without prior taxpayer contact, ensure that the W/H adjustment is appropriate.

      Note:

      Any adjustments to penalties (e.g., Failure to File or Failure to Pay) would not be subject to deficiency procedures since adjustments to W/H are not included on the Letter 3219BStatutory Notice of Deficiency.

    2. Send Letter 2893C. Include appropriate paragraphs to inform the taxpayer of the adjustment.

    3. Close the case with PC 4200.

    4. Input TC 925 with PC 4200 using IDRS CC:REQ77/FRM77.

    5. Annotate PC 4200 on the DCI and case folder.

  5. When preparing a Letter 2030 or Letter 2531 that includes a W/H discrepancy, take the following steps:

    1. The W/H PER RETURN amount in the "Shown on return" field for Withholding.

    2. The W/H NOW amount in the "As corrected by IRS" field for Withholding.

    3. Include PARAGRAPH 60 and 71 when disallowing O/C W/H.

    4. Include PARAGRAPH 61 when allowing additional U/C W/H.

      Note:

      Include PARAGRAPH 60 (O/C W/H) or 61 (U/C W/H) when issuing a Letter 2531.

4.119.4.16  (12-11-2014)
Penalties and Interest

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

  2. When the IRC 6662 accuracy-related penalties for negligence and substantial understatement are assessed under the BMF-AUR Program without an employee independently determining the appropriateness of the penalty, the penalty is automatically calculated through electronic means and may be assessed without written managerial approval of the penalty.

    1. If a taxpayer responds to the initial notice proposing a penalty or to the notice of deficiency, an IRS employee must consider the response. The employee must make an independent determination as to whether the response provides a basis to waive the penalty.

    2. Whether the employee decides to apply the penalty or not, the employee's independent determination of whether the penalty is appropriate means that the penalty is not automatically calculated through electronic means. Therefore, per IRC 6751(b)(1), written managerial approval of an employee's determination to assert the penalty is required.

4.119.4.16.1  (09-02-2016)
Failure to File Penalty (FTF)

  1. Tax returns worked in the BMF-AUR program are due by the following dates:

    1. Form 1120 tax returns are due by March 15th.

    2. Form 1041 tax returns are due by April 15th.

      Note:

      The above dates apply, unless they fall on a Saturday, Sunday, or a legal holiday. In this case 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.

      Note:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ a Failure to File (FTF) penalty may have been assessed on the unpaid tax balance. An additional FTF penalty may be due because of BMF-AUR processing.

  2. Compute additional FTF penalty using the mandatory “FTF calculator tool”:

    Tax Year 2014 and subsequent When generating a Recomputed Letter 2030, Recompute After STAT Letter 2030, or Letter 3219B, Statutory Notice of Deficiency, and the conditions below are present.
    Tax Year 2013 When generating a Letter 3219B, Statutory Notice of Deficiency, and the conditions below are present.

    Exception:

    If a TC 276 or TC 270 is posted on the account and a FTF penalty applies a manual penalty calculation is required. See Exhibit 4.119.4-7, Activity Codes/Category Codes and Exhibit 4.119.4-8, Definer Codes for additional information.

    1. The return posted date is later than the return due date as stated in (1) above.

      Caution:

      Before computing any FTF penalty, review the entity portion of the account to determine if the return due date (including extensions) fell within a Federally Declared Disaster area period. See IRM 20.1.2, Failure to File/Failure to Pay Penalties.

    2. Consider previously posted FTF penalty. TC 160 or TC 166. If the penalty was partially or fully reversed, it shows as TC 161 or TC 167.

    3. If the original FTF penalty was abated because it was under the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , the abated amount must be added to the additional FTF penalty. Do NOT add any unpaid FTF penalty that was written off with TC 606 because the balance due was under the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ A TC 607 will automatically generate to reverse the TC 606 write-off amount when the BMF AUR assessment posts.

