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Part 4. Examining Process

Chapter 19. Liability Determination

Section 3. IMF Automated Underreporter (Cont. 3)

4.19.3  IMF Automated Underreporter (Cont. 3)

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

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

4.19.3.10.1  (09-01-2008)
Schedule A Window

  1. When there are changes to AGI, the system computes the change to Medical and Dental Expenses, Casualty and Theft Losses, and/or Miscellaneous Expenses, and/or the limitation on itemized deductions as applicable. Input/verify the appropriate amounts in the Schedule A window of the Return Value screen. See IRM 4.19.7, Schedule A window. The following input fields require entering the amounts from:

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

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

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

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

  3. If the taxpayer's adjusted gross income per return is:

    1. Greater than $156,400 ($78,200 if married filing separately), add the amounts reported on Schedule A, lines 4, 9, 15, 19, 20, 27, and 28 and enter the sum in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

    2. Less than or equal to $16,400 ($78,200 if married filing separately), enter the Schedule A, line 29 amount in the NON LIMITED ITEMIZED DEDUCTIONS field of the Schedule A window.

  4. PARAGRAPH 10 ( See Exhibit 4.19.3-12.automatically generates when Medical and Dental Expenses are adjusted.

  5. PARAGRAPH 21 ( See Exhibit 4.19.3-12.automatically generates when Casualty and Theft Losses are adjusted.

  6. PARAGRAPH 7 ( See Exhibit 4.19.3-12.automatically generates when Miscellaneous Deductions are adjusted.

  7. PARAGRAPH 9 ( See Exhibit 4.19.3-12.automatically generates when the standard deduction exceeds the itemized deductions. The system also alerts the tax examiner with a message indicating the Schedule A changes have been limited to the standard deduction.

  8. PARAGRAPH 113 ( See Exhibit 4.19.3-12.automatically generates when itemized deductions are limited based on the taxpayer's new adjusted gross income.

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

  10. If the taxpayer's Schedule A charitable contributions (line 19) were limited to 50% of the adjusted gross income, during original processing and the AGI is increased due to U/R processing, send PARAGRAPH 148 ( See Exhibit 4.19.3-12 ).

  11. See IRM 4.19.3.7.18.2 for information on Gambling Losses.

  12. If there is an indication that the taxpayer claimed the General Sales Tax on Schedule A, line 5, send the following Special Paragraph: " Based on our proposed changes to your income, you may be entitled to claim additional state and local taxes. If you are entitled to an additional state and local sales tax deduction, please provide us with a signed statement showing the amount of the additional deduction that you are entitled to claim."

4.19.3.10.2  (09-01-2004)
Mortgage Interest Deduction (MID) and Points Paid

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ "≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

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

  3. Mortgage interest payments are reported on Form 1098.

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

4.19.3.10.2.1  (09-01-2008)
Mortgage Interest Deduction (MID) - Analyzation

  1. Mortgage Interest is a deduction used to reduce AGI and/or TXI and becomes an AUR issue when the taxpayer claims more mortgage interest deduction than is shown on the Form 1098 MID IR(s).

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

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

    • A similar payer statement attached to the return.

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

    Example:

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

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

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

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

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

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

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

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

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

    4. Schedule F, line 23a (Income Identify Code "PF" or "SF" )

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

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

  6. If mortgage interest is marked with a Status Code "U" , the Income Identify Code is MA, and the system determines a Schedule A was not filed, a warning message displays, "Verify Schedule A was used" . Determine if a Schedule A was filed.

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

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

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

  7. Mortgage interest and/or Points Paid is over-deducted (O/D) when the sum of mortgage interest and points paid (Form 1098, Boxes 1 and 2) is less than the sum of mortgage interest and/or points paid on the return.

    Note:

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

    Note:

    Consider mortgage interest O/D when the taxpayer has claimed the full mortgage interest IR(s) on Form 1040, Schedule A and has also claimed a credit identified as Form 8396 on Form 1040, line 54. The O/D amount from Form 1040, Schedule A is the credit shown on Form 1040, line 54.

  8. When taxpayers rent a portion of their own residence, they may only deduct a portion of the expenses on Schedule E. They may indicate a percentage of personal use. Taxpayers generally report the entire MID amount on Schedule E, line 12, then reduce the overall expenses by the percentage of personal use. The balance of the MID is then claimed on Schedule A, line 10.

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

      Example:

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

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

    Note:

    Taxpayer rental losses may be limited. When the overall loss is other than the math verified amount, determine if the taxpayer filed Form 8582 (Passive Activity Loss Limitations). If the loss was limited, the MID claimed on Schedule E, line 12 for that property will be the amount that will be applied against the MID IR.

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

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

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

    Note:

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

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

    1. Schedule C.

    2. Schedule E.

    3. Schedule F.

    4. Form 4835.

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

      Note:

      Mortgage interest on Schedule A and Form 8829 should equal Form 1098. However, taxpayers often take the allowable percentage deduction on Form 8829 and the full deduction on Schedule A. Follow the allocation procedures above to determine the O/D MID and send PARAGRAPH 169 ( See Exhibit 4.19.3-12).

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

      Example:

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

    7. When allocating MID, send PARAGRAPH 121 ( See Exhibit 4.19.3-12).

  11. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  12. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " .

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

  14. Issue a CP 2000 if the total MID ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  15. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡

  16. If the taxpayer deducts mortgage interest and there are no Form 1098 IRs with MORT and/or Points Paid amounts, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

4.19.3.10.2.2  (11-01-2005)
Mortgage Interest Deduction (MID) - Miscellaneous

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

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

  3. If there are MID amounts for both taxpayers on a joint return and it is not possible to allocate the correct amount(s) between schedules, treat as a complex issue.

  4. PARAGRAPH 40 ( See Exhibit 4.19.3-12.automatically generates when MID is O/D. Include all valid MID IR elements (both reported and discrepant) on the notice.

  5. When adjusting MID from Schedule C and/or F causes a change to SE Tax send PARAGRAPH 161 ( See Exhibit 4.19.3-12).

  6. See IRM 4.19.3.7.25 for instructions when there is Refund of Overpaid Mortgage Interest Deduction (ROMID) on the IR.

4.19.3.10.3  (09-01-2008)
Mortgage Insurance Premiums

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

  2. MIP elements contain Income Identify Code "MA" .

  3. The MIP element will be systemically marked with status Code " X" . ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Eligible taxpayers deduct qualified mortgage insurance premiums on Schedule A, line 13.

  5. The qualified mortgage insurance premiums begin to phase-out when the AGI is greater than $100,000 ($50,000 for FS3). Taxpayers can not claim a mortgage insurance premium deduction when their AGI is greater than $109,000 ($54,500 for FS3).

  6. PARAGRAPH 78 ( See Exhibit 4.19.3-12.automatically generates when the Mortgage Insurance Premium deductions are adjusted.

4.19.3.11  (09-01-2008)
Standard Deduction

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

    • $5,350 for FS 1, 3, or 6

    • $10,700 for FS 2 or 5

    • $7,850 for FS 4

  2. If Form 1040, Box 39a on page 2; or Form 1040A, Box 23a is checked, input/verify the appropriate entries in the AGE/BLIND COUNT field of the Return Value screen.

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

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

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

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

    Note:

    If Form 1040, Box 39b or Form 1040A, Box 23b is checked, the taxpayer's standard deduction is zero. See IRM 4.19.7, Standard Deduction window.

  4. If the taxpayer is claimed as a dependent on another person's tax return, the standard deduction is limited to the greater of $850 or the individual's earned income (plus $300) for the year. The standard deduction and TXI per return for this type of individual may change due to U/R issues. The system computes the changed TXI per return, if applicable.

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

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

      Note:

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

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

      Note:

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

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

    5. If the taxpayer's itemized deductions or earned income (plus $300) is less than $850 and remains less than $850, the TXI per return does not change.

    6. If the taxpayer's itemized deductions or recomputed earned income (plus $300) is more than $850, but less than the standard deduction amount for his/her filing status, and: there is no U/R unearned income, the system alerts you that the case is below tolerance. Close the case using PC 22.

    7. PARAGRAPH 149 ( See Exhibit 4.19.3-12.automatically generates when the recomputed TXI is different from the TXI on the Tax Account screen.

4.19.3.12  (09-01-2008)
Recomputation of Tax

  1. The exemptions phaseout is based on a computation using the AGI. The amount the taxpayer claims as a deduction for exemptions starts to phaseout when the AGI reaches a certain level for the filing status.

  2. The levels for phaseout are:

    • Single - $156,400

    • Married filing jointly (or qualifying widow(er) -$234,600

    • Married filing separate - $117,300

    • Head of household - $195,500

  3. The system automatically computes the dollar amount of exemptions allowable and displays the amount on the summary sections of the Return Value screen.

  4. PARAGRAPH 109 ( See Exhibit 4.19.3-12.automatically generates when the exemption amount is reduced due to U/R processing.

  5. There are six tax rates for ordinary income (10%, 15%, 25%, 28%, 33%, and 35%). Capital gains may be taxed at different rates, but no higher than 28%, even though the taxpayer may have other income taxed at the higher rates. See IRM 4.19.3.7.4.5 (7).

  6. The system automatically computes the tax if the taxpayer uses the tax tables and/or, the tax rate schedules. If the taxpayer uses the Schedule D computation, Schedule J computation, Form 8615, or Form 8814, the system computes the tax after the necessary information is entered in the applicable windows. See IRM 4.19.3.12.1 , See IRM 4.19.3.12.2, and/or See IRM 4.19.3.12.3. for further information.

  7. If there is no Schedule D and capital gains are listed on the Form 1040, line 13 (or Form 1040A, line 10), See IRM 4.19.3.12.2 (1) for further instruction.

4.19.3.12.1  (12-15-2005)
8615 Window

  1. A part of some children's investment income may be subject to tax at their parent's rate. This tax is computed on Form 8615, Computation of Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700. If data is present in the Form 8615 TAX window, it displays in Return Value. See IRM 4.19.7, 8615 Tax window.

  2. A child with investment income over $1,700 may use the Form 8615 to compute his/her tax. Investment income includes any income other than earned income.

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

  4. When the tax tables or tax rate schedules were used to figure both the child’s and the parent’s tax, input/verify the appropriate entries in the 8615 TAX window. See IRM 4.19.7, 8615 Tax window.

    Note:

    If Form 8615 is NOT attached to the return, research IDRS using Command Code (CC) RTVUE, TRDBV (for ELF returns), etc. for the missing data.

  5. If there is an indication that the child or the parents used the Qualified Dividend and Capital Gain worksheet, Schedule D or Schedule J (Farm Income Averaging) tax method to figure their tax, input/verify the appropriate entries in the 8615 Tax window. Issue a CP 2501 Notice and send PARAGRAPH 59 ( See Exhibit 4.19.3-12).

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

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

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

4.19.3.12.2  (09-01-2006)
Sch D/8814/ECR Tax Window

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

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

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

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

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

    Note:

    When the taxpayer owes tax from recapture of an education credit, the tax owed is included with the base tax and the taxpayer indicates "ECR" and the amount on the dotted portion of Form 1040, line 44 or Form 1040A, line 29.

    Note:

    If Form 4952 is attached, an adjustment to the Schedule D, long term gain amount may be necessary. See IRM 4.19.7, Sch D/8814/ECR Tax window.

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

  4. PARAGRAPH 150 ( See Exhibit 4.19.3-12.automatically generates when the recomputed tax is based on the Schedule D tax computation.

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

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

4.19.3.12.4  (09-01-2004)
Net Tax Increase/No Net Tax Increase/Tax Decrease Notices

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

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

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

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

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

      Note:

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

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

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

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

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

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

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

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

4.19.3.13.1  (09-01-2003)
Changes to Non-Refundable Credits

  1. When a CP 2000 is issued and there are credits on Form 1040, lines 47 through 55, (Form 1040A, lines 29 through 33) input/verify the amount(s) in the Non-refundable Credit window of the Return Value screen. See IRM 4.19.7, Non-refundable Credit window.

  2. ALWAYS check the tax return for the presence of non-refundable credits when verifying entries on the Non-refundable Credit window, WHETHER OR NOT THEY ARE BEING ADJUSTED DUE TO U/R PROCESSING.

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

4.19.3.13.2  (10-29-2007)
Credit for Child and Dependent Care Expenses

  1. Form 2441, Credit for Child and Dependent Care Expenses (or Form 1040A, Schedule 2) is recomputed when:

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

    • The earned income changes, or

      Note:

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

    • The AGI changes, and/or

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

  2. The person who qualifies the taxpayer for the credit for the child and dependent care expenses must be the taxpayer's dependent who is either:

    1. Under the age of 13 or

    2. Incapable of caring for himself/herself regardless of age.

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

  4. The system computes the correct amount of credit for child and dependent care expenses. Input/verify the appropriate amounts in the Child Care Credit window of the Return Value screen. See IRM 4.19.7, Child Care Credit window.

    Caution:

    Verify the number of qualifying children, ESPECIALLY when Math Error Codes are present that indicate the number of exemptions was changed.

  5. Taxpayers sometimes enter an incorrect amount on Form 2441, line 3 or Form 1040A, Schedule 2, line 3. This most frequently occurs when DCB is an issue and Part III of the Child Care Credit was incorrectly calculated or was incomplete. When entering QUALIFYING EXPENSES on the Child Care Credit window, use the following procedures to determine the correct entry:

    1. Review the taxpayer's entries in Part III, lines 12 through 33 of Form 2441 or Form 1040A, Schedule 2. Prepare a mock Form 2441 (Schedule 2) to correct any errors and/or complete any omitted entries.

    2. Carry the line 35 amount to line 3, Part II of Form 2441 or Form 1040A, Schedule 2. This amount is also entered in the QUALIFYING EXPENSES field on the Child Care Credit window.

      Note:

      See IRM 4.19.7 to determine the correct entry on Form 2441, line 3 or Form 1040A, Schedule 2, line 3.

    3. Send PARAGRAPH 66 ( See Exhibit 4.19.3-12) when Child Care Credit is adjusted due to DCB's impact on the Qualifying Expenses.

  6. PARAGRAPH 48 ( See Exhibit 4.19.3-12.automatically generates when an adjustment is made that impacts Child Care Credit.

    Note:

    If the only issue is Child Care Credit "toggle off" Paragraph 48 in the Notice Summary Screen.

4.19.3.13.3  (09-01-2003)
Credit for the Elderly or Disabled

  1. Recompute Schedule R, Credit for the Elderly or the Disabled (or Form 1040A, Schedule 3) when:

    1. The AGI increases, and/or

    2. The nontaxable portion of SS/RR benefits or pension/annuity/disability benefits either changes or was not originally reported on Schedule R, line 13a and/or 13b or Form 1040A, Schedule 3, line 13a and/or 13b.

      Note:

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

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

  3. Input the appropriate entries in the Credit for the Elderly or Disabled window of the Return Value screen. See IRM 4.19.7, Credit for the Elderly or Disabled window.

  4. PARAGRAPH 13 ( See Exhibit 4.19.3-12.automatically generates when an adjustment is made to the credit for the elderly.

4.19.3.13.4  (09-01-2008)
Credit for Qualified Adoption Expenses

  1. Form 8839, Qualified Adoption Expenses is recomputed when the taxpayer's modified AGI changes. A credit of up to $11,390 may be claimed for qualifying expenses to adopt an eligible child.

    Note:

    The Credit for Qualified Adoption Credit Expenses is reduced when the Modified AGI is more than $170,820 and cannot be claimed if the Modified AGI is $210,820 or more. Send PARAGRAPH 189 ( See Exhibit 4.19.3-12).

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

  3. Input/verify the appropriate amounts in the ADOPTION CREDIT window. See IRM 4.19.7, Adoption Credit window.

    Note:

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

  4. PARAGRAPH 20 ( See Exhibit 4.19.3-12.automatically generates when there is an indication that a portion of the credit was carried forward.

  5. PARAGRAPH 188 ( See Exhibit 4.19.3-12.automatically generates when there is a change to the Adoption Credit.

4.19.3.13.5  (09-01-2008)
Child Tax Credit

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

  2. Taxpayers who claim qualifying children may be eligible to claim an Additional Child Tax Credit. See IRM 4.19.3.15.4 for further information.

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

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

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

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

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

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

      Note:

      For each qualifying child, the taxpayer must either place a " check mark" in the box on Form 1040/1040A, line 6c, column (4), and/or complete Form 8901, Information on Qualifying Children Who Are Not Dependents (for Child Tax Credit).

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

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

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

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

  5. If the taxpayer claims Foreign Tax Credit, Child and Dependent Care Credit, Credit for the Elderly, Education Credits (Form 8863), Residential Energy Credit (Form 5695) and/or Retirement Savings Contributions Credit (Form 8880), these credits offset the base tax BEFORE determining the amount of allowable Child Tax Credit.