      Exception:

      Additional FTF penalty does not apply if the original return was "R" coded. This code displays on IDRS CC:BRTVU in the "COMP COND CDS" also known as (CCC) field. If the tax return was paper filed, the "R" appears in the income section of the return. This code indicates that the taxpayer was not subject to FTF penalty because they provided reasonable cause for late filing.

  3. A minimum penalty amount applies when the return is more than 60 days late and the penalty calculation is less than the amount shown below:

    Return Due Date (without extension) Minimum Amount
    Before 01/01/2009 $100.00 or 100% of the unpaid tax, whichever is less.
    Between 01/01/2009 and 12/31/2015 $135.00 or 100% of the unpaid tax, whichever is less.
    After 12/31/2015 $205.00 or 100% of the unpaid tax, whichever is less.

    Note:

    The $205 minimum in the table above is subject to inflation adjustments. There will be no change for returns due in 2016 or in 2017.

    Note:

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

  4. If the tax on a late filed balance due return is decreased or if the net result of changes to W/H or Refundable Credits is a decrease in balance due, any unpaid tax 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 IDRS CC:TXMOD, it is reversed with a TC 161/167.

  5. The FTF penalty is automatically corrected on IDRS when there is a change to pre-payments on a late-filed return. No action is needed to address the FTF penalty when posting a withholding only change (i.e., PC 4200).

  6. When posting a TC 290/291 for a significant amount and a previous TC 160/161 is present, a TC 160/161 must be input (including a TC 160 for .00) to avoid an unpostable condition.

  7. When an assessment is needed and the FTF penalty is being decreased with a TC 161, review IDRS CC:TXMOD. Add all the displayed TC 16Xs together and compare this total to the amount computed using the tool. Input the necessary TC 161 adjustment to correct the posted FTF penalty if required. This action is needed because of rounding discrepancies and will prevent an unpostable condition.

    Note:

    Reason Code(s) determine the explanation that prints on the adjustment notice. For valid codes see Document 6209, IRS Processing Codes and Information. BMF-AUR requires reason codes when abating penalties.

  8. Include PARAGRAPH 70 on the Letter 2030 or Letter 2531 when the taxpayer may be subject to an adjustment to FTF penalty.

4.119.4.16.2  (12-11-2014)
Failure to Pay Penalty (FTP)

  1. If a FTP was assessed, it appears on IDRS CC:TXMOD as TC 270 or TC 276. If the penalty was partially or fully reversed, it shows as TC 271 or TC 277.

  2. Include PARAGRAPH 71 when disallowing O/C W/H.

4.119.4.16.3  (09-11-2015)
Accuracy-Related Penalty on Underpayments

  1. Accuracy-Related Penalty on underpayments considered by BMF-AUR include:

    • Substantial Understatement of Income Tax, or

    • Negligence or Disregard of Rules or Regulations

  2. The penalty is equal to 20 percent of the underpayment of tax.

  3. If both the accuracy-related penalty due to negligence or disregard of rules or regulations and substantial understatement of tax apply, only the larger of the two penalties will be imposed.

4.119.4.16.3.1  (03-02-2016)
Accuracy-Related Penalty Due to Substantial Understatement of Tax

  1. An understatement of income tax is considered substantial when it exceeds the greater of 10% of the tax required to be shown on the return or $5,000.

    Exception:

    In the case of a corporation (other than an S-Corporation or a personal holding company), an understatement of income tax is considered substantial when it exceeds the lesser of 10% of the tax required to be shown on the return (or, if greater, $10,000) or $10,000,000.

  2. When a substantial understatement exists, a penalty may be imposed equal to 20 percent of the underpayment of tax attributable to the understatement.

    Note:

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

  3. 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 or disregard of rules or regulations. If both penalties apply to the same underpayment, only one 20 percent penalty is imposed.

  4. As part of the Letter 2030 preparation process, the Substantial Understatement Penalty is automatically determined when the understatement meets the conditions above. The notice includes PARAGRAPH 76 to advise the taxpayer of the conditions subject to the penalty.