    Note:

    If the taxpayer has qualifying children, the Residential Energy Credit (Form 5695), Adoption Credit (Form 8839) and/or Mortgage Interest Credit (Form 8396) and/or District of Columbia First-time Home Buyer Credit (Form 8859) are also used to offset the base tax before determining the allowable Child Tax Credit.

  6. The system computes the correct amount of Child Tax Credit. Input/verify the appropriate amounts in the CHILD TAX CREDIT window. See IRM 4.19.7, Child Tax Credit window.

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

  8. When the taxpayer does not claim a Child Tax Credit, AUR will:

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

      Example:

      The boxes on Form 1040/1040A, line 6c, column 4, were checked to indicate the dependents claimed are qualifying children for Child Tax Credit. The base tax per return was zero and Child Tax Credit was not claimed. The issue of Child Tax Credit will be addressed as part of the Case Analysis processing.

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

      Example:

      The boxes on Form 1040/1040A, line 6c, column 4, were not checked to indicate the dependents claimed are qualifying children for Child Tax Credit. The base tax per return was zero and Child Tax Credit was not claimed. The issue of Child Tax Credit will not be addressed as part of the Case Analysis processing.

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

  10. When the taxpayer has previously claimed Child Tax Credit, the Child Tax Credit window automatically displays on the Return Value screen. If the taxpayer has not claimed Child Tax Credit, it may be necessary to access the window when certain conditions exist.

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

    1. The BASE TAX NOW on the Return Value screen is greater than zero (0) and the taxpayer checks the box(es) on Form 1040/1040A, line 6c, column 4 to indicate that the dependents claimed are qualifying children for the Child Tax Credit. OR

    2. The taxpayer is claiming Additional Child Tax Credit.

      Note:

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

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

    1. Total the number of dependents and/or entrants on Form 8901 indicated as qualifying child(ren) and enter the amount in the QUALIFYING CHILD field. This is a required field.

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

    Note:

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

  13. PARAGRAPH 120 ( See Exhibit 4.19.3-12.automatically generates.

4.19.3.13.6  (09-01-2008)
Education Credits

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

  2. Taxpayers CANNOT claim Education Credits when:

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

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

    3. The modified AGI is $114,000 or more for Filing Status 2.

    4. The modified AGI is $57,000 or more for Filing Status 1, 4 or 5.

      Note:

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

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

    6. They are a non-resident alien.

  3. Form 8863 is used to determine two separate education credits:

    1. Form 8863, Part I is used to determine qualifying expenses for the Hope Credit.

    2. Form 8863, Part II is used to determine qualifying expenses for the Lifetime Learning Credit.

      Note:

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

      Note:

      If the taxpayer erroneously claims BOTH the Hope Credit and the Lifetime Learning Credit for the same student, disallow the lesser of the two qualifying expenses.

  4. If the taxpayer claimed a deduction for Tuition and Fees and the Education Credit, check Form 8917 to determine if the deduction and credit are for the same student. If the deduction and the credit ARE for the same student disallow the deduction for Tuition and Fees and send PARAGRAPH 111 ( See Exhibit 4.19.3-12 ).

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

    Note:

    Manually determine the new education credits when Form 8863 Part I, column (c) contains more than $2,200 per student and/or Part II, line 5b contains an entry (other than zero). Prepare a mock Form 8863, using the BASE TAX NOW plus revised ALT MINI TAX (if any) to complete Form 8863, line 14. Enter the new overall education credit (Form 8863, line 17) in the MANUAL EDUCATION CREDIT field of the Education Credit window.

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

    Note:

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

  7. PARAGRAPH 58 ( See Exhibit 4.19.3-12.automatically generates when Education Credits are adjusted.

4.19.3.13.7  (09-01-2008)
Qualified Retirement Savings Contributions Credit (QRSC)

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

    • U/R income causes a change to the AGI.

    • Distributions are increased due to U/R.

    • Contributions are disallowed.

  2. Taxpayers CANNOT claim the QRSC credit when:

    1. They are younger than 18 years old.

    2. Claimed as a dependent on someone’s tax return.

    3. A full-time student.

    4. Their AGI is more than $26,000 for Filing Status 1, 3, 6, or 5.

    5. Their AGI is more than $39,000 for Filing Status 4.

    6. Their AGI is more than $52,000 for Filing Status 2.

  3. The QRSC begins to phase-out when the taxpayer’s AGI is:

    • between $15,000 and $26,000 for FS 1, 3, 6 or 5

    • between $30,000 and $52,000 for FS 2

    • between $22,500 and $39,000 for FS 4

  4. Input/verify the appropriate entries in the Retirement Savings Credit window when adjusting retirement contributions or distributions if Form 8880 is attached to the return.

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

      Note:

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

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

      Exception:

      Do not include distributions identified with COD "L" in the amount on line 4, Form 8880.

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

    Caution:

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

  6. PARAGRAPH 56 ( See Exhibit 4.19.3-12.automatically generates when the QRSC credit is adjusted.

4.19.3.13.8  (09-01-2007)
Non-Refundable Carryback/Carryforward Credits

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

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

    1. Foreign Tax Credit.

    2. Residential Energy Credit.

    3. Form 8396/Form 8859 Credits.

    4. Miscellaneous Credits.

  3. Foreign Tax Credit - Input/verify the amount of Foreign Tax Credit reported on Form 1040, line 47 (or Form 1116, line 33).

    Note:

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

  4. Residential Energy Credit - Input/verify the amount of Residential Energy Credit included on Form 1040, line 52, from Form 5695, line 31.

  5. Form 8396/Form 8859 Credits - Input/verify the amount of Mortgage Interest Credit (Form 8396) and/or DC First Time Home Buyers Credit (Form 8859) included on Form 1040, line 54 (or Form 8396, line 11/Form 8859, line 11).

  6. Miscellaneous Credits - Input/verify the amount of miscellaneous credit(s) included on Form 1040, line 55.

  7. If it is determined there may be unused non-refundable credits (even if the unused credits would offset the additional tax), issue a notice as appropriate.

  8. PARAGRAPH 20 ( See Exhibit 4.19.3-12.automatically generates when any entries (other than zero or the Foreign Tax Credit) are in the NONREFUNDABLE CREDITS window.

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

4.19.3.14  (09-01-2006)
Changes to Other Taxes

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

  2. These other taxes may include:

    • Self-employment tax,

    • Social Security tax on tip income unreported to the payer,

    • Ten percent (10%) tax on early distributions from qualified retirement plans,

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

    • Twenty-five percent (25%) tax on early distributions from SIMPLE IRA's,

    • Fifteen percent (15%) tax on medical savings account distributions,

    • 10% Additional Tax for Health Saving Accounts

    • 50% Additional Tax for Medicare Advantage MSA distributions - See IRM 4.19.3.7.27.1 for more information

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

    • Advance earned income credit (AEIC),

    • Alternative minimum tax, and

    • Miscellaneous other taxes.

4.19.3.14.1  (09-01-2008)
Self-Employment Tax

  1. The taxpayer must pay self-employment tax (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, line 58.

  3. Schedule SE represents information for only one taxpayer (a maximum of two, one for each spouse, may be attached to a return). Underreported self-employment income must be associated with the appropriate taxpayer.

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

    • "PB" -business self-employment income for the primary taxpayer.

    • "PF" -farm self-employment income for the primary taxpayer.

    • "SB" -business self-employment income for the secondary taxpayer.

    • "SF" -farm self-employment income for the secondary taxpayer.

    Note:

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

  5. Self-employment 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 an EIN is considered self-employment income.

    • There is reported self-employment income that is not included on Schedule SE.

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

    • 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.

      Note:

      Self-employment income may include income described by the taxpayer as commissions, renewal commissions, director's fees, lecture fees, honoraria, etc.

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

  7. When self-employment tax is computed or recomputed, input/verify the appropriate entries in the SET SHORT/LONG SCHEDULE or SET OPTIONAL METHOD section, as applicable, of the SE Tax window of the Case Analysis screen.

    Note:

    If the SE Tax window computes a $1 change, check the Form 1040, line 58 amount (consider dollars and cents), then adjust the SE Tax window accordingly.

  8. The system computes the correct amount of SE Tax for each taxpayer.

  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.

    Note:

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

    1. Negative amounts must be entered in the PRIMARY and/or SECONDARY REPORTED SE INCOME field(s) in the SET window. This amount should include (but is not limited to) the totals from Schedule C, line 31 and Schedule F, line 36.

    2. Changes made to the PRIM/SEC SCH C EXPENSES in the MISC ADJUSTMENT/SCHEDULE C EXPENSE window will display on the SETAX window.

    3. Verify that the taxpayer 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.

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

    5. 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 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, Schedule SE Tax window.

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

  12. Self-employment 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 taxpayer did not treat as self-employment income.

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

    4. The taxpayer writes "Exempt-Form 4361 " or "Exempt-Form 4029" on Form 1040, line 58, or there is some indication that he/she is exempt from SE tax.

      Note:

      Long Schedule SE, Section B, contains a box for taxpayers 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 taxpayer is a Statutory employee (Box 13 on Form W-2 is checked or IR indicates SEI).

    6. The taxpayer is a motor vehicle sales person and is paid OTINC by an auto manufacturer.

    7. The taxpayer 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 (11).

    8. The taxpayer is a newspaper carrier or magazine seller under the age of 18.

    Note:

    To suppress the SE Tax computation, the Income Identify Code for the U/R income should be blank. See Exhibit 4.19.3-17, 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. PARAGRAPH 17 ( See Exhibit 4.19.3-12.automatically generates when self-employment tax is adjusted because of U/R self-employment income and/or reported income on which the taxpayer should have paid self-employment tax but did not.

    Reminder:

    Send applicable IR elements when the SE tax is adjusted.

  15. PARAGRAPH 18 ( See Exhibit 4.19.3-12.automatically generates when SE Tax is adjusted because there is an increase to social security wages or tips from Form W-2.

  16. PARAGRAPH 29 ( See Exhibit 4.19.3-12.automatically generates when SE Tax is adjusted because the taxpayer no longer qualifies for the optional method. This situation applies if the taxpayer originally computed SE Tax using the farm or non-farm optional method, but because of AUR processing, now has:

    • New gross farm income greater than $2,400 and new net farm profits equal to or greater than $1,733, or

    • New net non-farm profits equal to or greater than $1,733 or equal to or greater than 72.189% of his/her gross farm income.

  17. Taxpayers can deduct one-half of their 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.

    Note:

    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  (09-01-2004)
Social Security Tax on Tip Income Unreported to the Payer

  1. If the taxpayer 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, Computation of Social Security Tax and Medicare Tax on Unreported Tip Income, and carried forward to Form 1040, line 59. The income may or may not be reported on the return.

  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 taxpayer 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) 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, SST on TIPS window.

    Note:

    The SST on TIPS window must be selected in the proper case analysis sequence as described in See IRM 4.19.3.3.2. (3). If the SST on TIPS window is selected out of order, a message displays describing the proper sequence.

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

  6. PARAGRAPH 68 ( See Exhibit 4.19.3-12.automatically generates when an increase in social security wages causes a change to Form 4137.

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

4.19.3.14.3  (09-01-2008)
10% Tax on Early Distributions from Qualified Retirement Plans/25% Tax on Early Distributions from SIMPLE IRAs

  1. Premature distributions from IRA's (Traditional and Roth), qualified retirement plans and early withdrawals from deferred annuity contracts may be subject to an additional tax equal to 10% or 25% (for premature distributions from SIMPLE IRAs within the first two years - after two years, the tax is 10%) of the taxable portion of the distribution. The 10% additional tax also applies to distributions from Qualified Education Programs (QTP and CESA) not used for education expenses.

    Note:

    If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% premature distribution tax could apply to distributions under a written election providing a specific schedule for the distribution of the taxpayer's interest in the contract if, as of March 1, 1986, the taxpayer began receiving payments under the election. The taxpayer will multiply the taxable portion of the eligible distribution by 5% (instead of 10%). The taxpayer must attach an explanation to the tax return. If the distribution is identified as being only subject to a 5% premature distribution tax, See IRM 4.19.3.14.3 (11) d) for further instructions.

  2. Distributions issued before the taxpayer reaches age 59 1/2 are subject to the additional 10% or 25% tax unless the distribution is subject to certain exceptions to the additional tax.

  3. Qualified retirement plans include:

    • Qualified employee retirement plans.

    • Qualified annuity plans.

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

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

    • For the 10% 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% 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% or 25% tax is not assessed on the Gross Distribution amount.

  5. Suppress the system computed 10% or 25% tax on early distributions from IRA's, qualified retirement plans, or 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 " .

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

    Caution:

    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 taxpayer 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% additional tax on Qualified Education Program distributions (QTP and CESA), See IRM 4.19.3.7.26.2 (3).

    1. The taxpayer is age 59 or older.

    2. Distributions other than from an IRA (e.g., ESOP, TRASOP, PAYSOP, Thrift Plan, Savings Plan, Incentive Plan) were made to an employee who separated from service with his/her employer in or after the year in which he/she reached age 55 - Form 5329 Exception Code 01.

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

    4. The distribution was due to total and permanent disability. The taxpayer 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 7.5% of the AGI - Form 5329 Exception Code 05.

    7. The distributions other than from an IRA were 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 taxpayers 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 taxpayer 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. The taxpayer 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 - Form 5329 Exception Code 12.

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

    15. The taxpayer completes Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments. The portion of the distribution reported on Form 8915 line 9 (non-IRA retirement plans) or line 18 (IRA type distributions) is not subject to the 10%/25% premature distribution tax.

  7. If Form 5329 is attached with Part I completed, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of the distribution(s) subject to the 10% or 25% tax on early distributions from IRA's, qualified pension plans or a SIMPLE IRA.

  8. 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. See IRM 4.19.7, Total Other Tax window — 10% or 25% Tax.

    Caution:

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

  9. Because the system only computes the 10% or 25% tax when ALL the conditions in IRM 4.19.3.14.3 (4) above apply, an IR may need to be created or modified.

  10. Create an IR if:

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

  11. Modify an IR if:

    1. The conditions in IRM 4.19.3.14.3 (4) above apply but the IR is not subject to the 10% or 25% tax. See IRM 4.19.3.14.3 (6) above to determine when the 10% or 25% tax does not apply. Delete the Distribution Code in the IND field and leave it blank.

    2. The IR is subject to the 10% or 25% 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% or 25% 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 1099-R distribution is identified as being only subject to a 5% premature distribution tax (as identified by the taxpayer's explanation), change the Income Identify Code to "5P" . See IRM 4.19.3.14.3(1) Note above for further information.

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

  13. PARAGRAPH 11 ( See Exhibit 4.19.3-12.automatically generates when the additional 10% tax is assessed.

  14. PARAGRAPH 194 ( See Exhibit 4.19.3-12.automatically generates when the additional 25% tax is assessed.

  15. Send reported Form 1099-R IR elements when the 10% or 25% tax is adjusted.

4.19.3.14.4  (09-01-2005)
15% Tax on Archer Medical Savings Account (AMSA) and 10% Tax on Health Savings Account (HSA) Distributions

  1. Archer Medical Savings Account (AMSA) distributions may be subject to an additional tax equal to 15% of the taxable portion of the distribution.

  2. Health Savings Account (HSA) distributions may be subject to an additional tax equal to 10% of the taxable portion of the distribution.

  3. The system computes the 15%/10% tax on the distribution when:

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

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

  4. DO NOT assert the 15%/10% tax if there is an indication:

    • The taxpayer is age 65 or older.

    • The taxpayer 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 taxpayer rolled over the distributions.

    • The distribution was received after the death of the owner/taxpayer.

  5. Input the Income Identify Code " RO" to suppress the system computed 15%/10% tax on distributions.

  6. If Form 8853 is attached with Part III completed correctly, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of distribution(s) subject to the 15% tax on MSA distributions.

    Note:

    Do not pursue the 15% if the box on Form 8853, Part II line 11a is checked.

  7. If Form 8889 is attached with Part II completed correctly, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ as to the amount of distribution(s) subject to the 10% additional tax on HSA distributions.

    Note:

    Do not pursue the 10% if the box on Form 8889, Part II line 15a is checked.

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

  9. Because the system only computes the 15%/10% tax when all the conditions in IRM 4.19.3.14.4(3) above apply, an IR may need to be created or modified.

  10. Modify an IR if:

    • The conditions in IRM 4.19.3.14.4(3) above apply but the IR is not subject to the 15%/10% tax. See IRM 4.19.3.14.4(4) above to determine when the 15%/10% tax does not apply. Delete the Distribution Code in the IND field and leave it blank.

    • The IR is subject to the 15%/10% tax but the Distribution Code is not "1" or "5" . Input Distribution Code "1" in the IND field.

    • The IR was partially rolled over and only the taxable portion is subject to the 15%/10% tax. Distribution Code 1 or 5 should be used only for the portion which is not rolled over.