  5. See IRM 20.1.5, Penalty Handbook - Return-Related Penalties, for procedures regarding the computation of the penalty.

  6. The amount of the understatement is reduced to the extent the taxpayer shows that there is or was substantial authority for his or its reporting of the item on the return. Examples of sources that could provide 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

    Reminder:

    See IRM 20.1.5, Penalty Handbook - Return Related Penalties, for additional information.

  7. If the substantial understatement penalty can be waived, and a recomputed Letter 2030 is needed, see the Lead Tax Examiner for additional information.

    Reminder:

    Check the Penalty Waiver IND box on the DCI if the Accuracy Related Penalty has been waived.

4.119.4.16.3.2  (09-02-2016)
Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Penalty)

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

  2. The negligence penalty is 20 percent of the portion of the underpayment attributable to negligence or disregard of rules or regulations. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

    Note:

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

  4. 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 or disregard of rules or regulations. If both penalties apply to the same underpayment, only one 20 percent penalty is imposed.

  5. The amount of an underpayment attributable to Disregard of Rules or Regulations is reduced by any portion of the underpayment for which the taxpayer has made an adequate disclosure. A disclosure can be adequate only if it is made on Form 8275, Disclosure Statement or, if the position is contrary to a regulation, on Form 8275-R, Regulation Disclosure Statement. See IRM 20.1.5, Return Related Penalties, for additional information.

  6. The negligence penalty is NOT imposed if reasonable cause exists for the U/R. or O/C item. The most common reasonable cause issues for waiving the penalty (if they occurred at the time of filing) are as follows:

    • Death (taxpayer or individual responsible for filing and paying taxes)

    • Serious illness (taxpayer or individual responsible for filing and paying taxes)

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

    • Unavoidable absence (taxpayer)

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

    Note:

    See IRM 20.1.5, Penalty Handbook - Return-Related Penalties, for additional information.

    Reminder:

    Check the Penalty Waiver IND box on the DCI if the Accuracy Related Penalty has been waived.

    Note:

    Generally, reasons such as forgetfulness, ignorance of the law, or mistakes (e.g., the taxpayer/preparer forgot to include the income or thought the income was nontaxable) do not qualify for penalty relief because these actions do not demonstrate ordinary business care and prudence.

  7. When preparing a notice, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , and the negligence penalty is not waived due to the conditions above:

    If Then
    Preparing Letter 2531
    1. Per IRC 6751(b)(1), written managerial approval is required.

    2. Include PARAGRAPH 75.

    Preparing Letter 2030 (including amended or recomputed)
    1. Ensure that the penalty is included on the notice.

    2. Per IRC 6751(b)(1), written managerial approval is required.

    3. Include PARAGRAPH 75.

    Note:

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

4.119.4.16.4  (12-11-2014)
Interest for Letter 2030

  1. Interest on Letter 2030 is predetermined by letter date.

  2. Form 1120 filers worked within the BMF-AUR program with an underpayment or proposed deficiency greater than $100,000 may be subject to additional interest as described in IRM 20.2.5, Interest on Underpayments. See IRM 4.119.4.16.5, Form 1120 2% Large Corporate Underpayment (LCU) – 2% LCU, for additional information.

4.119.4.16.5  (04-05-2016)
Form 1120 2% Large Corporate Underpayment (LCU) - 2% LCU

  1. Corporations are subject to a 2% increase above the prevailing underpayment rate when:

    1. A notice/letter of underpayment or proposed deficiency is greater than $100,000 (determined without regard to interest, penalties, or additions to the tax), AND

    2. The amount shown on a proposed deficiency is not paid within 30 days from the notice/letter date.

      Note:

      This is also known as 2% Large Corporate Underpayment or 2% LCU.