  11. Create an IR if:

    • The taxpayer paid the 15%/10% 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.

    • The taxpayer has a 1099-SA attached which is subject to the 15%/10% tax, the taxpayer did not pay the 15%/10% tax on it, and there is no IR present on the Case Analysis screen.

  12. PARAGRAPH 196 ( See Exhibit 4.19.3-12.automatically generates when the 15% tax on AMSA applies.

  13. PARAGRAPH 140 ( See Exhibit 4.19.3-12. automatically generates when the 10% tax on HSA applies.

4.19.3.14.5  (09-01-2005)
Advance Earned Income Credit (AEIC)

  1. If the taxpayer expects to qualify for earned income credit, he/she may choose to receive the credit in advance. The employer then includes advance earned income credit payments on Form W-2.

    1. The taxpayer must include the amount of these payments in the total for Form 1040, line 61, or Form 1040A, line 36.

    2. The total amount of AEIC displays in the AEIC field in the Tax Account screen.

  2. Determine the amount of AEIC received by the taxpayer(s) by comparing AEIC amounts with attached Form(s) W-2, Box 9. If there is an amount on Form W-2, Box 9 that does not correspond to any IR AEIC amount(s), create an IR for the attached Form W-2.

  3. Determine if there is a change to AEIC.

    1. Group by income type AEIC.

      Note:

      If Status Code "U" is entered on an AEIC income type, the system automatically groups the AEIC. The Change Group Status Code window displays.

    2. Compare the group total to the amount reported on the Tax Account screen in the AEIC field.

    3. If the group total is different from the reported amount, assign Status Code "U" to the group. The system considers the AEIC U/R or O/R, as applicable.

      Note:

      If the taxpayer reports wages that we do not have corresponding IR(s), do not consider AEIC over-reported. Assign Status Code "R" to the group.

  4. Input/verify the total amount of AEIC as shown in the AEIC field of the Tax Account screen in the per return column of the ADVANCED EIC field on the Total Other Taxes window of the Return Value screen. See IRM 4.19.7, Total Other Tax window - AEIC.

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

  6. PARAGRAPH 62 ( See Exhibit 4.19.3-12.automatically generates when AEIC is an issue.

4.19.3.14.6  (09-01-2003)
Alternative Minimum Tax

  1. Input/verify the entries in the Alt Min Tax (Form 6251) window. Taxpayers filing Form 1040A may pay Alternative Minimum Tax. If the taxpayer paid AMT on Form 1040A, enter the amount from the return in the OTHER MISC TAX field in the Total Other Tax 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, Alternative Minimum Tax window.

  3. If the taxpayer is under age 18, 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 and See IRM 4.19.3.16.6.

    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 31 amount in the GROSS TENTATIVE TAX: RSNBL CAUSE field.

  5. PARAGRAPH 76 ( See Exhibit 4.19.3-12.automatically generates when there is a change to Form 6251.

4.19.3.14.7  (09-01-2006)
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 Section 409A is identified as "NQDC" in the INCOME TYPE field on Forms W-2 or 1099-MISC.

    Note:

    IRC 409A(a)(1)(B)(i) imposes additional taxes that consist of two parts: One part consists of 20% of the deferred compensation required to be included as income (the "NQDC" 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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. Enter Status Code "R" on the "NQDC " element(s).

  3. The system computes the additional tax based on the " NQDC" 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, Total Other Taxes window.

    Caution:

    If the taxpayer reports additional taxes identified as "NQDC" on Form 1040, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ "" ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ DO NOT change the amounts in the NON QUAL DEF COMP TAX fields in the Total Other Taxes window.

  5. PARAGRAPH 174 ( See Exhibit 4.19.3-12. automatically generates when the additional tax is assessed.

  6. Mark "NQDC" elements with Send Indicator " S" when the additional tax is being adjusted.

4.19.3.14.8  (09-01-2006)
Miscellaneous Other Taxes

  1. The Total Other Tax 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 for premature distribution taxes from Qualified Retirement Plans. See IRM 4.19.3.14.4 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 Section 409A. See IRM 4.19.3.14.7 for additional information.

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

    5. Advanced EIC. See IRM 4.19.3.14.5 for further information

    6. Household Employment Tax

    7. 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 4.19.3.7.9.8 and IRM 4.19.7, Lump Sum Tax window.

    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, Total Other Tax window.

  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, line 60.

    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. Household Employment Tax - Input/verify the amount of Household Employment Tax (Schedule H) reported on Form 1040, line 62.

  5. Other Miscellaneous Taxes- Use these fields to capture any additional taxes included in the Form 1040, line 60 or the dotted portion of line 63 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:

    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 or group-term life insurance

      Note:

      This tax may impact the determination of Excess SSTax. See IRM 4.19.3.15.2 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

  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,

    • Taxpayer error that is discovered during analyzation, and/or

    • Taxpayer provides information during response phase that changes the tax.

    Note:

    If, based on taxpayer’s response, an adjustment to excess contributions tax (Form 5329 Part III through VIII) is needed, manually adjust the taxpayer’s MFT 29 account through IDRS. See IRM 21.6.5.4.11.9 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 Tax window.

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

    3. See IRM 4.19.3.14.3(8). for further instructions.

4.19.3.15  (11-07-2003)
Changes to Payments

  1. Payments are refundable credits that are applied against the tax liability and are reported by the taxpayer on Form 1040, lines 64 through 71; Form 1040A, lines 38 through 42; or Form 1040EZ, lines 7 through 9.

  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 taxpayer's wages, pensions and annuities, gambling winnings, etc., and is deposited with IRS by the payer to ensure payment of the taxpayer's income tax liability.

    2. Excess Social Security Tax (SST) or Tier 1 Railroad Retirement Tax (RRT) Withheld - hese taxes are withheld from a taxpayer's wages and are deposited directly by the employer. The taxpayer may, if certain conditions are met, claim a credit for amounts withheld in excess of $6,045.00.

    3. Earned Income Credit (EIC) - this amount may be claimed up to a maximum of $4,536 by taxpayers with two children, $2,747 by taxpayers with one child, and $412 for taxpayers with no children, if specified conditions are met.

    4. Additional Child Tax Credit (Form 8812) - the taxpayer may be able to claim this credit if he/she has qualifying children and certain conditions are met.

4.19.3.15.1  (05-04-2007)
Withholding - General

  1. Withholding may be reported by payers on Form W-2 and Form 1099.

  2. Withholding appears as TC 806 on the Tax Account screen.

    Caution:

    Changes to W/H can also post as TC 802 and as TC 290 with RC 051.

  3. Taxpayers claim W/H payments on:

    • Form 1040, line 64.

    • Form 1040A, line 38.

    • Form 1040EZ, line 7.

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

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

    2. Send PARAGRAPH 6 ( See Exhibit 4.19.3-12).

    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 ELF payer documents displayed in the TRDB window are considered more accurate than the IR when:

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

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

  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.

  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  (09-01-2008)
Withholding - Analyzation

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

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

    • 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 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.7.11.1 (5) for further information. If, after accessing the Withholding window, the system is allowing additional under-claimed W/H from ≡ ≡ ≡ ≡ ≡ ≡ ≡ , take the following action:

    1. Ungroup the W/H

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

    3. Access the Withholding window

    Note:

    Schedules K-1 may contain backup withholding (BWH). If the taxpayer attaches a Form 1041-Schedule K-1 showing backup withholding 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 withholding amount claimed on the return.

  3. If the taxpayer 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.

  4. Form 1042-S 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:

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

  5. When the taxpayer is claiming additional Federal Withholding 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 the following Special Paragraph: "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."

  6. If the W/H amounts exceeds 50% 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 Campus Fraud Coordinator to determine the validity of the payer information.

  7. 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.

  8. Ensure that the taxpayer'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 taxpayer's intent. (e.g., 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 in the VERIFIED WITHHOLDING field.)

  9. 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 (3) through (5) above exist.

    1. Select the Withholding window.

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

  10. 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, Withholding window.

  11. 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:

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

    • The taxpayer 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.

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

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

  12. If there are equal numbers of IRs with W/H on the Case Analysis screen and information documents showing W/H attached to the return and the payers and the income type are the same, but that same income type is O/R and W/H is O/C, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    Example:

    There are two forms W-2 attached to the return showing total wages of $100,000 and W/H of $30,000. There are two WAGE IRs totalling $100,000 in wages and $30,000 in W/H. The TP reported wages of $120,000 and W/H of $35,000. Accept the O/C W/H based on the O/R wages for which there is no IR or attached document.