  2. Taxpayer accounts subject to 2% LCU require manually computed interest at the time of assessment.

  3. Taxpayers may be liable for 2% LCU based on original filing or previous activity on the account. If this is the case, the 2% - INT field on IDRS CC:TXMOD will contain a value.

  4. If the taxpayer was subject to 2% LCU based on prior account activity, any additional assessment (other than TC 290 for .00 to post a No Change) due to BMF-AUR underreporting will require manual interest (regardless of the amount of the BMF-AUR deficiency or the notice phase).

    1. Determine the amount of manual interest to be asserted on the assessment.

    2. Input the adjustment using IDRS CC:ADJ54. See IRM 4.119.4.21.10, Adjustments, for further information.

    3. Close the case with the applicable Process Code based on case disposition (agree or default).

    4. Input TC 925 with the applicable Process Code using IDRS CC:REQ77/FRM77.

    5. Annotate the DCI and case folder with the appropriate PC.

  5. If the BMF-AUR deficiency meets the 2% LCU criteria, and the taxpayer submits full payment within 30 days of the Letter 3219B, Statutory Notice of Deficiency:

    1. Review a current IDRS CC:TXMOD screen for presence of TC 640/670 payment relating to the amount on the Letter 3219B.

    2. If the payment submitted is for the entire deficiency and the payment date is equal to or less than 30 days from the Letter 3219B date, the taxpayer is not subject to the additional 2% LCU interest.

      Exception:

      Cash bonds and 6603 deposits are not considered for purposes of determining whether the underpayment is paid within 30 days.

    3. Process the case per normal procedures.

  6. If the BMF-AUR deficiency meets the 2% LCU criteria and the taxpayer does not submit full payment within 30 days of the Letter 3219B then:

    1. Determine the amount of manual interest to be asserted on the assessment.

    2. Input the adjustment using IDRS CC:ADJ54. See IRM 4.119.4.21.10, Adjustments, for further information.

    3. Close the case with the applicable Process Code based on case disposition (agree or default).

    4. Input TC 925 with the applicable Process Code using IDRS CC:REQ77/FRM77.

    5. Annotate the DCI and case folder with the appropriate PC.

4.119.4.16.6  (09-02-2016)
Revenue Ruling 99-40 and Credit Elects (May Sequa)

  1. Rev. Rul. 99-40 provides rules for determining the date from which interest will be assessed on a deficiency when an overpayment claimed on the original return (or offset without interest) is credited to the succeeding year’s estimated tax or refunded without interest, and a deficiency for the overpayment year is subsequently determined.

  2. Transaction Code 830 or 836 identify the credit elect amount on the overpaid module and TC 710 or 716 identifies the posting of the prior year credit elect to the BMF-AUR tax year module. If these transaction codes are posted on IDRS CC:TXMOD, then the taxpayer may be allowed an interest-free period when computing interest on a deficiency for the year that generated the credit elect.

    Note:

    The taxpayer may also be eligible for an interest-free period on a deficiency assessment when Transaction Code 840 or 846, without credit interest, is present on the module. Manual interest is not needed unless there is another condition on the module that requires it.

  3. Taxpayer accounts with unreversed TC 830/836 require manually computed interest for subsequent assessments (other than TC 290 for .00 to post a No Change) when the subsequent year return has been filed.

    Note:

    Manual interest is not needed if the subsequent year return has not been filed or the credit elect is applied only to the first installment, and the TC 836 transaction date posted is the date of the first installment.

    1. Determine the amount of manual interest to be asserted on the assessment. See IRM 20.2.5.7.2, Revenue Ruling 99-40 and Credit Elects (May/Sequa).

    2. Input the adjustment using IDRS CC:ADJ54. See IRM 4.119.4.21.10, Adjustments, for further information.

    3. If Rev. Rul. 99-40 was considered, input TC 971 with AC 653 using IDRS CC: REQ77 to document the module.

    4. Close the case with the applicable Process Code based on case disposition (agree or default).

    5. Annotate the DCI and case folder.


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