    Reminder:

    If W/H equals or exceeds 50% of the O/R income, see (6) above.

    Exception:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ if the reason for the O/C W/H is CLEARLY determined (e.g., Schedule C income is reported and the taxpayer claimed a W/H amount (TC 806) that equals the amount of estimated payments (TC 660) shown on the Tax Account screen). See IRM 4.19.7, Tax Account screen with TC 806/660.

  13. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ 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 Exhibit 4.19.3-12).

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

4.19.3.15.1.2  (09-01-2008)
Withholding and SSTax 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, an adjustment may be made without issuing a notice, when the W/H change is confirmed and appropriate. Withholding changes due to the following conditions are considered confirmed and appropriate:

    Caution:

    If the system computes a tax change ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ See IRM 4.19.3.15.1.2 (4) for further instructions.

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

      Exception:

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

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

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

    4. Over-claimed 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 taxpayer reported the ES payment amount on the line designated for W/H.

      Note:

      If the discrepancy is due to IRS Data Transcription error, follow local Erroneous Refund procedures.

    5. Withholding 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 andan overall refund.

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

  4. In order to adjust Excess SST/RRT 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 5-12). See IRM 4.19.7, Assessment window.

      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 and/or Excess SST/RRT are not included on the Statutory Notice.

    5. Blocking Series 5X.

    6. TC 290-.00.

    7. Source Code "2" .

    8. Reason Code "051" for W/H or "055" for Excess SST/RRT.

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

    10. Reference Code 806 (amount) for U/C W/H Reference Code 807 (amount) for O/C W/H.

    11. Credit Reference Number 252 as a positive money amount for U/C excess SST/RRT or a negative money amount for O/C SST/RRT.

    12. Source document attached "Y" . If it is an ELF return and the only issue is excess SST/RRT enter a "N" .

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

      Note:

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

      Note:

      Leave the IRS RECD DATE field blank.

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

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

    16. 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 2893C Letter.

  5. PARAGRAPH 43 ( See Exhibit 4.19.3-12.automatically generates when the net result of changes to W/H, excess SST/RRT, EIC and Additional Child Tax Credit is a NEGATIVE amount.

  6. PARAGRAPH 28 ( See Exhibit 4.19.3-12.automatically generates when allowing additional U/C W/H.

  7. If the taxpayer partially reports income and/or W/H (i.e.: based on attached payer documents), send PARAGRAPH 139 ( See Exhibit 4.19.3-12). However, if the IR is fully U/R for both income and W/H, PARAGRAPH 139 is not needed.

  8. PARAGRAPH 27 ( See Exhibit 4.19.3-12.automatically generates when disallowing O/C withholding.

  9. When it appears the taxpayer claimed a W/H amount from the wrong box on Form W-2, send PARAGRAPH 106 ( See Exhibit 4.19.3-12).

  10. If W/H from Social Security benefits is an issue and there is an indication that the taxpayer is a resident alien, See IRM 4.19.3.7.32 for additional instructions.

4.19.3.15.2  (09-01-2008)
Social Security Tax/Tier 1 Railroad Retirement Tax

  1. Social Security Tax/Tier 1 Railroad Retirement Tax (SST/RRT) are reported by payers on Form W-2. Excess SST/RRT amounts appear as TC 766 with Credit Reference Number 252 on the Tax Account screen. Income Identify Code "FT" displays on the Case Analysis screen for SST/RRT 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 taxpayer must use Form 843.

  2. Taxpayers claim SST/RRT on Form 1040, line 67

  3. Excess SST/RRT may be claimed as a prepayment credit if ALL of the following conditions are met (joint filers must be considered separately).

    1. The taxpayer worked for two or more employers.

    2. The taxpayer received Social Security wages or Railroad wages of $97,500 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" .

    3. The taxpayer has SST and/or RRT Tier 1 withholding plus any uncollected SSTax on Tips or Group-Term Life insurance in excess of $6,045.00.

      Note:

      The taxpayer 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, line 63 (identified on the dotted line portion with " UT" ) before this amount can be considered in determining any excess SST/RRT. See IRM 4.19.7, Excess SST/RRT window for further information.

      Note:

      Any SST/RRT withheld in excess of the above amounts from the same employer does not qualify as excess SST/RRT. However, if there is an indication that the employer used "Agent Reporting " , See IRM 4.19.3.15.2 (12) below for further instructions.

  4. SST/RRT needs to be computed if the conditions in IRM 4.19.3.15.2 (3) above are present or if SST/RRT is a discrepant item. The net change to excess SST/RRT 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 or MCWGE literal when screening valid Wage IRs. Use of Status Code "N" or " D" may result in an incorrect excess SST/RRT calculation.

  5. Create an IR(s) if there is SST/RRT 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 SST/RRT window correctly.

  6. Input/verify the appropriate entries on the Excess SST window. See IRM 4.19.7, Excess SST/RRT window.

  7. Ensure that the taxpayer's intent is followed when excess SST/RRT is computed/recomputed as to rounding, dropping cents, or using dollars and cents. Always verify that the system computes the correct excess SST/RRT in accordance with the taxpayer's intent.

  8. If excess SST/RRT 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.

  9. If the system is not computing an excess SST/RRT 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 SST/RRT to allow in the VERIFIED EXCESS field.

    Note:

    See IRM 4.19.3.1.7(3) if ELF return.

  10. 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.

  11. If the taxpayer is claiming additional excess SST 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 (5) for further instructions.

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

    1. Two or more WAGE IRs with similar payer names AND different TIN's. OR:

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

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ In either situation, make the appropriate entries in the EXCESS SST window so that the taxpayer's intent is followed.

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

  14. If an Excess SST/RRT increase/decrease is the only issue ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on a non-ELF return, PC 20 may 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).

  15. When Excess SST/RRT is the only issue and the taxpayer files an ELF return, See IRM 4.19.3.4.2 (7) and (8) 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 SST: Follow the procedures for non-ELF in (14) above.

    2. U/C Excess SST: If the SSWAG element multiplied by 6.2% (0.062) equals the SSTAX element, allow the system calculated Excess SST amount and make the adjustment using PC 20. See IRM 4.19.3.15.1.2 (4) for further instructions.

    3. U/C Excess SST: If the SSWAG element multiplied by 6.2% (0.062) does not equal the SSTAX element, issue a CP 2501. Include the following Special Paragraph: "Please provide us with copies of Form(s) W-2 to support the amount of social security tax withheld."

  16. When there is a change to excess SST/RRT and a notice is issued:

    1. PARAGRAPH 151 ( See Exhibit 4.19.3-12.automatically generates.

    2. If disallowing excess SST/RRT withheld from a single employer, send PARAGRAPH 137 ( See Exhibit 4.19.3-12 ).

  17. PARAGRAPH 43 ( See Exhibit 4.19.3-12.automatically generates when the net result of changes to W/H, excess SST/RRT, EIC and Additional Child Tax Credit is a NEGATIVE amount.

4.19.3.15.3  (09-01-2007)
Earned Income Credit

  1. Earned Income Credit (EIC) enables certain eligible taxpayers 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 EITC 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 taxpayer 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 taxpayer 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.

    Note:

    An EIC RCT IND of blank or "0" displays when there was no recertification issue or it has been resolved and the taxpayer 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 INCM CODE field for all income types that qualify as earned income. See Exhibit 4.19.3-17, 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. 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 one–half SE Tax deduction reduces AGI and earned income.

    • Gross income received as a statutory employee

    • Strike benefits reported on Form W-2

    • Disability retirement benefits (until taxpayer reaches minimum retirement age)

  6. The taxpayer has the option of including nontaxable combat pay in their earned income when computing EIC. The taxpayer makes this election by entering their nontaxable combat pay on Form 1040, line 66b; Form 1040A, line 40b; or Form 1040EZ, line 8b. If the taxpayer 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, taxpayer 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 taxpayer’s intent with regard to the election. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  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, 1040A, or line 1 of Form 1040EZ).

    • Social Security and Railroad Retirement benefits.

    • Workers' compensation.

    • Unemployment compensation.

    • Income exempt from SET 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 taxpayers are earned income, even if they are exempt from Social Security (FICA) taxes.

    • Alimony.

    • Child support.

  8. To qualify for EIC the taxpayer must be other than FS 3 and have:

    1. One qualifying child and earned income and AGI totaling less than $33,241 ($35,241 if married filling jointly) , or

    2. More than one qualifying child and earned income and AGI totaling less than $37,783 ($39,783 if married filing jointly) or

    3. No qualifying children, and have earned income and AGI totaling less than $12,590 ($14,590 if married filing jointly) and, must be at least age 25 but under age 65, and not entitled to be claimed on parent's or someone else's return, and a resident of the US for more than one-half of the tax year. If the taxpayer was allowed EIC during processing and the system displays a message that EIC was disallowed due to the taxpayer'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, or 2).

  10. If taxpayer 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 taxpayer's principal home is outside the United States, unless on extended active duty in the U.S. military.

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

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

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

    5. There is an indication the taxpayer 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. See IRM 4.19.3.15.3 (3).

  11. Earned income credit must be recomputed when there is U/R income and the investment income is $2,900 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, See Exhibit 4.19.3-18 , 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 taxpayer files a Schedule E.

    Caution:

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

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

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

    3. Dividend income - Form 1040/1040A, 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, column (g) (or line 9, column (g) 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 21 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 38, or Form 1040A, line 22, or Form 1040EZ, line 4.

  13. When EIC needs to be recomputed, and the taxpayer has not used the optional method to figure his/her self-employment tax, input the appropriate entries in the Earned Income Credit window of the Return Value screen. See IRM 4.19.7, Earned Income Credit window.

    Note:

    If the taxpayer used the optional method to figure self-employment 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 1040/1040A, line 7 or Form 1040EZ line 1, PLUS.

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

    3. The One-Half SE tax Deduction.

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

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

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

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

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

    5. Nontaxable Combat pay.

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

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

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

    Note:

    If any of the conditions above exist, the Earned Income Manual Calculation Worksheet, See Exhibit 4.19.3-15. , can be used to determine the amount to enter in the TOTAL EARNED INCOME FIELD.

    Caution:

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

  16. If either/both taxpayer(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 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 36.

    2. Add any other reported earned income for the primary/secondary TP as applicable (see (15) above), to the amount from 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 Earned Income Credit is $2,853 for one qualifying child, $4,716 for two or more qualifying children, or $428 if no qualifying child.

  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 ( See Exhibit 4.19.3-12.automatically generates when there is a change to EIC. PARAGRAPH 184 automatically generates when investment income exceeds the maximum allowable amount.

  21. PARAGRAPH 43 ( See Exhibit 4.19.3-12.automatically generates when the net result of changes to W/H, excess SST, EIC and Additional Child Tax Credit is a NEGATIVE amount.

4.19.3.15.4  (09-01-2008)
Additional Child Tax Credit (ACTC)

  1. Additional Child Tax Credit (ACTC) enables certain qualifying taxpayers 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 taxpayer is eligible for the credit if both of the following apply:

    1. The taxpayer claims qualifying child(ren).

      Note:

      For each qualifying child, the taxpayer must either place a "check mark" in the box on Form 1040/1040A, line 6c, column (4), and/or complete Form 8901, Information on Qualifying Children Who Are Not Dependents (for Child Tax Credit).

    2. The taxpayer does not claim the full allowable amount of Child Tax Credit on Form 1040, line 53, (Form 1040A, line 33).

      Note:

      If U/R income results in the taxpayer being eligible for the full allowable amount of Child Tax Credit, previously allowed ACTC will be adjusted accordingly.

      Note:

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

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

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

  7. 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.

    • One-half Self-employment Tax deduction.

    • Social Security Tax on Tips.

    • Uncollected Social Security and Medicare Tax on Wages

    • Earned Income Credit.

    • Child Tax Credit.

  8. 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 4.19.3.13.5 (11) for further information.

  9. Taxpayers are instructed to include nontaxable combat pay in earned income on Form 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 Form 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:

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

  10. 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, Additional Child Tax window. Failure to follow this instruction will cause an Unpostable condition.

    Note:

    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 will display.

  11. 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.

  12. PARAGRAPH 36 ( See Exhibit 4.19.3-12.automatically generates when the ACTC is disallowed because the taxpayer becomes eligible for the full amount of Child Tax Credit.

  13. PARAGRAPH 37 ( See Exhibit 4.19.3-12.automatically generates when the taxpayer originally claimed ACTC and there is a change to the ACTC.

  14. PARAGRAPH 43 ( See Exhibit 4.19.3-12.automatically generates when the net result of changes to W/H, excess SST, EIC and ACTC is a NEGATIVE amount.

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 Section 6751(b)(1) asserting accuracy-related penalties generally requires written managerial approval, See IRM 4.19.3.20.1.4. Leave a Case Note with a brief explanation as to why the penalty is asserted/assessed.

4.19.3.16.1  (11-08-2005)
Failure to File Penalty (FTF)

  1. Individual tax returns are due by April 15 unless April 15 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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ on the unpaid tax balance. 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.

  2. The system does not compute additional FTF 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 is computed if the original FTF was abated ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The abated amount is added to the additional FTF.

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

    Note:

    TC 167 is computer generated and does not restrict Master File.

  4. If a FTF 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 SST, and/or EIC is a decrease in tax, 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 the Tax Account screen, it is reversed with a TC 161.

  5. The FTF percentage is generally 5% of the unpaid tax, with an additional 5% for each month or part of a month, but not to exceed 25%. The unpaid tax 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 taxpayer is entitled. The FTF is based on the amount of tax 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 $100 or 100% of the unpaid tax, whichever is less.

    Exception:

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

  6. The FTF for a month is reduced by the amount of any FTP for the return for that month. When the FTF is based only on the amount shown 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% a month. (Payments made after the prescribed date reduce the FTP but not the FTF.)

  7. The system computes or recomputes the FTF when applicable.

    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 for further instructions.

  9. PARAGRAPH 35 ( See Exhibit 4.19.3-12.automatically generates when FTF is proposed.

  10. When a manual assessment is done and the FTF is decreased, See IRM 4.19.3.20.10.1 (11) Note for special instructions.

4.19.3.16.2  (09-01-2003)
Failure to Pay Penalty (FTP)

  1. If a FTP 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 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 ( See Exhibit 4.19.3-12.automatically generates to advise the taxpayer that he/she may receive a separate notice for the recomputation of FTP when the net result of changes to W/H, excess SST/RRT, EIC and Additional Child Tax Credit is a negative amount.

4.19.3.16.3  (09-01-2003)
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. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and the penalty has not been fully reversed, the Estimated Tax Penalty window displays on the Return Value screen. See IRM 4.19.7, 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 ( See Exhibit 4.19.3-12.automatically generates.

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 taxpayer 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 taxpayer 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 taxpayer 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% of the SS tax.

  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% 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 and IRM 4.19.7, SST on Tips window, for further instructions.

  7. PARAGRAPH 15 ( See Exhibit 4.19.3-12.automatically generates when the system generates the 50% penalty on social security tax on unreported tip income.

4.19.3.16.5  (09-01-2008)
Accuracy-Related Penalty Due to Substantial Understatement of Tax

  1. If the taxpayer 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 taxpayer either has substantial authority or has made an adequate disclosure is treated as if it were shown on the return. Substantial authority is discussed in (9) below, and adequate disclosure is discussed in (10) 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% of the tax required to be shown on the return and is also equal to or greater than $5,000.

    Example:

    Tax required to be shown on the return (new Total Tax): $125,500 (10% of $125,500): $12,550, New Tax increase: $8,500. The 10% criteria applies. Substantial Understatement Penalty DOES NOT apply because the new tax increase is LESS THAN the 10% of the tax to be shown on the return.

    Example:

    Tax required to be shown on the return (new Total Tax): $15,500 (10% of $15,500): $1,550, New Tax increase: $6,500. The $5,000 criteria applies. Substantial Understatement Penalty DOES apply because the new tax increase is GREATER THAN $5,000.

  3. The substantial understatement penalty is 20% 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.

    1. If both penalties apply to the same underpayment, only one 20% 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. PARAGRAPH 91 ( See Exhibit 4.19.3-12.automatically generates.

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

  8. When the taxpayer'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) for more information.

  9. The penalty does not apply if the taxpayer 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.

  10. The Substantial Understatement penalty does not apply if the taxpayer 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 taxpayer 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.

    2. The item at issue is disclosed on the taxpayer'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 or 8275-R.

  11. If the tax examiner determines to suppress the substantial understatement penalty in full, 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, enter the applicable amount in the SUBSTANTIAL UNDERSTATEMENT PENALTY field on the Limit Penalties window.

    Note:

    If the Substantial Understatement Penalty is being fully suppressed due to reasonable cause, a verification window will appear.

  12. See IRM 4.19.3.16.6 (5) 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.

4.19.3.16.6  (09-01-2008)
Accuracy-Related Penalty Due to Negligence or Disregard of Rules or Regulations (Negligence Disregard Penalty)

  1. The negligence disregard penalty is 20% of the portion of the underpayment attributable to negligence or disregard of rules or regulations. In the AUR program, this penalty applies to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "" ≡ ≡ ≡ ≡ ≡ "≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ is identified by 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.

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

    Note:

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

  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.

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

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

    3. PARAGRAPH 92 ( See Exhibit 4.19.3-12.automatically generates.

  4. 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.

  5. The negligence disregard penalty is NOT proposed 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 immediate family member)

    • Serious Illness (taxpayer or immediate family member)

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

    • Unavoidable Absence (taxpayer)

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

    See IRM 20.1.5, Return Related Penalties, for details on reasonable cause criteria.

    Note:

    Generally forgetfulness, ignorance of the law or mistakes (i.e., the taxpayer/preparer forgot to include the income or thought the income was nontaxable) or reliance on Professional Tax Advice/Tax Preparation Software do not qualify for penalty relief because these actions do not demonstrate ordinary business care and prudence.

  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. PARAGRAPH 86 ( See Exhibit 4.19.3-12.automatically generates.

  8. When the taxpayer'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) for more information.

4.19.3.16.7  (09-01-2008)
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, Negligence Status screen.

  2. The IRs displayed here are the IRs that have an IR CD of "U" (Underreported) 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, only display 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, Return Related Penalties, to determine if penalties apply.

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

      Note:

      If the Accuracy Related Penalty due to Negligence is being fully suppressed due to reasonable cause, a verification window will appear.

    3. If the taxpayer 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 ( See Exhibit 4.19.3-12.automatically generates, as appropriate.

  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 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.

4.19.3.16.8  (09-01-2003)
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 Negligence Penalty. See IRM 4.19.7, Limit Penalties window. This window is only used 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  (09-01-2008)
Computer Generated Interest for CP 2000

  1. Interest on CP 2000 Notices is generated by the IDRS interest program. If IRS refunds a claimed overpayment without interest, and then later determines a deficiency for the overpayment year, interest on the subsequently determined deficiency will run from the date of the refund check on that part of the deficiency that is equal to or less than the refund.

  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 for further instructions.

  4. If the IRS fails to notify the taxpayer 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).

    Interest will be suspended from the day after the close of the 36-month period and resumes on the 21st day after a notice is sent. Section 8242 of the Small Business and Work Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 190, 200), extended the current eighteen-month period within which the IRS can, without suspension of interest, contact a taxpayer regarding possible adjustments to the taxpayer’s liability to thirty-six months, effective for notices provided after November 25, 2007.

    Note:

    This provision DOES NOT apply to late filed returns.

4.19.3.16.10  (04-05-2005)
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.

  2. The following conditions require a Manual Interest computation.

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

    2. TC 846 and TC 776 are present, and the TC 846 is greater than or equal to the proposed tax increase, and the TC 776 is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

      Note:

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

  3. Input IPC MI. See IRM 4.19.3.9 (22) for further instructions.

  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. 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 fully 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 the RRA-98, Section 3305. See IRM 4.19.3.16.9 (4).

    Exception:

    IPC RN and SR do not require a Manual Interest amount when Notice Indicator "8" is input.

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

4.19.3.17  (09-01-2003)
Automated Underreporter (AUR) Rejects

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

4.19.3.17.1  (04-06-2005)
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.

  3. Cases with new Payer/Agent information are identified by the control function indicating "PA" on the Form 4251. Review new Payer/Agent information and rework the case as necessary.

  4. Cases with new transactions (from Master File) have "New Trans" indicated on the Form 4251. These cases have new actions (TC's, payments, etc.) which may effect the case. Rework the case if necessary.

    Note:

    More than one condition may exist on the case; however, the control function notates only one condition on the Form 4251.

  5. A new address is present for the spouse. The clerk indicates "Spouse Add" on the folder. The IDRS print associated by the clerk contains the spouse's address. If the last address change cycle is 200752 or later (the address change cycle is located next to the STREET/CITY field) the tax examiner uses 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.

4.19.3.17.2  (09-01-2008)
Letter Rejects

  1. When letters are sent to the taxpayer (e.g., 2626C Letter, 4314C Letter, 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 taxpayer. When an SSN is entered on the Stop Notice window, the system automatically assigns the appropriate "not mailed" PC.

    Caution:

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

    Note:

    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 appropriate 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 taxpayer response to the CP 2000/2501 in the AUR Program.

4.19.3.18.1  (09-01-2007)
CP 2501

  1. The CP 2501 is the notice sent to a taxpayer to obtain additional information prior to issuing a CP 2000. See Exhibit 4.19.3-11 , CP PARAGRAPH Alpha List, and See Exhibit 4.19.3-12., CP PARAGRAPHs.

    Note:

    Publication 3498, "The Examination Process" , is mailed as an enclosure with all CP 2501s.

  2. Beginning with tax year 2006, 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.

  3. See IRM 4.19.3.6, Determination of CP 2501 Issuance, for more information on when to issue a CP 2501.

    Note:

    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.

4.19.3.18.2  (09-01-2006)
CP 2000

  1. The CP 2000 is sent to the taxpayer 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, AEIC. EIC, ACTC, or excess SST/RRT.

  2. The following paragraphs automatically generate on CP 2000 Notices, when appropriate:

    1. PARAGRAPH 39 (automatic for all CP 2000 Notices)

    2. PARAGRAPH 90

    3. PARAGRAPH 93

    4. PARAGRAPH 193

    5. PARAGRAPH 198

      Note:

      See Exhibit 4.19.3-12.

    Note:

    Publication 3498, "The Examination Process " and Form 9465, Installment Agreement, with pre-populated information are mailed as enclosures with all CP 2000s.

  3. See Exhibit 4.19.3-12 for the CP PARAGRAPHS and See Exhibit 4.19.3-11. for an alphabetical (by topic) listing of the PARAGRAPHs.

4.19.3.18.3  (09-01-2008)
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, Notice 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 taxpayer. See IRM 4.19.7, Notice Summary screen.

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

    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 Self-employment Deduction 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 taxpayer 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 taxpayer has responded.

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

    3. Use Indicator "4" to generate a recomputed CP 2000 that displays PARAGRAPH "S" . PARAGRAPH "S" explains to the taxpayer 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 PARAGRAPH "T" . PARAGRAPH "T" informs the taxpayer that the documentation or explanation that he/she provided was not sufficient enough to allow us to waive the Accuracy-Related Penalty Due to Negligence/Substantial Understatement of Tax.

    5. Use Indicator "6" to generate a recomputed CP 2000 that displays PARAGRAPH "U" . PARAGRAPH "U" tells the taxpayer that although he/she indicated agreement to our previous CP 2000, he/she failed to sign the Consent to Tax Increase line on the notice.

    6. Use Indicator "7" to generate a recomputed CP 2000 that displays PARAGRAPH "W" . PARAGRAPH "W" applies when the taxpayer 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 taxpayer's calculations and informs him/her that the notice has been sent for informational purposes only.

    7. Use Indicator "8" for those instances when the taxpayer 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 taxpayers figures ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ The input of Notice Indicator "8" suppresses the generation of a subsequent notice to the taxpayer 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 taxpayers figures ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ In these situations issue a letter to the taxpayer confirming that we used the information/computation they provided to make the assessment to their account.

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

    9. Use Indicator "0" (zero) to generate a recomputed CP 2000 following a Statutory Notice. The notice displays PARAGRAPH "Y" . Indicator "0" notices are sent to the taxpayer as information only notices. The taxpayer'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. and See IRM 4.19.3.20.6.1.

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

    1. When an original CP 2501 is amended, also notate the case folder with "30A" .

    2. When an original CP 2000 is amended, also notate the case folder with "55A" .

  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.

    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 4.19.3-12) - DO NOT USE SORT CODE 1.

    2. Provide specific details for required clerical actions.

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

      Note:

      Use a single digit numeric Sort Indicator (other than " 1" ) or an alpha Sort Indicator (any alpha except A, O, R, S, T, U, X, or Z).

  5. Input/verify the total of all payments credited toward the taxpayer'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 Process Code. If the notice should not be sent and another action is necessary, access the Process Code window and input the appropriate Process Code. See Exhibit 4.19.3-5, AUR Process Codes., For a list of Internal Process Codes (IPC), See Exhibit 4.19.3-4., 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 Process Code or Internal Process Code is entered.

    • Entering a Process Code 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 Process Code is in the work unit.


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